On May 22, 2020 the SBA and Department of the Treasury released the long awaited Interim Final Rule on Forgiveness of Paycheck Protection Program (PPP) Loans and the Interim Final Rule on SBA Loan Review Procedures, following up on the prior posting of the Borrower Forgiveness Application and accompanying Procedural Notice.

For more information on the Paycheck Protection Program, the Economic Injury Disaster Loans (EIDL) and the Emergency Economic Injury Grants (EIDL Grants).

PPP Loan Forgiveness Information

Procedure – PPP Loan Forgiveness

Q:    How do Borrowers apply for PPP loan forgiveness? 

A:    Eight weeks from the PPP loan closing date, a Borrower can begin to submit a request to its Lender for PPP loan forgiveness. Borrowers must complete and submit the Loan Forgiveness Application SBA Form 3508 to the Lender that provided the PPP Loan. Page 10 of the Forgiveness Application itemizes the documents that each Borrower must submit with its application, including specific payroll records, full-time equivalent employee (FTE) documentation, and non-payroll costs documentation. Borrowers should begin collecting this required documentation.

Q:    Is there a due date for the Forgiveness Application? 

A:    As of the date of this publication, nothing in the Forgiveness Application, the Interim Final Rules or the SBA FAQs requires the Borrower to apply for forgiveness. These sources also do not provide a deadline by which Borrowers who do wish to apply for forgiveness must submit their forgiveness applications to their Lenders. However, Borrowers should review the promissory notes and other loan documents they executed in connection with their PPP loan, because Lenders may have included terms that require the Borrower to apply for forgiveness and to do so within a certain period of time. 

Q:    When will I know if I was approved for forgiveness? 

A:    For loans not reviewed by the SBA, the forgiveness process could take up to 5 months. This time period could be even longer for loans reviewed by the SBA.

After a Borrower submits a complete application for forgiveness to its Lender, the Lender has 60 days to review the application and submit its decision to the SBA. The Lender’s decision may take the form of an approval, in whole or in part; a denial; or if directed by the SBA, a “denial without prejudice” due to a pending SBA review of the loan. A Borrower may request that the SBA review a Lender’s decision denying forgiveness within 30 days of receiving the denial notice from the Lender. The SBA, subject to any SBA review of the loan or loan application, has up to 90 days to remit the appropriate forgiveness amount to the Lender.

As indicated on the Loan Forgiveness Application, the audit threshold is based on whether the Borrower, together with its affiliates, received PPP loans with an original principal amount in excess of $2 million. The SBA may also review a PPP loan of any size – regardless of whether a forgiveness application has been submitted – at any time in its discretion. If the SBA reviews a PPP Loan, the SBA will notify the Lender in writing and the Lender is required within five (5) business days to notify the Borrower in writing of receipt and to provide certain information to the SBA including the loan application, the forgiveness application, and all supporting documentation. If the SBA determines that a Borrower was ineligible for the PPP loan, was ineligible for the PPP loan amount obtained or for the loan forgiveness amount claimed, the SBA will direct the Lender to deny the loan forgiveness application in whole or in part, as appropriate. The SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.

The Borrower may appeal the SBA’s determinations, and the SBA has indicated that it intends to issue a separate interim final rule addressing this appeal process. The interim final rule does not impose a time frame on the SBA for its review of any PPP loan.  

Q:    If my Lender denies my application for forgiveness, can I appeal the Lender’s decision? 

A:    Yes. If a Lender denies a Borrower’s application for forgiveness, the Lender must notify the Borrower in writing that it has issued a decision to the SBA denying the loan forgiveness application. Within 30 days of such notice from the Lender, the Borrower may request that the SBA review the Lender’s decision. If the SBA undertakes such a review, the SBA will notify the Lender in writing and the Lender must notify the Borrower in writing within five (5) business days of receipt.  

Q:    If the SBA determines that I was ineligible for the PPP loan, or was ineligible for the PPP loan amount obtained or for the loan forgiveness amount claimed, can I appeal the SBA’s determination?

A:    Yes. The SBA has indicated that it intends to issue a separate interim final rule addressing this appeal process.

Q:    Will my forgiveness application be audited by the SBA? 

A:    As indicated on the Loan Forgiveness Application, the audit threshold is based on whether the Borrower, together with its affiliates, received PPP loans with an original principal amount in excess of $2 million. The SBA may also review a PPP loan of any size – regardless of whether a forgiveness application has been submitted – at any time in its discretion. If the SBA reviews a PPP loan, the SBA will notify the Lender in writing and the Lender is required within five (5) business days to notify the Borrower in writing of receipt and to provide certain information to the SBA including the loan application, the forgiveness application, and all supporting documentation. The SBA may request additional information from the Borrower in connection with its audit. The Borrower will have the opportunity to respond to the SBA’s questions in a review. The Borrower’s failure to provide the information requested by the SBA may result in a determination that the Borrower was ineligible for the PPP loan or ineligible to receive the loan amount or loan forgiveness amount claimed by the Borrower. If the SBA determines that a Borrower was ineligible for the PPP loan, was ineligible for the PPP loan amount obtained or for the loan forgiveness amount claimed, the SBA will direct the Lender to deny the loan forgiveness application in whole or in part, as appropriate. The SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.

The Borrower may appeal the SBA’s determinations, and the SBA has indicated that it intends to issue a separate interim final rule addressing this appeal process. The interim final rule does not impose a time frame on the SBA for its review of any PPP Loan.  

An audit may even occur after the PPP loan is forgiven or is repaid in full. Borrowers are reminded that they are required to keep all documentation related to their PPP loan for six (6) years after the date of forgiveness or repayment. 

Q:    What happens if only a portion of my PPP loan is forgiven, or if my forgiveness application is denied? 

A:    If a Borrower is denied forgiveness in whole or in part, the amount of the loan not forgiven must be repaid by the Borrower on or before the two-year maturity date. This applies only to loan forgiveness applications that are not reviewed by the SBA prior to the Lender’s decision on the forgiveness application. A Borrower should also review its promissory note and the other loan documentation it executed in connection with its PPP loan for any additional implications of a denial of forgiveness and specific repayment requirements.

If the SBA determines that the Borrower is ineligible for the PPP loan or is ineligible for the loan amount or the loan forgiveness amount claimed by the Borrower, the SBA may pursue other available remedies.  

Q:    A Lender may deny a Borrower’s loan forgiveness application “without prejudice” – what does this mean?

A:    If, at the time a Borrower submits its forgiveness application, the SBA is already reviewing the Borrower’s loan and loan application, then the SBA may direct the Lender to “deny without prejudice” the Borrower’s forgiveness application.  In the case of a “denial without prejudice” the Borrower may subsequently request that the Lender reconsider its application for loan forgiveness, unless the SBA has determined that the Borrower is ineligible for a PPP loan.  

Eligibility – PPP Loan Forgiveness

Q:    What amount of my PPP loan is eligible for forgiveness? 

A:    A Borrower is eligible for forgiveness of part or all of its PPP Loan, subject to adjustments and limitations, if proceeds are used for eligible purposes and the Borrower can provide the required supporting documentation to demonstrate that it qualifies for forgiveness. The Forgiveness Application is set up as a worksheet with instructions. Borrowers must complete the Schedules to the Forgiveness Application in accordance with the Forgiveness Application Instructions to determine the amount of forgiveness.

Q:    Which expenses from my PPP loan proceeds are eligible for forgiveness? 

A:    The sum of the following costs incurred and payments made during the Covered Period or the Alternative Payroll Covered Period, as applicable (see below Q&As on “Covered Period” and “Alternative Payroll Covered Period”), subject to certain other terms and limits discussed elsewhere in this FAQ and as set forth on the Forgiveness Application and the terms of SBA Interim Final Rules and guidance, are eligible for forgiveness:

• Payroll costs;
• Interest payments on any business mortgage obligation on real or personal property that was incurred before February 15, 2020;
• Business rent payments on real or personal property under a lease agreement in force before February 15, 2020; and
• Business utility payments for the distribution of electricity, gas, water, transportation, telephone or internet access for which service began before February 15, 2020.

It is important to note that the “Alternative Payroll Covered Period” is only applicable to payroll costs and cannot be used to determine non-payroll expenses included in the forgiveness calculation.
 
Q:    What is the “Covered Period” for loan forgiveness? 

A:    The “Covered Period” is the 8-Week (56-day) period beginning on the date that the loan proceeds were disbursed to the Borrower. For example, if the Borrower received its PPP Loan proceeds on April 20, 2020, then the first day of the “Covered Period” is April 20, 2020 and the last day of the “Covered Period” is June 14, 2020.

Q:    What is the “Alternative Payroll Covered Period” for loan forgiveness?

A:    Borrowers with a bi-weekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the 8-Week (56-day) period beginning on the first day of the first pay period following the date that the loan proceeds were disbursed to the Borrower. For example, if the Borrower received its PPP loan proceeds on April 20, 2020, and the first day of its first pay period following its PPP loan disbursement is April 26, 2020, then the first day of the “Alternative Payroll Covered Period” – if elected by the Borrower – is April 26, 2020 and the last day of the “Alternative Payroll Covered Period” is June 20, 2020.   

If the Borrower elects the “Alternative Payroll Covered Period,” it must apply the “Alternative Payroll Covered Period” wherever there is a reference in the Loan Forgiveness Application to “the Covered Period or the Alternative Payroll Covered Period.”  However, the Borrower must apply the “Covered Period” (not the “Alternative Payroll Covered Period”) wherever there is a reference in the application to “the Covered Period” only.

It is important to note that the “Alternative Payroll Covered Period” is only applicable to payroll costs and cannot be used to determine non-payroll expenses included in the forgiveness calculation.  

Q:   What “payroll costs” are eligible for forgiveness? 

A:   “Payroll costs” include compensation up to $100,000 which applies only to cash compensation, not to non-cash benefits, such as payment for provision of employee benefits consisting of group health care coverage, payment of state and local taxes assessed on compensation, and employer contributions to defined-benefit or defined-contribution retirement plans. The compensation is on an annualized basis to employees with a principal place of residence in the U.S. in the form of:

• gross salary, gross wages, gross commissions, or similar compensation; 
• gross 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); 
• payment for vacation, parental, family, medical, or sick leave;
• allowance for separation or dismissal; 
• payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; 
• payment of state and local taxes assessed on compensation of employees; and
• for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation.

“Payroll costs” may not include:

• compensation of an individual employee in excess of an annual salary of $100,000 in one year, pro-rated during the covered period;
• an employer’s share of payroll tax;
• any compensation of any employee whose principal place of residence is outside of the United States;
• qualified sick leave wages or family leave wages for which a credit is allowed under section 7001 or 7003 of the Families First Coronavirus Response Act; or 
• amounts paid to independent contractors.  

Borrowers are generally eligible for forgiveness for the payroll costs “paid” and the payroll costs “incurred” during the Covered Period or Alternative Payroll Covered Period. Payroll costs are considered “paid” on the day that paychecks are distributed or the Borrower originates an ACH credit transaction. Payroll costs are considered “incurred” on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period or Alternative Payroll Covered Period are eligible for forgiveness if paid on or before the next regular payroll date.
 
Q:    Are bonuses or hazard pay eligible for forgiveness? 

A:    Yes. If an employee’s total compensation does not exceed $100,000 on an annualized basis, the employee’s hazard pay and bonuses are eligible for loan forgiveness.   

Q:    What non-payroll costs are eligible for forgiveness? 

A:     Non-payroll costs eligible for forgiveness include:

• covered mortgage obligations: payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020;
• covered rent obligations: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020; and
• covered utility payments: business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

Eligible non-payroll costs must be 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. As a reminder, eligible non-payroll costs cannot exceed 25% of the total forgiveness amount.  

Q:    I incurred certain eligible payroll or non-payroll costs before I actually received my PPP Loan proceeds, but I paid those costs during the Covered Period or Alternative Payroll Covered Period (as applicable). Are those amounts incurred prior to – but paid during – the Covered Period or Alternative Payroll Covered Period (as applicable) eligible forgiveness?  

A:    Yes.  

Borrowers are generally eligible for forgiveness for the payroll costs “paid” and the payroll costs “incurred” during the Covered Period or Alternative Payroll Covered Period. Payroll costs are considered “paid” on the day that paychecks are distributed or the Borrower originates an ACH credit transaction. Payroll costs are considered “incurred” on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period or Alternative Payroll Covered Period are eligible for forgiveness if paid on or before the next regular payroll date.  

For example, a Borrower’s Covered Period runs from April 14 through June 8, 2020. The Borrower has a bi-monthly payroll schedule that pays on the 15th and the last day of each month. The Borrower may use PPP loan funds to pay the payroll costs that would be paid on April 15, 2020 (“paid” during the Covered Period even though for payroll prior to the Covered Period). The Borrower may also use PPP loan funds to pay the payroll costs that would be paid on April 30, 2020; May 15, 2020; and May 31, 2020 (“incurred” and “paid” during the Covered Period). Additionally, on June 15, 2020 (next regular payroll date), the Borrower may use PPP Loan funds to pay the payroll costs attributable to June 1 through June 8, 2020 (“incurred” during the Covered Period even though paid after the Covered Period). All such payments may be included in the requested forgiveness amount.  

Eligible non-payroll costs must be 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. The Interim Final Rule on forgiveness provide the example of an electric bill. Electric bills are typically paid in arrears. The Borrower’s Covered Period is June 1 through July 26, 2020. The electric bills that the Borrower pays for May and June are paid during the Covered Period and eligible for forgiveness. The July electric bill is paid on August 10, 2020 (which is the next regular billing date). The payment on August 10, 2020 (only for the portion of the Borrower’s July electricity bill through July 26, 2020 – the end of the Covered Period) may be included in the requested forgiveness amount because the related expenses were “incurred” during the Covered Period and paid on the next regular billing date.

Q:    Is interest that accrued on the PPP Loan eligible for forgiveness? 

A:    It appears that the answer is yes, and that interest is included in the forgiveness amount that the SBA pays to the Lender. The May 22, 2020 Interim Final Rules provide that: “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 the amount remitted by SBA to the Lender exceeds the remaining principal balance of the PPP loan (because the borrower made scheduled payments on the loan after the initial deferment period), the Lender must remit the excess amount, including accrued interest, to the borrower.” 

Q:    What if I applied for my PPP Loan based on a good faith belief that I was eligible, but a later Interim Final Rule or SBA guidance made clear my interpretation was not in line with what the SBA intended? 

A:    In discussing the SBA’s determination of forgiveness, the Interim Final Rule on forgiveness states “The Administrator may review whether a borrower is eligible for the PPP loan based on the provisions of the CARES Act, the rules and guidance available at the time of the borrower’s PPP loan application, and the terms of the borrower’s loan application. See FAQ 17 (posted April 6, 2020).” FAQ 17 states that Borrowers and Lenders may rely on the laws, rules and guidance available at the time of the application, but if the loan proceeds had not been disbursed at the time of the clarifying guidance, then the Borrower should have modified its application. The eligibility review will be “based on the provisions of the CARES Act, SBA rules or guidance available at the time of the borrower’s loan application, or the terms of the borrower’s PPP loan application…” The SBA’s review will also examine whether the Borrower provided adequate documentation for the certifications on the loan application.

Q:     What if I have not been able to open my business at all, but I am still paying employees? 

A:     For employees who 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). Therefore, such payroll costs are eligible for forgiveness.

Reductions to Forgiveness Amount

This FAQ section is limited to the additional information provided in the Interim Final Rule on Forgiveness and the Interim Final Rule on Loan Review Procedures. Additional instructions and examples are contained in the Interim Final Rules themselves, as well as on the Forgiveness Application.

Q:    What actions will reduce my forgiveness amount? 

A:    Generally, the amount of loan forgiveness will be reduced if the number of full-time equivalent employees is reduced (FTE Reduction), if employees’ salaries or hourly wages are reduced by more than 25% (Salary/Hourly Wage Reduction), or if the Borrower’s eligible non-payroll expenses exceed 25% of the total eligible expenses.

Q:    How should a Borrower calculate a full-time equivalent employee (FTE)? 

A:    There are two (2) methods for a Borrower to calculate FTEs:

• Option #1 – for each employee, take the number of hours paid per week, divide by 40, and round the total to the nearest tenth.  The maximum for each employee is capped at 1.0.
• Option #2 – Assign a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.  

Borrowers may select only one of these two methods, and must apply that method consistently to all of their part-time employees for the Covered Period or the Alternative Payroll Covered Period and the selected reference period.  

Q:    What is the FTE Reduction? 

A:    Generally, the Borrower’s loan forgiveness will be reduced if the Borrower’s average number of FTEs during the Covered Period or Alternative Payroll Covered Period is less than the average number of FTEs during the Borrower’s chosen reference period.  Borrowers can choose between the following reference periods:

• February 15, 2019 to June 30, 2019;
• January 1, 2020 to February 29, 2020; or 
• for seasonal employers, either of the preceding periods or a consecutive 12-week period between May 1, 2019 and September 15, 2019. 

The same method must be used for each employee.

However, the FTE Reduction Safe Harbor provides that if both (1) the Borrower reduced its FTE employee levels between February 15, 2020 and April 26, 2020; and (2) the Borrower restored its FTE employee levels not later than June 30, 2020 to the levels in the Borrower’s pay period that included February 15, 2020, then such reduction will not reduce the amount eligible for forgiveness. 

Additionally, the following situations do not count toward the FTE Reduction calculations:

• the Borrower offered to rehire former employees or offered to restore the reduced hours of such employee so long as the following conditions are met:
  • the Borrower made a good-faith, written offer to rehire the employee (or, if applicable, restore the reduced hours of such employee) during the Covered Period or the Alternative Payroll Covered Period; 
  • the offer was for the same salary or wages and the same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;
  • the employee rejected the offer;
  • the Borrower maintained records documenting the offer and its rejection; and
  • the Borrower informed the applicable state unemployment insurance office of the offer and rejection within 30 days of the employee’s rejection. This last requirement is a new provision from the Interim Final Rule on Forgiveness.The SBA will provide additional information on this reporting requirement on its website.
• employees fired for cause during the Covered Period or the Alternative Payroll Covered Period;
• employees who voluntarily resigned during the Covered Period or the Alternative Payroll Covered Period; or
• employees who requested and received a reduction in their hours during the Covered Period or the Alternative Payroll Covered Period.

Any FTE reductions in the above cases do not reduce the Borrower’s loan forgiveness.  

Q:     By what amount is my loan forgiveness reduced if I have fewer FTEs during the Covered Period or the Alternative Payroll Covered Period? 

A:     If none of the FTE Reduction exceptions or the FTE Reduction Safe Harbor apply, the average number of FTEs during the Covered Period or the Alternative Payroll Covered Period reduces the amount of forgiveness proportionally by the percentage of reduction in FTEs. For example, if the Borrower has 20% fewer FTEs during the Covered Period or the Alternative Payroll Covered Period, then the amount of forgiveness is reduced by 20%. The Forgiveness Application and schedules account for these reductions.

Q:     What is the Salary/Hourly Wage Reduction? 

A:     Generally, for employees who earned $100,000 or less in 2019 (or were not employed by the Borrower in 2019), the Borrower’s loan forgiveness will be reduced for each employee whose average pay (salary or hourly wage) during the Covered Period or the Alternative Payroll Covered Period is less than 75% of their average pay compared to the period from January 1, 2020 to March 31, 2020.

The Salary/Hourly Wage Reduction Safe Harbor provides that (1) if the average annual salary or hourly wages between February 15, 2020 and April 26, 2020 is equal to or greater than the annual salary or hourly wages as of February 15, 2020 or (2) if the average annual salary or hourly wage as of June 30, 2020 is restored to an amount equal to or greater than the average annual salary or wage as of February 15, 2020, then the reduction during the Covered Period or the Alternative Payroll Covered Period does not count to reduce the amount of forgiveness. 

If the Borrower does not meet the Salary/Hourly Wage Reduction Safe Harbor, the total amount of forgiveness is reduced by the total dollar amount of salary or wage reduction in excess of 25% of the salary or wages between January 1, 2020 and March 31, 2020. This reduction calculation is done on a per employee basis, not in the aggregate. 

Q:     If I terminated an employee or reduced their hours from full-time to part-time, do I count those reductions in both the calculations for the FTE Reduction and the Salary/Hourly Wage Reduction? 

A:    The Salary/Hourly Wage Reduction applies only to the portion of the Salary/Hourly Wage Reduction that is not attributable to the FTE Reduction.The SBA and Treasury make clear that Borrowers should not be doubly penalized by having such reductions count in both the Salary/Hourly Wage Reduction and the FTE Reduction. For 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 or the Alternative Payroll Covered Period (FTE employee of 0.5). There was no change to the employee’s hourly wage during the Covered Period or the Alternative Payroll Covered Period. Because the hourly wage did not change, the reduction in the employee’s total wages is entirely attributable to the FTE Reduction and the Borrower is not required to conduct a Salary/Hourly Wage Reduction calculation for that employee. However, in this same example, if that employee’s hourly wage was also reduced, the FTE Reduction calculation is impacted and the Salary/Hourly Wage Reduction calculation is impacted, but only by the reduction attributable to the wage rate reduction, not the number of reduced hours. 

Q:    Is there a cap on the amount of loan forgiveness for owner-employees and self-employed individuals’ payroll compensation?

A:    Yes. The amount of loan forgiveness for owner-employees and self-employed individuals’ payroll compensation can be no more than the lesser of 8/52 of 2019 compensation or $15,385 per individual in total across all businesses. 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 at the amount of their owner compensation replacement, calculated based on 2019 net profit; and 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.