Interim Final Rule on PPP Loan Forgiveness

• These Interim Final Rules were issued on May 22, 2020
• Updates were made to the rule on June 22, 2020 and we have updated this page as of June 26, 2020.
• This post should be used in conjunction with our May 19, 2020 (Updated June 26, 2020) blog which can be found here.

Loan Forgiveness Process

• • A borrower must complete and submit the Loan Forgiveness Application (SBA Form 3508, SBA Form 3508EZ or the lender’s equivalent form) to their lender
  • • A borrower may submit a loan forgiveness application any time on or before the maturity date of the loan – including before the end of the covered period if the borrower has used all the loan proceeds for which the borrower is requesting forgiveness.
  • The lender will review the application and make a decision regarding loan forgiveness
    • The lender has 60 days from receipt of a completed application to issue a decision to SBA
  • SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to SBA.
  • If applicable, SBA will deduct EIDL Advance Amounts from the forgiveness amount remitted to the lender as required by section 1110(e)(6) of the CARES Act.

Updates to Payroll Costs

• Payroll costs eligible for loan forgiveness are incurred or paid during the covered period or alternative payroll covered period.
  • The covered period is 24 weeks (168-days) for all loans, if the loan was received before June 5, 2020, the borrower can choose to elect an 8 week (56 day) covered period instead.
• Payroll costs are considered paid on the day that paychecks are distributed, or the borrower originates an ACH credit transaction
• Payroll costs incurred during the borrower’s last pay period of the covered period or the alternative payroll covered period are eligible for forgiveness if paid on or before the next regular payroll date
  • Example (8-weeks): A borrower has a bi-weekly payroll schedule whose 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. If the borrower elects the alternative payroll covered period for payroll cost purposes the period would start on June 7 and end 55 days later (for a total of 56 days) on August 1. Payroll costs paid and incurred during this period would be eligible for forgiveness as long as they are paid on or before the first regular payroll date occurring after August 1.
  • Example (24-weeks): A borrower has a bi-weekly payroll schedule whose eight-week covered period begins on June 1 and ends on November 15. The first day of the borrower’s first payroll cycle that starts in the covered period is June 7. If the borrower elects the alternative payroll covered period for payroll cost purposes the period would start on June 7 and end 167 days later (for a total of 168 days) on November 21. Payroll costs paid and incurred during this period would be eligible for forgiveness as long as they are paid on or before the first regular payroll date occurring after November 21.
• Payroll costs are incurred on the day the employee’s pay is earned (i.e. the day the employee worked)
  • If employees are not performing work but are still on the borrower’s payroll, payroll costs are incurred based on the schedule established by the borrower (typically, each day that the employee would have performed work).
• Salary, wages, or commissions payments to furloughed employees, bonuses or hazard pay during the covered period are eligible for loan forgiveness
  • As long as the employee’s total compensation does not exceed $100,000 when annualized, the employees’ hazard pay and bonuses are eligible for loan forgiveness.
  • For an 8-week covered period that amount is $15,385. For a 24-week covered period, the amount would be $46,154 for employees (NOT owner-employees).

Updates on Owner-Employees and Self-Employed Individuals

• There is a cap on the amount of loan forgiveness available for owner-employees and self-employed individuals’ own payroll compensation
  • Loan forgiveness 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 are capped by the amount of their 2019 employee cash compensation and employee 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 net profit.
    • General partners are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235.
  • No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners, as such expenses are paid out of their net self-employment income.

Updates on Nonpayroll Costs

• Nonpayroll costs are eligible for forgiveness if they were 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.
  • Example: The covered period begins on June 1 and ends on July 26, the borrower pays its 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. The borrower may also seek forgiveness for the portion of the July electricity bill through July 26 (end of the covered period) because it was incurred during the covered period and paid on the next regular billing date.
• Cannot prepay any expenses and seek forgiveness on them

Updates on Owner-Employees and Self-Employed Individuals

• There is a cap on the amount of loan forgiveness available for owner-employees and self-employed individuals’ own payroll compensation
  • Loan forgiveness can be no more than the lesser of 8/52 of 2019 compensation or $15,385 per individual for an 8-week covered period in total across all businesses. For a 24-week cover period, the amount is capped at 2.5 months’ worth of 2019 compensation or net profit not to exceed $20,833.
    • C-Corporation owner-employees are capped by the amount of their employee cash compensation and employer retirement and health insurance contributions made on their behalf.
    • S-Corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement contributions made on their behalf.
      • Health Insurance contributions made on their behalf cannot be separately added because those payments are already included in their employee cash compensation.
  • Schedule C or F filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit.
  • General partners are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235.
• No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C or F filers and general partners, as such expenses are paid out of their net self-employment income.

Updates on Nonpayroll Costs

• Nonpayroll costs are eligible for forgiveness if they were 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.
  • Example: The 24-week covered period begins on June 1 and ends on November 15. The borrower pays its electricity bills for June through October during the covered period an pays its November electricity bill on December 10, which is the next regular billing date. The borrower may seek loan forgiveness for its June through October electricity bills because they were paid during the covered period. The borrower may also seek forgiveness for the portion of the November electricity bill through November 15 (end of the covered period) because it was incurred during the covered period and paid on the next regular billing date.

Clarification on Reduction in Loan Forgiveness Amounts

• The CARES Act allows for a reduction in a borrower’s loan forgiveness amount based on reductions in full-time equivalents (FTE) or in employee salary, wages or hours during the covered period
• There is an exemption for this reduction if the employees are rehired and restored to their salary, wage and hour levels by December 31, 2020.
• The SBA and Treasury department also adopted a regulatory exemption to the reduction rules for borrower’s who have offered to rehire employees or restore employee hours, even if the employees have not accepted.
  • The loan forgiveness amount will not be reduced due to an employee declining to come back to work if the borrower does the following:
    • The borrower made a good faith, written offer to rehire such employee (or, if applicable, restore reduced hours of such employee) during the covered period or the alternative covered period
    • The offer was for the same salary or wages and the same number of hours as earned by such employees 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
    • The borrower informed the applicable state unemployment insurance office of such an employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.
  • The Paycheck Protection Program Flexibility Act of 2020  states the amount of loan forgiveness shall be determined without regard to a proportional reduction in the number of full-time equivalents  if an eligible recipient, in good faith,
    • • Is able to document:
        • An inability to rehire individuals who were employees of the eligible recipient on February 15, 2020 and
        • An inability to hire similarly qualified employees for unfilled positions  on or before December 31, 2020, or
      • Is able to document an inability to return to the same level of business activity as such business was operating before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Center for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period March 1, 2020 and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirements related to COVID-19.
        • Example: A PPP borrower is in the business of selling beauty products both online and at its physical store. During the covered period, the local government where the borrower’s store is located orders all non-essential businesses, including the borrower’s business, to shut down their stores, based in part on COVID-19 guidance issued by the CDC in March 2020. Because the borrower’s business activity during the covered period was reduced compared to its activity before February 15, 2020 due to compliance with COVID Requirements or Guidance, the borrower satisfies the Flexibility Act’s exemption and will not have its forgiveness amount reduced because of a reduction in FTEs during the covered period, if the borrower in good faith maintains records regarding the reduction in business activity and the local government’s shutdown orders that reference a COVID Requirement or Guidance as described above.
• A reduction in FTEs for loan forgiveness reduction reduces the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees.
  • For example, if a borrower had 10 FTE employees during the reference period and this declined to 8 FTE employees during the covered period, the percentage of FTE employees declined by 20% and thus only 80% of otherwise eligible expenses are available for forgiveness.
• A full-time equivalent employee means an employee who works 40 hours or more, on average each week. For those employees who work less than 40 hours a week on average get a portion of a single full-time equivalent employee and together those are aggregated to get the total FTEs.
  • For full-time employees, the borrower will divide the average number of hours paid for each employee per week by 40 capping the quotient at 1.0
  • For part-time employees, the borrower has two options to calculate the full-time equivalency.
    • One option is to calculate the average number of hours a part-time employee was paid per week during the covered period and divide that average by 40
    • The second option for administrative convenience would be to elect to use a full-time equivalency of .5 for each part-time employee. This would be a good option if you don’t have access to documentation needed to calculate the average number of hours worked each week or if it would be too cumbersome to calculate.
  • All FTE calculations and documentation for the reference period and covered period must be retained by the borrower for 6 years.
• A reduction in an employee’s salary or wages in excess of 25 percent will generally result in a reduction in the loan forgiveness amount unless an exception applies.
  • Done on an individual employee basis
  • 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 base salary or wages between January 1, 2020 and March 31, 2020, subject to exceptions for borrowers who restore reduced wages or salaries by June 30, 2020.
    • Example: A borrower is using a 24-week covered period. This 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 on a full-time basis during the covered period, with an FTE of 1.0. In this case, the first $250 (25 percent of $1,000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $1,200 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by 24 weeks). If the borrower applies for forgiveness before the end of the covered period, it must account for the salary reduction for the full 24-week covered period (totaling $1,200).
    • Example: A borrower that received a PPP loan before June 5, 2020 has elected to use an eight-week covered period. This 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 on a full-time basis during the covered period, with an FTE of 1.0. In this case, the first $250 (25 percent of $1,000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $400 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by eight weeks).
• To avoid a double penalty, the salary/wage reduction applies only to the portion of the decline in employee’s salary and wages that is not attributed to the FTE reduction.
  • Example – An hourly wage employee had been working 40 hours per week during the borrower selected reference period (FTE employee of 1.0) and the borrower reduced the employee’s hours to 20 hours per week during the covered period (FTE employee of 0.5). There was no change to the employee’s hourly wage 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 conduct a salary/wage reduction calculation for that employee.
• There will be no reduction in loan forgiveness for an employee who is fired for cause, voluntarily resigns, or voluntarily requests a schedule reduction.
  • For fired for cause, voluntarily resigns or voluntarily requests a reduced schedule during the covered period or the alternative payroll covered period the borrower may count such employee at the same full-time equivalency level before the FTE reduction even when calculating the FTE reduction penalty.

Documentation Each Borrower Must Maintain but Not Required to Submit

See May 19 blog post here.

You can read the SBA’s original guidance document on the Treasury’s website here.

You can read the SBA’s additional guidance document on the Treasury’s website here.

If you have any questions, please reach out to your personal Sciarabba Walker contact or email us at info@swcllp.com.