PPP Loan Forgiveness: Interpreting the May 22 SBA Interim Final Rules

The CARES Act, established to provide immediate assistance to those affected by COVID-19, authorized the U.S. Small Business Administration (SBA) to temporarily guarantee loans under the Paycheck Protection Program (PPP).

Section 1106(b) of the CARES Act provides that, subject to several important limitations, borrowers are eligible for forgiveness of their PPP loan in an amount equal to the sum of eligible costs incurred and eligible payments made during the covered period. However, the CARES Act still left several specifics undefined and caused some confusion among borrowers.

On May 15, 2020, Treasury and the SBA released the SBA Form 3508 PPP Forgiveness Application allowing borrowers to get a glimpse at the forgiveness process. Issuance of the application resolved certain matters and confused others.

On May 22, the SBA released an Interim Final Rule (IFR) on Loan Forgiveness to help resolve some of this confusion. This guidance is consistent with the application, but adds several important clarifications.

New clarifications learned from the IFR

Area of Consideration	Clarification
Allowable costs have been unclear, due to uncertain definitions of paid and/or incurred terms.	Additional paid and/or incurred wording seems to allow for increased forgiveness, subject to limitations
Bonuses and hazard pay	Eligible for forgiveness, subject to limitations
Many borrowers were concerned about the timing of forgiveness, because Section 1102 provides a time period for allowable uses that goes from February 15, 2020 to June 30, 2020 Although the time period for Section 1106 (addressing forgiveness) never included a June 30 end date, some borrowers worried about the discrepancy between allowable uses and forgiveness	While the IFR does not affect the allowable uses requirements contained in Section 1102, it does provide examples that demonstrate forgiveness may include activity that occurs later than June 30
Since tips are paid by customers and are not an expense incurred directly by borrowers, some have questioned if tips would be eligible for forgiveness	The payroll definition included in the IFR specifically includes “cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips)”
Owner-employees and self-employed compensation	Forgiveness of such compensation is subject to certain caps — see Question 3 c. below

Keep in mind that forgiveness considerations are subject to certifications requiring that “funds will be used to retain workers and maintain payroll” and be used for other authorized purposes.

Certification and eligibility

On May 22, the SBA issued guidance related to loan review procedures and related borrower and lender responsibilities.

Section 1106(b) of the CARES Act provides for forgiveness of a PPP loan only if the borrower is an “eligible recipient” as defined by 15 U.S.C. § 636(a)(36)(A)(iv) and rules and guidance. The intention is to promote the public interest and align the SBA’s functions with other governmental policies, and allow the SBA to carry out the CARES Act’s PPP provisions, including PPP loan eligibility.

Based on this guidance, the SBA may direct a lender to disapprove a PPP borrower’s loan forgiveness application if the SBA determines that the borrower does not qualify as an eligible recipient for the loan.

Eligible for forgiveness?

Below we will highlight some of the important matters contained in the new IFR. Please review the Interim Final Rule on Loan Forgiveness for full consideration.

Payroll costs eligible for loan forgiveness

Question 3 a. of the IFR asks, “When must payroll costs be incurred and/or paid to be eligible for forgiveness?” The accompanying guidance states:

“In general, payroll costs paid or incurred* during the eight consecutive week (56 days) covered period are eligible for forgiveness. Borrowers may seek forgiveness for payroll costs for the eight weeks beginning on either:

1. the date of disbursement of the borrower's PPP loan proceeds from the Lender (i.e., the start of the covered period); or
2. the first day of the first payroll cycle in the covered period (the alternative payroll covered period).
   * Emphasis added

Based on the guidance, it appears that payroll costs paid during the covered period (or alternative period) are eligible for forgiveness. In addition, payroll costs incurred during the covered period (or alternative period) are eligible for forgiveness as long as they are paid on or before the next regular payroll date after the period.

Question 3 b. asks, “Are salary, wages, or commission payments to furloughed employees; bonuses; or hazard pay during the covered period eligible for loan forgiveness?” The guidance states: “The CARES Act defines the term ‘payroll costs’ broadly to include compensation in the form of salary, wages, commissions, or similar compensation.” Therefore, the answer is yes, subject to the $100,000 annual basis limitation.

Question 3 c. asks, “Are there caps on the amount of loan forgiveness available for owner-employees and self-employed individuals’ own payroll compensation?” The guidance reveals that the answer is yes:

“[T]he 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 (i.e., approximately 15.38 percent of 2019 compensation) or $15,385 per individual in total across all businesses. See 85 FR 21747, 21750.

In particular, owner-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 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.”

Nonpayroll costs eligible for loan forgiveness

Question 4 a. asks, “When must nonpayroll costs be incurred and/or paid to be eligible for forgiveness?”

“A nonpayroll cost is eligible for forgiveness if it was:

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 is after the covered period.

Based on this guidance, the borrower can be forgiven for amounts paid during the covered period and amounts incurred during the covered period and paid after the covered period, but before the next regular billing date. This should allow for more forgiveness than originally thought.

Please note that advanced payments for mortgage interest are not eligible for forgiveness.

In addition, nonpayroll costs are capped at 25% of the loan forgiveness amount.

Reduction to loan forgiveness

Section 1106 of the CARES Act includes provisions for reductions in loan forgiveness based on reduction of full-time equivalent employees (FTEs).

Question 5 a. asks, “Will a borrower’s loan forgiveness amount be reduced if the borrower laid-off or reduced the hours of an employee, then offered to rehire the same employee for the same salary and same number of hours, or restore the reduction in hours, but the employee declined the offer?” The guidance reveals that the answer is no.

When the borrower offers to rehire employees, they are generally exempt from the CARES Act’s loan forgiveness reduction calculation. See the Interim Final Rule on Loan Forgiveness for full consideration of requirements, calculation of, and the result of reductions in FTEs as well as reduction in employees’ salaries.

Question 5 g. asks, “If a borrower restores reductions made to employee salaries and wages or FTE employees by not later than June 30, 2020, can the borrower avoid a reduction in its loan forgiveness amount?” The guidance explains that the answer is yes:

“Section 1106(d)(5) of the CARES Act provides that if certain employee salaries and wages were reduced between February 15, 2020 and April 26, 2020 (the safe harbor period) but the borrower eliminates those reductions by June 30, 2020 or earlier, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in salaries and wages under section 1106(d)(3) of the CARES Act.

Similarly, if a borrower eliminates any reductions in FTE employees occurring during the safe harbor period by June 30, 2020 or earlier, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in FTE employees.”

Question 5 h. addresses employees who are fired, who resign, or who request a schedule reduction. As with employees who reject an offer to return to work, employees who are fired for cause, voluntarily resign, or voluntarily request a schedule reduction will not result in forgiveness reduction, assuming the borrower maintains records demonstrating that each such employee was fired for cause, voluntarily resigned, or voluntarily requested a schedule reduction. The borrower will be required to provide this documentation upon request.

Consider wait and see approach

Legislation that is currently being considered in the Senate and the House could extend the loan forgiveness period to 16 or as much as 24 weeks. In addition, legislation may eliminate the rule requiring PPP borrowers to spend at least 75% of the funds on payroll costs to qualify for full loan forgiveness.

If passed, these changes would result in more favorable forgiveness terms for borrowers. Specifically, it would not be necessary for you to utilize all of your loan proceeds during the initial eight-week covered period to obtain forgiveness. Instead, some of the proceeds could be used during the forgiveness extended period.

We suggest that you pull your finance team together or connect with a trusted business advisor to manage the resources of your business to best weather this financial storm.

How we can help

As you face challenges now and in the months ahead, CLA is here to assist you. CLA can come alongside you as you navigate the PPP forgiveness application process. Please contact us today.

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