The CARES Act provides that all PPP loans are eligible for forgiveness but not automatically forgiven. Instead, borrowers must apply for forgiveness with their lender, and the amount to be forgiven may be limited. Borrowers should, therefore, take important steps preceding and during the 8-weeks following the date of the PPP loan to maximize the amount forgiven.

This memorandum sets out what we currently know from both the CARES Act enacted on March 27, 2020 and the Interim Final Rule published by the SBA on April 3, 2020 about how forgiveness of PPP loans will work. Please note that we are in the Comment Period. The CARES Act has given the SBA until April 26, 2020 to finalize administrative rules for the PPP program, including guidance for loan forgiveness, and the SBA has advised that further guidance will be released. The contents of this memorandum are therefore dated, and certain parts of our analysis may become inaccurate or incomplete in the next two weeks.


  1. Repayment of CARES Act loans may be forgiven up to 100% if the borrower timely spends the loan proceeds on covered payroll and other permitted expenses.
  2. Forgiveness requires approval of the lender based upon rigorous recordkeeping. We suggest you keep the PPP borrowed funds in a segregated account, prepare a budget on the front end to be sure the money is used for purposes that may result in forgiveness, and that you monitor the use of loan proceeds against the budget during the 8-weeks following receipt of the loan proceeds.
  3. The amount of a PPP Loan subject to forgiveness can be reduced by a headcount limitation and a wage limitation. Do the math before you spend the money.
  4. Principal amounts not forgiven bear interest at 1% and are payable over a 2-year period. The first payment is due in 6 months after the date of the loan.
  5. Bottom line to ensure maximum forgiveness: don't reduce your employee headcount and don't reduce wages by more than 25% for employees who make less than $100,000 per year.


I. What The CARES Act Tells Us About Forgiveness of PPP Loans.

A. What costs qualify for forgiveness.

Loan forgiveness is discussed in Section 1106 of the CARES Act ("Section 1106"). Section 1106 provides that "[a]n eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period:

  1. Payroll costs;
  2. Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation);
  3. Any payment on any covered rent obligation; and
  4. Any covered utility payment." (emphasis added).

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Originally Published 15 April, 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.