SBA and Treasury Release Interim Final Rules on PPP Loan Forgiveness

/, Covid-19/SBA and Treasury Release Interim Final Rules on PPP Loan Forgiveness
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On May 23 the Small Business Administration in coordination with the Department of Treasury released their Interim Final Rules (IFRs) on PPP Loan Forgiveness. The IFRs codify rules previously suggested with the Loan Forgiveness Application and Instructions (the Application). Moreover, the IFRs add clarity and provide additional examples for the benefit of PPP borrowers.

Timing of Payroll Costs Eligible for Loan Forgiveness

The IFRs confirm that payroll costs paid or incurred during the eight consecutive week (56 day) covered period are eligible for forgiveness. Borrowers may seek forgiveness for payroll costs for the eight weeks beginning on either:

  • The date of disbursement of the borrower’s PPP loan proceeds from the lender; or
  • The first day of the first payroll cycle in the covered period (i.e. the Alternative Payroll Covered Period).

However, as mentioned in our previous article “SBA Releases PPP Loan Forgiveness Application” (here) the Alternative Payroll Covered Period (APCP) is only available to borrowers with weekly or bi-weekly payroll.

For example, suppose a borrower has a bi-weekly payroll schedule and the borrower’s eight-week covered period begins on June 1 and ends on July 26. The first day of the borrower’s first payroll cycle that starts in the covered period is June 7. The borrower may elect an APCP for payroll cost purposes that starts on June 7 and ends 55 days later (for a total of 56 days) on August 1. Payroll costs paid during the APCP are eligible for forgiveness. In addition, payroll cost incurred during the APCP are eligible for forgiveness as long as they are paid on or before the first regular payroll date occurring after August 1.

Compensation to Furloughed Employees, Bonuses, and Hazard Pay Are “OK”

The CARES Act defines “payroll costs” broadly to included compensation in the form of salary, wages, commissions, or similar compensation. The IFRs confirm that if a borrower pays furloughed employees their salary, wages, or commissions during the covered period, those payments are eligible for forgiveness as long as they do not exceed $15,385 ($100,000 annualized for 8 weeks) during the covered period. Moreover, the IFRs also confirm that employee’s hazard pay and/or bonuses are eligible for loan forgiveness because they constitute a supplement to salary or wages and are thus a similar form of compensation. Again, all flavors of cash compensation are limited to $15,385 during the covered period.

Loan Forgiveness Limits for Owner-Employees, Self-Employed Individuals, and Partners           

The IFRs clarify that the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation can be no more than the lesser of 8/52 of 2019 compensation or $15,385 per individual in total across all businesses.

Owner-employees (i.e. corporate shareholder-employees) are capped by the amount of their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf.

Schedule C filers are capped by the amount of their owner compensation replacement calculated based on 2019 Schedule C net profit.

General partners are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction and unreimbursed partnership expenses) multiplied by .9235.

No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, Schedule C filers and general partners, as such expenses are paid out of their net self-employment income.

Non-Payroll Costs Eligible for Loan Forgiveness

The IFRs confirm that a non-payroll cost is eligible for forgiveness if it was:

  • Paid during the covered period; or
  • Incurred during the covered period and paid on or before the next regular billing date (even if the billing date is after the covered period)

For example, suppose a borrower’s covered period begins on June 1 and end on July 26. The borrower pays it May and June electricity bill during the covered period and pays its July electricity bill on August 10, which is the next regular billing date. The borrower may seek loan forgiveness for its May and June electricity bills, because they were paid during the covered period. In addition, the borrower may seek loan forgiveness for the portion of the July electricity bill through July 26, because it was incurred during the covered period and paid on the next regular billing date.

Reductions to Loan Forgiveness Amount Based on FTEs

As mentioned in our “10 Ten Strategies for Maximizing Loan Forgiveness” (here), loan forgiveness may be reduced under the FTE Reduction Test. However, the IFRs confirm that loan forgiveness will not be reduced under this test if the borrower laid-off or reduced the hours of an employee, then offered to re-hire the same employee for the same salary and the same number or hours, but the employee declined the offer.

Specifically, in calculating the loan forgiveness amount, a borrower may excluded any reduction in FTEs that is attributable to an individual employee if:

  • The borrower made good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee during the covered period or the APCP);
  • The offer was for the same salary or wages and the same number of house as earned by such employee in the last pay period prior to the separation or reduction in hours;
  • The offer was rejected by such employee;
  • The borrower has maintained records documenting the offer and its rejection; and
  • The borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.

What Does “Full-Time Equivalent” Employee Mean?

Borrowers seeking forgiveness must document their average number of FTE employees during the covered period (or APCP) and their selected reference period (defined in our “10 Ten Strategies for Maximizing Loan Forgiveness” here). For purposes of this calculation, borrowers must divide the average number of hours paid for each employee per week by 40, capping this quotient at 1.0. For example, an employee who was paid 48 hours per week during the covered period would be considered to be an FTE employee of 1.0.

For employees who were paid for less than 40 hours per week, borrowers may choose to calculate the FTE in one of two ways:

  • The average number of hours dived by 40; or
  • Borrowers may elect to use a FTE of 0.5 for each part-time employee

Borrowers may select only one of these two methods, and must apply that method consistently to all or their part-time employees for all measurement periods.

Reductions to Loan Forgiveness Based on Salary and Wage Reductions

As mentioned in our “10 Ten Strategies for Maximizing Loan Forgiveness” (here), loan forgiveness may be reduced under the Salary and Wage Reduction Test. However, the IFRs clarify that the total dollar amount of the salary or wage reductions that are in excess of 25 percent of base salary or wages from the first quarter of 2020 (the reference period) reduce forgiveness. Moreover, the IFRs clarify that this reduction is calculated on an employee by employee basis.

For example, suppose a borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work full time during the covered period as a 1.0 FTE. In this case, the first $250 (25% of $1,000) is exempted from the reduction. The borrower would list $400 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by eight weeks).

The IFRs further clarify that the Salary and Wage Reduction Test is only applied to employees who did not receive (during any single pay period during 2019) wages or salary at an annualized rate of pay in an amount more than $100,000.

How do the FTE Reduction Test and Salary/Wage Reduction Tests Intersect?

The salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction. For example, suppose an hourly wage employee had been working 40 per week during the selected FTE reference period and the borrower reduced their hours to 20 hours per week during the covered period. There was no change to the employee’s hourly wages during the covered period. Because the hourly wage did not change, the reduction in the employee’s total wages is entirely attributable to the FTE employee reduction and the borrower is not required to calculate a salary/wage reduction for that employee.

June 30 Safe-Harbors from FTE Reduction and Salary/Wage Reduction Penalties

The IFRs confirm that a borrower may restore reductions made to employee salary/wages or FTE employees by not later than June 30, 2020 and avoid a reductions in loan forgiveness. As described in “SBA Releases PPP Loan Forgiveness Application” (here) the borrower must first be eligible to utilize the safe-harbors before they may be applied.

Employees Fired for Cause, Voluntary Resignations, or Voluntary Requests for Schedule Reduction

The IFRs explain that when an employee of the borrower is fired for cause, voluntarily resigns, or voluntarily requests a reduced scheduled during the covered period (or APCP) this would usually be considered an FTE reduction event. However, the borrower may count such employee at the same FTE level before the FTE reduction for purposes of the FTE Reduction Test. Said differently, the borrower will not be penalized if the employee is fired for cause, voluntarily resigns, or voluntarily requests a reduced schedule.


The information and tips noted above are intended as general guidelines only. The provisions within the CARES Act are complicated with many questions still unanswered. Every client situation is unique and ideas expressed in this article should not be considered a substitute for professional advice. Opinions expressed in this article are subject to change as interpretations are clarified and additional guidance is issued. Please call our office if you have questions regarding the CARES Act or any other recent legislation.