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Paycheck Protection Program: Forgiveness Guidance Released

Posted by : on : May 25, 2020 | 8:00 am

The Small Business Administration ("SBA"), in consultation with the U.S. Department of Treasury ("Treasury"), released much-anticipated Paycheck Protection Program ("PPP") loan forgiveness guidance late Friday, May 22, 2020. The guidance came in the form of two Interim Final Rules ("IFRs"). This FGMK Alert provides an overview of the newly released guidance, as well as highlights questions that remain, and provides thoughts for moving forward. It is anticipated that the SBA will soon post a series of new Frequently Asked Questions ("FAQs") that may address some of the outstanding questions.


Interim Final Rule 14 - Rule on Loan Forgiveness


Payroll Costs


What We Know


The guidance set forth in Interim Final Rule on Loan Forgiveness ("IFR #14") provides four primary issues to review:


  1. Borrower may account for payroll costs paid or incurred during the Covered Period (or Alternative Payroll Covered Period as discussed below);
  2. Borrower that utilizes a bi-weekly or more frequent payroll cycle may utilize an alternative date range, referred to as an Alternative Payroll Covered Period, to track and claim payroll costs eligible for forgiveness;
  3. Forgivable payroll costs include salary, wages, or commission payments to furloughed employees, as well as hazard pay and bonuses paid to employees, subject to an employee compensation cap of $100,000 on an annualized basis, or $15,385 during the Covered (or Alternative) Period; and
  4. Confirms a new category of owner compensation, referred to as an "owner-employee", which is treated similar to a partner or self-employed individual with a slight modification related to benefits paid on behalf of such owner-employee.


1. Paid or Incurred


The guidance states in pertinent part, "In general, payroll costs paid or incurred during the eight consecutive week (56 days) covered period are eligible for forgiveness."  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 the employee's pay is earned, i.e., on day the employee worked (or in the case of the furloughed employee on the day that the employee would have worked).  The flexibility of the guidance allows for inclusion of payroll costs paid during the respective 56-day loan period, as well as those costs incurred but not paid during the 56-day period if such payroll costs are paid on or before the next regular payroll date that follows the end of such covered period.


2. Alternative Payroll Covered Period


The SBA's guidance also confirmed a new concept set forth in the SBA Loan Forgiveness Application instructions which allows a borrower to use an alternative date range, referred to as the Alternative Payroll Covered Period, to track and claim payroll costs eligible for forgiveness if the borrower utilizes a bi-weekly or more frequent payroll cycle.  If the borrower elects to utilize this alternative 56-day period for payroll costs, the payroll covered period begins on the first day of the first payroll cycle in the covered period and continues for the next 56 days.  As noted above, costs incurred during the Alternative Payroll Covered Period but not paid during the 56-day period still qualify as long as such payroll costs are paid on or before the next regular payroll date that follows the end of the Alternative Payroll Covered Period.  The following example is provided in the guidance.


A borrower uses a bi-weekly payroll schedule and has a 56-day covered period begin on June 1 and that ends on July 26.  The first day of the borrower's first payroll cycle that starts within the Covered Period (period beginning on date loan first disbursed) is June 7.  If the borrower elects the Alternative Payroll Covered Period, the period for forgivable payroll costs begins June 7 and ends 55 days later on August 1.  Payroll costs paid on June 7 and thereafter during the Alternative Payroll Covered Period (June 7 - August 1) are eligible for forgiveness, as well as those payroll costs incurred during the alternative period and paid on or before the first regular payroll date occurring after August 1.


Payroll costs incurred and paid during the Covered (or Alternative) Period may only be counted once.


3. Furloughed Employees, Hazard Pay, and Bonuses


The guidance provides that "payroll costs" include compensation paid as salary, wage, or commissions to furloughed employees during the Covered (or Alternative) Period, as long as they do not exceed $100,000 on an annualized basis, or $15,385 during the Covered (or Alternative) Period.  The SBA and Treasury have determined that such interpretation is consistent with the CARES Act and advances the purpose of the program by enabling borrowers to continue paying employees even if those employees are not able to perform day-to-day duties due to lack of economic demand or health considerations. 


And the SBA has confirmed that if an employee's compensation does not exceed $100,000 on an annualized basis, the employee's hazard pay and bonuses are eligible for loan forgiveness.  The SBA and Treasury view such payments as a similar form of compensation.


4. Owner-Employee


The SBA Loan Forgiveness Application instructions first introduced the concept of the "owner-employee" category.  The newly released guidance does not define an "owner-employee" but does provide guidance as to the calculation of forgivable payroll costs paid to such a person.  Similar to a partner or self-employed individual, payroll costs for an owner-employee are capped based on the lesser of $15,385 ($100,000 on an annualized basis) OR 8/52 of 2019 compensation. 


As a reminder, a partner or self-employed compensation is calculated as follows:   


  • Partner - Lesser of $15,385 OR (8/52 * (92.35% * (2019 Net Self Employment Income - Section 179 Deduction - Unreimbursed Partnership Expenses - Depletion from Oil & Gas Properties)))
  • Self-Employed - Lesser of $15,385 OR 8/52 * Line 31 of 2019 Schedule C (Net Profit) 


Unlike a partner or self-employed individual, an owner-employee may include employer retirement and health care contributions made on his or her behalf in 2019 in the 2019 compensation computation.  However, unlike an employee, the retirement and health care expenses would be included in the $15,385 cap, whereas these expenses are included in addition to any $15,385 cash compensation cap for an employee.


The capped amount for an owner-employee is calculated based on compensation across all businesses.  Therefore, an owner-employee who has ownership in multiple businesses is subject to the $15,385 cap on a cumulative basis.


Remaining Questions


The burning question remains what does the SBA mean by "owner-employee"?  Does the term pertain to owners of S corporations and C corporations or just the former? 


FGMK Thoughts


The SBA has provided necessary flexibility to borrowers with regard to the election of an Alternative Payroll Covered Period, if the borrower runs payroll on a bi-weekly or more frequent basis, as well as the inclusion of payroll costs incurred but paid after the end of the Covered (or Alternative) Period.  While the Alternative Payroll Covered Period provides administrative ease, applicable borrowers would be advised to review how many payroll runs occur within the initial Covered Period, since the paid or incurred language may prove advantageous for those using the Covered Period depending on the date of loan disbursement and payroll runs. 


The allowance for the inclusion of hazard pay and bonuses in the cash compensation component of employees (capped at $15,385 per employee during the selected covered period) provides borrowers additional capability to use loan proceeds in a forgivable manner. Based on wording of the guidance in IFR #14 (Section 3.b.), some may be tempted to interpret the payment of a bonus or hazard pay in addition to the cap of $15,385.  However, the guidance seems to clarify that such payments constitute a form of cash compensation.  Therefore, borrowers would be advised to view these expenses as part of the cash compensation capped at $15,385 per employee, and thus can bring one up to but not past $15, 385 cap.


Finally, it appears that the owner-employee concept is aimed at S corporation owners.  Unlike C corporation owners who receive a wage and would be double-taxed on any distributed compensation, e.g., dividend, S corporation owners receive wage compensation and an allocation of income.  The latter is not subject to self-employment tax.  Therefore, this category and its rules appears aimed at owners of corporate entities who may not only have significant control over the entity but can obtain different tax treatment based on the structuring of compensation.  Further, while some have inquired as to whether such term may apply to limited partners or LLC members, since the SBA guidance often refers to partners as "general partners", that interpretation would not seem to align with the tax principle that partners cannot be employees, thereby contravening the term "owner-employee".


Nonpayroll Costs


What We Know


As mentioned in prior FGMK guidance, there are essentially three categories for use of a PPP loan with regard to nonpayroll costs that are forgivable: 


  • Interest payments on any business mortgage obligation on real or personal property that was incurred before February 15, 2020 (prepayments or payments of principle are not eligible); 
  • Payments on business rent obligations 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. 


While the CAREs Act and SBA guidance allows the use of a PPP loan to pay business interest on other obligations (other than those listed above), such expenses are not forgivable.  Therefore, borrowers seeking maximum forgiveness should only spend loan proceeds on the above three categories of nonpayroll costs (in addition to payroll costs).


The guidance confirms the retention of the 25 percent cap on nonpayroll costs for those borrowers seeking maximum forgiveness of the PPP loan.  However, legislation currently under consideration by the House of Representatives does include a provision that would legislatively override and eliminate this SBA-created rule.


Importantly, nonpayroll costs are not eligible for tracking pursuant to an Alternative Payroll Covered Period.  Therefore, if a borrower elects to utilize the Alternative Payroll Covered Period for payroll costs, the borrower will still need to track nonpayroll costs under the regular Covered Period, which begins on the date of the first loan disbursement (as IFR #10 allowed for some borrowers to seek loan increases) and ends 56 days after the start of the Covered Period.


Nonpayroll costs qualify if paid or incurred during the Covered Period.  Specifically, those nonpayroll costs incurred but not paid during the Covered Period remain eligible for forgiveness as long as they are paid on or before the next regular billing cycle.  The following example is provided in the guidance.


A borrower's covered period begins June 1 and ends on July 26.  The borrower pays its May and June electricity bills during the covered period and pays its July electricity bill on August 10, which is the next regular billing date.  The borrower may seek forgiveness for its May and June electricity bill, because they were paid during the covered period.  In addition, the borrower may seek loan forgiveness for the portion of its July bill through July 26 (the end of the covered period), because those expenses were incurred during the covered period and paid on the next regular billing date following the end of the covered period.


The example establishes that a borrower may utilize cash or accrual accounting treatment to include multiple nonpayroll costs billings within the requested forgiveness amount.  The guidance asserts that the flexibility remains consistent with Section 1106(b) of the CARES Act, and that the simplified approach aligns with the goal of administrative convenience for borrowers.  Moreover, the guidance asserts, "The Administrator notes that the 25 percent cap on nonpayroll costs will avoid excessive inclusion of nonpayroll costs."  However, if Congress passes legislation that eliminates the 75/25 rule (as currently set forth in the legislation awaiting vote in the House of Representatives), then the SBA may want to revisit this "safety-net" in its guidance.


Remaining Questions


The guidance does not define or address specific components of nonpayroll costs.  For example, there is still no definition or indication as to the meaning of "transportation".  A common question as to whether utilities includes payments for garbage collection services also remains unanswered.  Further, the guidance remains silent as to related-party rental payments.  However, unless subsequent guidance contravenes reasoning, it would seem that such payments would remain eligible if a documented arm's-length agreement exists between the parties.     


Additionally, many have inquired as to whether prepayments for future service may qualify.  For example, what if the borrower in the above nonpayroll cost example prepaid August and September electricity bills during the Covered Period?  The SBA's guidance clearly sets forth that paid or incurred expenses qualify.  Moreover, the guidance in IFR #14 specifically comments on the non-qualification of advance payments for mortgage interest payments, but does not provide any detailed commentary on the prepayment for other forgivable nonpayroll costs.


FGMK Thoughts


Borrowers should continue to monitor the SBA and Treasury for additional guidance.  If a borrower does not yet face the end of its Covered Period, it may be advisable to refrain from claiming those costs not explicitly identified as eligible and forgivable until further guidance is provided.  For example, borrowers may want to track the costs for utilities not explicitly identified, e.g., garbage collection services, and may want to consider making prepayments during the Covered Period for service related expenses that will be incurred after the end of the Covered Period.  However, borrowers may want to await the actual inclusion in the forgiveness computation of such expense or the making of such payments, respectively, until clearer guidance is available or timing dictates a reasonable business decision, i.e., end of Covered Period arrives before necessary guidance.


Forgiveness Reduction


What We Know


As a reminder, if a borrower properly spends the loan proceeds on the four identified forgivable categories (payroll costs, business mortgage interest, rent/lease payments, and utilities) during the respective 56-day period such expenses constitute the "expected forgiveness amount".  This amount can then be reduced based on one of three factors: 


  • Fail to maintain the same or higher average full-time equivalent ("FTE") headcount during the Covered (or Alternative) Period as compared to a selected reference period, e.g. January 1, 2020 - February 29, 2020, and do not restore that average count by June 30, 2020;
  • Reduce the pay of an employee who did not receive the annualized equivalent of $100,000 in any period of 2019 or a new 2020 hire by more than 25 percent during the Covered (or Alternative) Period as compared to the full calendar quarter that preceded the loan period, e.g. January 1, 2020 - March 31, 2020, and do not restore by June 30, 2020;
  • Fail to spend at least 75 percent of the loan proceeds on payroll costs during the Covered (or Alternative) Period, e.g. non-payroll costs exceed 25 percent of use of loan proceeds.


The SBA guidance confirms that the concept of a FTE is based on whether an employee is expected to work 40 or more hours per week.  While the SBA considered use of a 30-hour measurement, as used by the Affordance Care Act (Internal Revenue Code Section 4980H), it determined that the use of a 40-hour work week would align with the measurement used by most businesses to determine the status of full-time employment.


In accordance with the SBA Forgiveness Loan Application instructions, IFR #14 provides borrowers with the option to select one of two methods to calculate FTEs for each of the respective periods: 


  • Method 1: Uses computation of average weekly hours paid in concerned period divided by 40, rounded to nearest 1/10th; or
  • Method 2: Recognizes borrowers may not retain hourly records, and thus may use default of 1.0 for an employee who works 40 or more hours per week and default of 0.5 for those who work less than 40 hours per week for FTE value, i.e. full time = 1.0 FTE; part-time = 0.5 FTE.  


While a borrower may choose the use of either method, it must use the same method for all FTE calculations for all respective periods.


The guidance also confirms that a borrower may exclude an employee from the calculation of any FTE or wage/salary reduction if a borrower provides a good-faith, written offer to rehire the employee at the same salary or wage and same number of hours, and the employee declines the offer.  However, borrowers should be aware of the requirement that a requirement for the application of the exclusion is that the borrower informs the applicable state unemployment insurance office of such employee's rejection within 30 days of the rejection, which may impact the former employee's qualification for unemployment.


Similarly, a borrower may exclude a former employee from a reduction calculation if terminated for cause, voluntarily resigns, or voluntarily requests a schedule reduction.


The guidance also provides a new borrower-favorable rule in IFR #14, which excludes any employee from the salary/wage reduction computation if such employee was factored into the FTE headcount reduction.  In setting forth this new guidance, the SBA and Treasury noted that the CARES Act did not address the intersection between the FTE headcount reduction and salary/wage reduction, and that the rule will ensure borrowers are not doubly penalized for reductions.


Any reduction for failure to use 75 percent or more of the loan proceeds for payroll costs occurs after the FTE headcount and salary/wage reductions.


Remaining Questions


The guidance set forth in IFR #14 provides clarity on a number of issues, including the interplay between the FTE headcount and salary/wage reductions.  However, the combination of the guidance and the SBA Forgiveness Loan Application instructions set forth a complex set of rules and caveats that borrowers must navigate.


Additionally, an example in IFR #14 (Section 5.e.) regarding computation of a salary reduction for a salaried employee uses the concept of a weekly salary.  However, the SBA Loan Forgiveness Application appears to base the calculation on an annual salary. 


FGMK Thoughts


The forgiveness reduction guidance appears to be borrower-favorable.  The allowance for selection of a simplified method of calculating FTEs should provide administrative ease to borrowers who select that option.  In addition, the ability to exclude certain employees who reject offers to return to work or voluntarily elect not to return at the same capacity will allow many borrowers to avoid a reduction in the forgiveness amount.


However, the complexity of the rules will lead many borrowers to rely on PPP loan forgiveness calculators. 


Interim Final Rule 15 - Loan Review Procedures


What We Know


While the focus for many will be the loan forgiveness guidance provided in IFR #14, the SBA also released a companion IFR #15 that provides an overview of the loan forgiveness process. 

Key elements of the process include the following: 


  • Reaffirms that the SBA may review any PPP loan, and such a review may occur at any time (even before submission of SBA Loan Forgiveness Application) and could include analysis of borrower eligibility, loan amounts, use of proceeds, and whether entitled to forgiveness; 
  • Provides that borrower will have opportunity to respond to SBA determination;
  • Final SBA determination of ineligibility will result in no loan forgiveness, and SBA may deny an application for forgiveness in whole or in part;
  • Ability to appeal an SBA decision will be addressed in future guidance; and
  • Set forth the timing of review:
    • Lender has 60 days from receipt of the SBA Loan Forgiveness Application to reach a forgiveness determination and then submit to SBA;  
    • Potential determination may be: Approval (in whole or in part); Denial; or Denial without Prejudice (where directed by SBA due to pending review);
    • If lender submits denial decision to SBA, it must also notify borrower; and borrower will have 30 days from receipt of such notice to request SBA review; and
    • If lender submits approval (whole or part), it must also submit request for guaranty payment from SBA; and subject to review, SBA has 90 days to make such payment, plus interest through date of payment (and will deduct EIDL grant advance). 


The guidance also provides clarifications on certain borrower and lender requirements, including:   


  • Borrowers should retain supporting documentation for six years;
  • Lender will not receive a processing fee for a loan that SBA determines is provided to ineligible borrower; and
  • Lender fees are subject to claw-back.


Remaining Questions


The SBA plans to provide detailed guidance regarding the forgiveness loan process in a future IFR.


FGMK Thoughts


Borrowers should retain their supporting documentation for six years.  They should also be aware that the SBA may inspect these loans at any point - including prior to the submission of the application for forgiveness.




While the forgiveness guidance is welcomed, borrowers should continue to expect additional guidance in the form of new FAQs and IFRs.  Additionally, multiple pieces of legislation are under consideration in the House of Representatives and the Senate, which can impact the administration of the PPP, including whether the Covered Period may be extended from eight weeks to 16 weeks (as set forth in a Senate bill) or 24 weeks (as set forth in the House of Representatives bill).   


FGMK will continue to track SBA forgiveness guidance, as well as legislation in Congress that may impact the program.  Additionally, if interested in obtaining assistance with the calculation for loan forgiveness, please contact your FGMK engagement partner who can assist with the use of FGMK's loan forgiveness calculator.



The summary information in this document is being provided for education purposes only. Recipients may not rely  on this summary other than for the purpose intended, and the contents should not be construed as accounting, tax, investment, or legal advice. We encourage any recipients to contact the authors for any inquiries regarding the contents. FGMK (and its related entities and partners) shall not be responsible for any loss incurred by any person that relies on this publication.


Section references herein are to the Internal Revenue Code of 1986 and the Treasury Regulations thereunder.


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