Tax Policy

SBA Releases Interim Final Rules on PPP Loan Forgiveness

The SBA released anticipated interim final rules regarding loan forgiveness under the Paycheck Protection Program just in time for the Memorial Day weekend. While most of us will be heading to the beaches or taking some well-deserved time away from the home office, some of us will be reading through 26 pages of Treasury guidance that will likely leave us with more questions than answers.

As I am writing this sentence I am already 6 pages in and still haven’t read any relevant piece of information that I don’t already know. If you don’t want to waste your time reading through the guidance then this quick summary will save you a few hours of time that would be better spent sipping on margaritas and enjoying time with your family.  


Back on May 16th the SBA released the Paycheck Protection Program Loan Forgiveness Application which includes several pages of instructions and schedules to aide borrowers through the loan forgiveness process. If you are not a banker, lawyer, CPA or other professional whose job consists of reading through instructions or filling out forms on a daily basis then the loan forgiveness process can be confusing and ambiguous.

Now that most business owners are approaching their 8-week period to use up their PPP loan proceeds it’s time to focus on loan forgiveness and how to navigate the loan forgiveness process.

What is the General Process to Obtain Loan Forgiveness?

To receive loan forgiveness, a borrower must complete and submit the Loan Forgiveness Application to its lender (or the lender servicing the loan). Borrowers may also complete this application electronically through their lender so make sure to reach out to your lender regarding loan forgiveness before filling out any forms.

The lender has 60 days from receipt of a complete application to issue a decision to the SBA and the SBA has 90 days after the lender issues its decision, subject to any SBA review of the loan or loan application, to remit the appropriate forgiveness amount to the lender.

Given the amount of applications and complexities surrounding PPP loan forgiveness, borrowers may not know the status of their loan forgiveness for up to 5 months after submitting a completed application.

The lender is responsible to notify the borrower of the forgiveness amount and the borrower has 2 years to repay any portion of the loan that was not eligible for loan forgiveness or any portion of the loan for which an application for loan forgiveness was denied.

What Business Expenses are Eligible for Loan Forgiveness?

In general, there are only 4 categories of business expenses eligible for loan forgiveness:

  1. Payroll Cost,
  2. Mortgage interest on obligations incurred before February 15, 2020,
  3. Rental or lease payments on agreements in force before February 15, 2020, and
  4. Business utility payments including electricity, gas, water, transportation or internet access.

Non-payroll cost (2, 3, & 4) cannot exceed 25% of the loan forgiveness amount.

Are Wages Paid to Furloughed Employees Eligible for Loan Forgiveness?

Yes! Any payroll cost paid to furloughed employees are eligible for loan forgiveness. Bonuses, hazard pay and wages paid to employees unable to perform day-to-day duties are all eligible payroll cost.

Are There Caps on Owner Compensation?

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

This is in-line with the $100,000 cap per individual ($15,385/8×52=$100,002.50) and prevents owners of multiple businesses from circumventing this cap by spreading out their payroll across several businesses to maximize loan forgiveness. Additionally, this will prevent owners from maximizing loan forgiveness by giving themselves bonuses during the 8-week period that would be in excess of their typical pay. This includes both cash compensation and health care contributions made on their behalf.

What is the Payroll Period Covered Under Loan Forgiveness?

In general, payroll cost paid or incurred during an eight-consecutive week period are eligible for forgiveness. Borrowers have two options for when their eight-week period begins:

  1. The date they received the PPP loan proceeds; or
  2. The first day of the first payroll cycle in the covered period.

Payroll is considered paid on the day paychecks are distributed or the borrower originated an ACH credit transaction. Payroll is considered incurred on the day when the employee’s pay is earned.

For administrative convenience of the borrower, a borrower with a bi-weekly (or more frequent) payroll cycle may elect to use an alternative payroll covered period that begins on the first day of the first payroll cycle in the covered period.

For example, let’s say a business owner receives proceeds from a PPP loan on June 1. By default, their covered period will run from June 1 to July 26. However, the first day of the next payroll cycle begins June 7th and subsequent 8 weeks (or 56 days later) ends on August 1st. Choosing the alternative period will allow borrowers to easily track total payroll cost over this 8-week period because they coincide with the weekly/bi-weekly payroll reporting cycle.

Will Layoffs, Reduced Pay or Reduced Hours Impact Loan Forgiveness?

Yes, section 1106 of the CARES Act specifically requires certain reduction in a borrower’s loan forgiveness based on reductions in full-time equivalent employees or in employee salary and wages during the covered period. Reduction in full time equivalent employees will reduce loan forgiveness in proportion to such reduction (i.e. a reduction in staff by 50% will reduce forgiveness by 50%) and a reduction of more than 25% for employees earning less than $100,000 will reduce forgiveness dollar for dollar.

How is the Reduction in Full Time Equivalent (FTE) Calculated?

In general, borrowers will reduce their loan forgiveness by the same percentage as the percentage reduction in FTE. The borrower will calculate this reduction by measuring the number of FTE during the covered period against one of the following reference periods:

  • February 15, 2019 through June 30, 2019
  • January 1, 2020 through February 29, 2020, or
  • For seasonal employers, 1 of the 2 options above or a consecutive 12-week period between May 1, 2019 and September 2019.

Any employee working 40 hours or more will be considered 1 FTE. For employees working less than 40 hours a week there are two methods to calculate the FTE per part-time employee:

  1. Calculate the average number of hours a part-time employee was paid per week during the covered period, or
  2. Use .5 for each part time employee.

Example: An employer calculates an FTE of 10 during the reference period and 5 FTE during the covered period. The reduction in FTE is 50% so therefore the reduction in loan forgiveness is 50%. If the calculated loan forgiveness was $100,000 then the applicant would only be allowed $50,000 in loan forgiveness.

How is the Reduction in Employees’ Salary or Wages Calculated?

In general, a reduction in employee’s salary or wages in excess of 25% will reduce loan forgiveness. Specifically, for any new employee in 2020 and each existing employee who was not paid more than the annualized equivalent of $100,000 in any pay period in 2019, the borrower must reduce the total forgiveness amount by the total dollar amount of the salary or wage reductions that are in excess of 25% of the base salary or wages between January 1, 2020 and March 31, 2020.

Now in English, the first 25% reduction in employee’s compensation who earns less than $100,000 is excluded from the calculation. If an employee earns $1,000 per week and her compensation is reduced to $750 per week then there is no reduction in forgiveness for that specific employee ($1,000 x 25% = $250 excluded from the reduction calculation).

If that same employee’s compensation was reduced from $1,000 per week to $700 per week then the excess $50 per week ($300 reduction – $250 exclusion = $50 excess) would reduce, dollar for dollar, any loan forgiveness. In this example, $50 per week over an 8-week period reduces forgiveness by $400 ($50 excess x 8 week covered period = $400 reduction in loan forgiveness).

What if There is a Reduction in Wages and FTE?

To not double penalize borrowers the reduction in wages is only considered if there is no change in FTE for that specific employee. For example, if an employee’s wages are cut in half because their hours were cut in half then only a reduction in FTE is considered. However, if an employee’s wages are cut in half but they are working the same number of hours then only the wage reduction is considered. If there is a reduction in hours and compensation (i.e. 40 hours a week earning $15 an hour cut down to 20 hours per week at $10 an hour) then both calculations should be considered. Put simply, the salary/wage reduction attributed to the FTE reduction is not considered in the limitation on forgiveness calculation.

What if an Employer Laid-Off or Reduced Hours but Rehired and Increased Hours After Receiving a PPP Loan?

If the borrower offers to rehire or restore the hours of employees then these employees are generally exempt from the loan forgiveness reduction calculation. This exemption is available if a borrower offers to restore the employee’s hours at the same salary or hourly wage.

To exclude any reduction in full-time equivalent from the employee headcount the employer must meet the following requirement:

  • Make a good faith, written offer to rehire or restore reduced hours during the covered period (or alternative payroll covered period),
  • The offer was for the same salary and same hours before their termination
  • If the offer is rejected then the borrower must maintain records documenting the offer and rejection and report the rejected offer to the state unemployment insurance office within 30 days, and
  • Borrowers will have until June 30, 2020 to restore previously reduced employment.

What if an Employee is Fired for Cause, Voluntarily Resigns or Requests a Schedule Reduction?

If an employee is fired for cause, voluntarily resigns or requests a schedule reduction then the employer may use the same FTE from the reference period as the covered period for those employees. This effectively exempts these types of reductions in overall headcount from penalizing the borrower.

The employer should maintain records demonstrating that each employee was fired for cause, voluntarily resigned or voluntarily requested a schedule reduction. The borrower shall provide such documentation upon request.

More Guidance to Come?

Although this guidance gives a broad overview of loan forgiveness there are still specific examples across various industries and entity types that must be answered. More likely than not there will be additional guidance and additional clarification from the Treasury to give specific examples that will better assist borrowers in filling out their PPP loan forgiveness applications.

The information contained herein is is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined though consultation with your tax adviser. This article represents the views of the author only and does not necessarily represent the views or professional advice of this publication or the author’s employer.

Jeremias Ramos is a CPA working at a nationally recognized full-service accounting, tax, and consulting firm with offices conveniently located throughout the Northeast. Jeremias specializes in tax and business consulting with focus areas in real estate, professional service providers, medical practitioners, and eCommerce businesses.

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