In a recent interim final rule, the Small Business Administration (“SBA”) clarified that borrowers of paycheck protection program (“PPP”) loans could apply for loan forgiveness prior to the end of a borrower’s covered period if the borrower had already used all the PPP loan proceeds. Generally, a borrower’s covered period is either 8 weeks, if the borrower obtained the PPP loan prior to June 5, 2020 and chooses not to use the longer 24-week period, or 24 weeks, in the case of any other borrowers, from the date of loan disbursement.

Borrowers should recall that PPP loan forgiveness is subject to reduction where a borrower has reduced employee wages or salaries in excess of 25% during the covered period.  Nonetheless, a safe harbor will permit such borrowers to disregard any reduction in PPP loan forgiveness that would otherwise apply so long as that salary or wage reduction is eliminated by December 31, 2020.  However, the interim final rule permitting early loan forgiveness application makes clear that if a borrower has reduced any employee’s salaries or wages in excess of 25%, that borrower must account for the excess salary reduction for the full covered period, regardless of whether it later eliminates the reduction within the allotted timeframe.  The SBA included the following example to illustrate:

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, [as a full-time equivalent employee].  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).[1]

Any borrower that has had to reduce employee salaries or wages should weigh the costs of monitoring its continued compliance with the ever-shifting PPP rules coming forward from the SBA against the certain reduction in its PPP loan forgiveness should it decide to apply early for loan forgiveness.

[1] The example can be found on page 18 of the interim final rule, available here.

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