On May 22, 2020, the Small Business Administration (SBA), in consultation with the U.S. Department of Treasury (Treasury), published an interim final rule (the Forgiveness Guidance) to supplement previous Paycheck Protection Program (PPP) loan forgiveness guidance.

The Forgiveness Guidance is intended to help PPP borrowers prepare and submit loan forgiveness applications, assist PPP lenders who will be making loan forgiveness decisions, and inform borrowers and lenders of SBA’s process for reviewing PPP loan applications and loan forgiveness. The Forgiveness Guidance is consistent with the PPP Loan Forgiveness Application that was released on May 15, 2020, and provides additional information on loan forgiveness eligibility.

Loan Forgiveness Process

Lenders will have 60 days from receipt of a PPP Loan Forgiveness Application to issue a decision regarding loan forgiveness. If the lender determines that the borrower is entitled to forgiveness of some or all of the amount applied for, the lender must request payment from the SBA at the time the lender issues its decision to the SBA.

If the SBA determines that the borrower was ineligible for the PPP loan based on the applicable provisions of the Coronavirus Aid, Relief and Economic Security Act (CARES Act), SBA rules or guidance available at the time of the borrower’s loan application, or the terms of the PPP loan application (i.e., the borrower lacked an adequate basis for the certifications made in its PPP loan application), the loan will not be eligible for forgiveness. If the loan forgiveness is denied in whole or in part, any remaining balance due on the loan must be repaid on or before the two-year maturity of the loan.

Payroll Costs Eligible for Forgiveness

The Forgiveness Guidance restates the options for borrowers to calculate payroll costs using an “alternative payroll covered period” that aligns with borrowers’ regular payroll cycles. Key clarifications include:

• For the timing of payroll cost calculations, payroll costs are considered paid on the day the 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 covered period are eligible for forgiveness if paid on or before the next regular payroll days. Payroll costs are generally incurred on the day the employee’s pay is earned.
• For employees who are not working but are still on the borrower’s payroll, payroll costs are incurred based on the borrower’s established schedule (i.e., the day the employee would have worked).
• Payroll costs for furloughed employees are eligible for forgiveness.
• Loan forgiveness for compensation paid to owner-employees and self-employed individuals is capped at the lesser of 8/52 of 2019 compensation or $15,385 per individual across all businesses.
  • 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 profit.
  • General partners are capped by the amount of their 2019 net earnings from self-employment (reduced by certain enumerated deductions) multiplied by .9235.
  • No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners.

Non-Payroll Costs Eligible for Forgiveness

An important clarification on non-payroll costs eligibility is that advance payments of interest on a covered mortgage obligation are not eligible for loan forgiveness. The Forgiveness Guidance notes that the CARES Act loan forgiveness provisions regarding mortgage obligations specifically exclude “prepayment.”

Reductions to Loan Forgiveness Amount

The Forgiveness Guidance affirms previously issued guidance with respect to a borrower’s right to exclude any reduction of full-time employee headcount attributable to an individual employee if an offer to rehire such employee was made and rejected. As previously provided, the borrower must make a good-faith written offer for the same level of compensation and maintain records of the offer and rejection.

The Forgiveness Guidance adds an additional requirement in order for the rehire “safe harbor” to apply: the borrower must inform the applicable state unemployment insurance office of an employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer. The Forgiveness Guidance notes that further information on this reporting requirement will be published on the SBA’s website.

An additional clarification is that loan forgiveness will not be reduced if an employee is fired for cause, voluntarily resigns or voluntarily requests a schedule reduction. Such employees may be counted as employees at the same full-time equivalency level before the Full-Time Equivalent (FTE) reduction event when calculating the FTE employee reduction penalty.