Skip to Content

New guidance issued by the SBA addresses questions regarding PPP loan forgiveness. Here’s our brief summary of the interim final rule’s main provisions.

Younger businesswoman using a tablet device in an open foyer area.The U.S. Small Business Administration (SBA) has issued an interim final rule (IFR) addressing Paycheck Protection Program (PPP) loan forgiveness. The IFR answers some, but not all, questions surrounding PPP loan forgiveness. Revisions as well as further guidance may be forthcoming. In the meantime, here’s a brief summary of the IFR’s main provisions:
  • The loan forgiveness process for applications not reviewed by SBA prior to the lender making a decision: After receiving a loan forgiveness application, the lender is required to review and make a decision about loan forgiveness within 60 days. That decision will be given to the SBA and to the borrower. Procedures for forgiveness applications reviewed by SBA are addressed in a separate IFR for borrower and lender responsibilities.
  • Payroll costs eligible for loan forgiveness: Payroll costs must be paid or incurred within the eight-week (56-day) “covered period.” The covered period begins on one of the two following periods, selected by the borrower:
    • The date the borrower’s PPP loan proceeds were disbursed (the start of the covered period)
    • The first day of the first payroll cycle in the covered period (the “alternative payroll covered period”).
      • Payroll costs are considered “paid” on the date that either (1) paychecks are distributed, or (2) the borrower originates an ACH credit transaction.
      • Payroll costs are “incurred” on the day the employee’s pay is earned. Payroll costs incurred during the borrower’s last pay period of the covered period (or, alternative covered period) are eligible for forgiveness if paid on or before the next regular payroll date.
  • Furloughed employee, bonus, and hazard pay: Compensation for furloughed employees is eligible for forgiveness. In addition, if an employee’s total compensation doesn’t exceed $100,000 on an annualized basis, hazard pay and bonuses are eligible for forgiveness.
  • Limits on forgiveness for owner-employees and self-employed individuals: Loan forgiveness for owner-employees and self-employed individuals is limited to a set percentage (15.38%) of 2019 compensation or net profits. No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals.
    • In addition, the following special rules apply to each of the following:
      • Owner-employees must account for 2019 cash compensation.
      • Sole proprietors (Schedule C filers) are limited to 15.38% of 2019 net profit.
      • General partners are limited to 2019 net earnings from self-employment (less section 179 deductions and unreimbursed partnership expenses), multiplied by 92.35%. The resulting amount is multiplied by 15.38% to arrive at the limitation.
  • Nonpayroll costs eligible for loan forgiveness: Nonpayroll costs must be either (1) paid during the “covered period” or (2) incurred during the “covered period” and paid on or before the next regular billing date, even if the billing date falls after the close of the “covered period.” Advance payments of mortgage interest aren’t eligible for forgiveness.
  • Regulatory exemptions to the loan forgiveness amount reduction rules based on a reduction in full-time equivalent (FTE) employees: Employers who make, document, and take certain actions in connection with good-faith offers to rehire employees during the covered period (or alternative payroll covered period) aren’t required to reduce loan-forgiveness-eligible amounts even when the employee refuses the work offer.
  • Determination of FTEs: The IFR uses 40 hours (not 30 hours as used in other legal determinations) as an FTE. An FTE of 1.0 is established for each employee working an average of 40 hours or more per week during the covered period (maximum FTE is 1.0). For employees working an average of less than 40 hours per week, borrowers may select one of the following two amounts, provided it’s applied to all such employees during the covered period:
    • An amount equal to the average number of hours divided by 40 (for example, an average of 30 hours per week, 30/40, yields an FTE of 0.75) or
    • An FTE of 0.5 for each part-time employee during the covered period.
  • Reduction of loan forgiveness amounts based on salary or hourly wage reductions: If an employee’s compensation is reduced more than 25% during the covered period, the excess reduces forgiveness amounts. For example, an employee earning $1,000 during the reference period whose wages are reduced to $700 has a $300 wage reduction. Since the first $250 of wage reduction is 25% of the employee’s reference period wages, the loan forgiveness is not reduced for this portion of the employee’s wage reduction. The $300 weekly wage reduction exceeds the 25% allowance by $50 per week. The result is a $400 reduction to the borrower’s loan forgiveness, based on the $50 excess reduction times the eight-week covered period.
  • Avoidance of double-penalty provision: If an employer is required to reduce loan forgiveness amounts based solely because that employee’s FTE ratio has been reduced, the employer isn’t also required to conduct a salary/wage reduction for the same employee. However, there could still be a limitation applied for both FTE reductions and salary/wage reductions if an employee’s pay is lowered due to reductions in both work hours and in hourly rates.
  • Loan forgiveness reductions for employees fired for cause, voluntary resignations, or voluntary schedule reductions: Employees separated from employment for these reasons are not counted in the FTE calculation, and they do not cause an employer to suffer a reduction in loan forgiveness.

We’ll continue to monitor any future guidance issued by the SBA with respect to PPP and loan forgiveness. You can also view our webinar on loan forgiveness and subscribe to our COVID-19 resource center for future updates. Still have questions? Please give us a call. 

CARES Act: Get clarity. Then take action.

Access more insights.