The SBA’s Latest Clarification of PPP Loan Forgiveness Rules

A week after the release of the Paycheck Protection Program (PPP) loan forgiveness application, the Small Business Administration (SBA) has issued a new round of guidance. On May 22, 2020, the SBA issued two interim final rules addressing loan forgiveness, loan review procedures, and borrower and lender responsibilities. This amounted to 45 additional pages of guidance. Please refer to ATKG’s May 18, 2020 article, “NOW AVAILABLE:  PPP Loan Forgiveness Application”, to better understand how some of this guidance applies when completing the PPP loan forgiveness application. 

Requirements for Loan Forgiveness

Below is a summary of the 26 pages of interim final rules covering loan forgiveness requirements.

Turnaround Time on Forgiveness

Borrowers not subject to SBA loan review could be waiting up to 5 months to find if or how much of their PPP loan will be forgiven.

Once the loan forgiveness application has been submitted to the lender, they have 60 days to review the application and determine if the borrower is entitled to forgiveness of some or all of the amount applied for and request payment from the SBA. The SBA then has 90 days to remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment. The lender is then responsible for notifying the borrower of the approved forgiveness amount. Any portion not forgiven must be repaid by the borrower on or before the 2-year maturity of the loan.

Payroll Costs Incurred and/or Paid

The rule confirms that Payroll costs paid or incurred during the eight consecutive week period are eligible for forgiveness and provides guidance on using an “Alternative Payroll Covered Period”.

The SBA recognized that the eight-week covered period will not always align with the borrower’s payroll cycle and provides the opportunity to select an “Alternative Payroll Covered Period”. The guidance provides examples of how the calculations work and indicates that it is possible that the Alternative Payroll Covered Period will include amounts paid during the period for days worked before that period begins as well as amounts incurred during the covered period but paid after the applicable eight-week period. 

Payments to Furloughed Employees, Bonuses, and Hazard Pay

Payments to furloughed employees, bonuses, and hazard pay are all eligible for loan forgiveness if they fall within the covered period.

The SBA clarified that the term “payroll costs” eligible for loan forgiveness includes salary, wages, commissions, or similar compensation paid to furloughed employees during the covered period if they do not exceed an annual salary of $100,000, as prorated for the covered period. Hazard pay and bonuses are also includable if an employee’s total compensation does not exceed $100,000 on an annualized basis.

Tipped Employees

Tips are eligible for loan forgiveness.

Employers can receive forgiveness on tips their employees receive during the covered period even though the tips come from customers and not the employer. 

Caps for Owner-Employees and Self-Employed Individuals

The prorated $100,000 salary cap ($15,385 per individual) applies to owner-employees and self-employed individuals and is limited in total across all businesses. Treatment of retirement and health insurance contributions is also clarified.

Owner-employees are capped by the amount of their 2019 employee cash compensation and employer-paid 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 Sec. 179 expense, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by .9235. Retirement and health insurance contributions for self-employed individuals (including general partners) are not eligible for forgiveness.   

Nonpayroll Costs

Nonpayroll costs are eligible for forgiveness if they were either paid during the covered period or incurred during the covered period and paid before the next regular billing date, even if the billing date is after the covered period.

The guidance provides an example of how this is applied.

Prepayments of Mortgage Interest

Advance payments of interest on a covered mortgage obligation are not eligible for loan forgiveness.

Employees Declining Offers to Return to Work

Employers will not be penalized with a reduction in loan forgiveness if a previously laid-off employee or employee with reduced hours declines an offer to be rehired or have their reduction in hours restored.

In calculating the loan forgiveness amount, a borrower may exclude any reduction in full-time equivalent employee headcount that is attributable to an individual employee if:

  • the borrower made a good faith, written offer to rehire the employee during the covered period or the alternative payroll covered period;
  • the offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;
  • the offer was rejected by the employee;
  • the borrower has maintained records documenting the offer and its rejection; and
  • the borrower informed the state unemployment office of the employee’s rejected offer of employment within 30 days of such rejection. 

Full-Time Equivalents

“Full-time equivalent employee” is defined and a simplified calculation is provided for part-time employees.

The Interim Final Rules define “full-time equivalent employee” (FTE) to mean an employee who works 40 hours or more, on average, per week. Hours worked in excess of 40 do not count in the calculation and such employee would be considered an FTE employee of 1.0. 

For part-time employees, borrowers may choose between 2 methods to calculate full-time equivalency. The borrower may calculate the average number of hours a part-time employee was paid per week during the covered period or they may elect to use a full-time equivalency of 0.5 for each part-time employee. Borrowers must apply their chosen method consistently to all part-time employees.

Salary/Hourly Wage Reductions

Salary/hourly wage reductions will only be considered if they are not attributable to an FTE reduction. 

A reduction in an employee’s salary or wages in excess of 25% will generally result in a reduction in loan forgiveness. Additionally, a reduction in FTE employees during the covered period or the alternative payroll covered period reduces the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees. To ensure that borrowers are not doubly penalized, the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction. 

The guidance provides an example of how this is applied.

Loan Review Procedures +
Borrower and Lender Responsibilities

Below is a summary of the 19 pages of interim final rules outlining PPP loan review procedures and related borrower and lender responsibilities.

SBA Review of PPP Loans

The SBA may review any PPP loan, regardless of size.

Loans may be reviewed by the SBA to determine whether the borrower (a) is eligible for a PPP loan, (b) calculated the loan amount correctly, (c) used the funds for eligible costs, and (d) is eligible for the amount of loan forgiveness requested.

Record Retention

The borrower must retain all PPP documentation for 6 years after the date the loan is forgiven or repaid in full. 

Borrower Right to Appeal

The borrower may appeal an SBA determination that forgiveness is denied or reduced.

A future interim final rule will provide guidance on the appeals process.

Lender Requirements

The rule provides guidance on the documentation that must be reviewed by the lender, as well as a timeline for deciding on loan forgiveness.

Lenders are required to do the following:

  • confirm receipt of the borrower’s certifications in the Loan Forgiveness Application Form;
  • confirm receipt of the documentation that must be submitted to verify payroll and nonpayroll costs;
  • confirm that the borrower’s calculations on the Application are accurate; and
  • confirm compliance with the 75% of payroll test.

The timeline in this interim final rule is the same as the one referred to in the Requirements for Loan Forgiveness section above. 

Lender Fees for PPP Loans

Confirms that lenders will not be paid their loan fees for any PPP loan that the SBA deems ineligible. 

Conclusion

As always, the SBA guidance is lengthy and complex. More questions are sure to arise as a result of the interim final rules released last week. The SBA has indicated that additional guidance is in the works. ATKG will continue to monitor the release of future documents and will keep you informed as information is released. Please contact your ATKG advisor to learn how this new guidance affects your business.  

Annette Goodson is a Tax Director for ATKG. She serves as the lead of the firm’s State and Local Tax practice. She brings more than 25 years of public accounting experience to the team in the areas of federal tax, state tax and recruiting. Annette is a Certified Public Accountant and received her bachelor’s degree in accounting from The University of Texas at San Antonio.

For further information on this topic or other tax questions please contact Annette Goodson or a member of our Tax practice at 210.733.6611 or agoodson@atkgcpa.com.