For many businesses, the Paycheck Protection Program has been a much-needed economic lifeline. For others, though, it has amounted to a source of frustration and uncertainty, especially when it comes to loan forgiveness. Bryan Johnson, who leads the standalone COVID-19 Practice Group at Michelman & Robinson, LLP, provides some background and explains how PPP loan
forgiveness works.

Just over a year ago, when the novel coronavirus reached pandemic proportions, the CARES Act was passed by the U.S. Congress and signed into law. The massive $2.2 trillion stimulus package was designed to counter the devastating economic consequences of the COVID-19 outbreak, and one of its most prominent elements was the Paycheck Protection Program.

The PPP was created in an attempt to help small businesses and other covered entities stay afloat, and to incentivize them to keep employees on their payrolls despite pandemic-related declines in business. This was accomplished by way of forgivable loans to cover an employer’s payroll expenses, now for up to 24 weeks (originally the covered period for so-called “first draw” loans was just eight weeks).

At its core then, the PPP is a grant program, assuming borrowers use loan proceeds for allowable purposes (read: wages, salaries, mortgage interest, rent, utilities, and the like). And those that qualify —  for instance, businesses and 501(c)(3) corporations with 500 or fewer employees and individuals who operate as sole proprietors or independent contractors — can receive first draw loans that are two and a half times their average monthly payroll up to $10 million.

A second iteration of the PPP became law last December, adding $284 billion to program. This allowed for additional first draw loans, as well as second draw loans for certain borrowers; namely, employers with less than 300 employees that have experienced a 25% decrease in gross receipts during any quarter of 2020 as compared to the same quarter in 2019. Pursuant to PPP 2.0, some additional entities also became eligible for loans; the list of forgiveness-worthy expenses was expanded; and amounts for second draw loans were adjusted to two and a half times a borrower’s average monthly payroll up to $2 million (three and a half times for restaurants and bars). Of note, the application deadline for all PPP loans was recently extended to May 31.

Assuming a borrower has used PPP funds for allowable purposes, its loan is eligible for forgiveness. That being said, in order to maximize forgiveness, that borrower must have spent no less than 60% of the PPP proceeds toward payroll and no more than 40% on non-payroll costs.

There is more. Borrowers must maintain employee headcount and wage levels to optimize loan forgiveness. Generally, a borrower can only expect partial forgiveness should headcount or wages not be returned to pre-pandemic levels by the end of the loan’s covered period.

There are multiple PPP loan forgiveness application forms to choose from depending upon the circumstances of the borrower’s business and loan amount at issue, the simplest being Form 3580S, which can be used by those that received first or second draw loans of $150,000 or less. The good news about Form 3508S is that it does not require borrowers to show the calculations used to determine their loan forgiveness amount. Nonetheless, supporting documentation may be sought by the SBA during its loan review process.

Form 3508EZ is another mechanism for streamlined loan forgiveness, but it is only available if the borrower meets one or more of the following criteria:

• The borrower has not reduced the salaries or wages of employees making under $100,000 annually by more than 25% during the covered period; and (2) the borrower did not reduce the number of employees or average paid hours between January 1, 2020 and the end of the covered period.


• The borrower has not reduced the salaries or wages of employees making under $100,000 annually by more than 25% during the covered period; and (2) the borrower was unable to operate during the covered period at the same level of business activity as before February 1, 2020 due to compliance with government regulations.

Borrowers that do not qualify to submit either Form 3508S or Form 3508EZ must complete the more cumbersome Form 3508. Those submitting Form 3508 will need to have at the ready evidence verifying eligible cash compensation and non-cash benefits paid, such as bank statements or payroll reports; payroll tax filings; documents evidencing employer contributions to employee health insurance and retirement plans; and verification of eligible non-payroll costs, including non-payroll obligations that existed prior to February 15, 2020.

No matter the form used, first and second round PPP borrowers that receive loan forgiveness may claim federal tax deductions for the covered expenses funded by their loan proceeds. Yet another positive of the PPP.

Without question, loan forgiveness is more closely scrutinized than front-end PPP loan eligibility. But the scrutiny does not end there.
Companies that secure PPP loans for $2 million or more should expect SBA auditors to come knocking. In fact, the SBA and U.S. Treasury Department have explicitly stated that all PPP loans in excess of $2 million will be reviewed following a lender’s submission of a borrower’s loan forgiveness application.

For those that have received south of $2 million in PPP proceeds, now is not the time to be breathing a sigh of relief. They too may be in line for audit as well given an Interim Final Rule released by Treasury stating, “[f]or a PPP loan of any size, SBA may undertake a review at any time in [its] discretion.”

Borrowers can prepare for audit by (1) identifying a point person through whom all PPP-related information will flow; (2) coordinating with professional service providers for full strategic alignment; (3) setting aside all documentation regarding PPP eligibility and certification, the use of loan proceeds, and qualification for forgiveness; and (4) developing a strategy for responding to or explaining away any possible negative evidence.

Bryan Johnson is a powerhouse litigator who has also forged a particular expertise handling matters arising out of COVID-19, including PPP compliance and loan forgiveness. He can be contacted at or by phone at (312) 706-7762.

Return to event main page 

For reprint and licensing requests for this article, CLICK HERE.