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Your Daily Three: May 26 | Spotlight on PPP Forgiveness


May 26, 2020

Read Time

9 minutes


On Friday night, the SBA released two new Interim Final Rules providing some additional clarity on PPP loan forgiveness. At the same time, several bills are being considered in Congress related to loan forgiveness. Given its importance, and the comprehensive nature of the release, today’s Daily 3 will be focused entirely on this topic. We will continue to keep you updated as new information or guidance becomes available.


1. New Information Related to PPP Loan Forgiveness

Payroll Costs

  • Bonuses and hazard pay are eligible for loan forgiveness, so long as each employee’s total compensation does not exceed $100,000 on an annualized basis (i.e., $15,385)
    • This was not a surprise as the marketplace generally understood such payments would be forgivable costs, however, we hadn’t received the official ruling from the SBA to date
  • Payroll costs “incurred and paid”:
    • Payroll costs are considered “paid” on the day 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., the day the employee worked). If an employee is not performing work but still on borrower’s payroll, the payroll costs are incurred based on the schedule established by the borrower (typically, the days the employee would have performed work)
      • If a borrower pays furloughed employees their salary, wages, or commissions during the covered period, these payments are eligible for forgiveness, up to $100,000 prorated for the covered period ($15,385)
      • The SBA clarified that the intent is for borrowers to continue paying employees even if the employees are not able to perform their day-to-day duties (whether because of a lack of economic demand or public health considerations)
    • Payroll costs incurred during the borrower’s last pay period of the covered period (or alternative payroll covered period (outlined below)) but not paid during the applicable period are still eligible for forgiveness if paid on or before the next regular payroll date
  • 75% rule
    • The Interim Final Rule reiterated that if a borrower doesn’t use the full 75% of the loan on payroll costs, this doesn’t mean they forfeit eligibility for forgiveness altogether
  • Alternative method for determining when the 8 week forgiveness period begins for payroll cycles: the Alternative Payroll Covered Period provides a favorable clarification about the timing of payroll, which was previewed in the loan forgiveness application issued last week – essentially, borrowers with a biweekly (or more frequent) payroll schedule can choose to calculate their eligible payroll costs using the 8 week period that starts on the first day of their first pay period after the loan disbursement date (an “alternative payroll covered period”). The SBA provided the below example:

Example: A borrower has a bi-weekly payroll schedule (every other week). The borrower’s eight-week covered period begins on June 1 and ends on July 26. The first day of the borrower’s first payroll cycle that starts in the covered period is June 7. The borrower may elect an alternative payroll covered period for payroll cost purposes that starts on June 7 and ends 55 days later (for a total of 56 days) on August 1. Payroll costs paid during this alternative payroll covered period are eligible for forgiveness. In addition, payroll costs incurred during this alternative payroll covered period are eligible for forgiveness as long as they are paid on or before the first regular payroll date occurring after August 1. Payroll costs that were both paid and incurred during the covered period (or alternative payroll covered period) may only be counted once.

  • Calculating FTEs for forgiveness purposes:
    • FTEs (full-time equivalent employees) means an employee who works 40 hours or more, on average, per week. Employees who work less than 40 hours are calculated as proportions of a single FTE employee
    • There are two methods borrowers can use to calculate FTEs for employees who were paid for less than 40 hours per week:
      • For each employee, use the average number of hours paid per week, divided by 40. For example, if an employee was paid for 30 hours per week on average during the covered period, they would be considered to be an FTE employee of 0.75 (30/40)
      • A simplified calculation method that borrowers can choose to use assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work part-time (i.e., less than 40 hours)
    • When calculating the loan forgiveness amount, a borrower may exclude any reduction in FTE employee headcount that is attributable to an individual employee if:
  1. the borrower made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or the alternative payroll covered period;
  2. 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;
  3. the offer was rejected by such employee;
  4. the borrower has maintained records documenting the offer and its rejection; and
  5. the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.
  • If the average number of FTE employees during the covered period or the alternative payroll covered period is less than during the reference period (defined below), the total eligible expenses available for forgiveness is reduced proportionally by the percentage reduction in FTE employees
    • As an example from the SBA, if a borrower had 10.0 FTE employees during the reference period and this declined to 8.0 FTE employees during the covered period, the percentage of FTE employees declined by 20 percent and thus only 80 percent of otherwise eligible expenses are available for forgiveness.
    • The “reference period” is selected by a borrower from: (i) February 15, 2019 through June 30, 2019; (ii) January 1, 2020 through February 29, 2020; or (iii) in the case of a seasonal employer, either of the two preceding methods or a consecutive 12-week period between May 1, 2019 and September 15, 2019


Non-Payroll Costs

  • Non-Payroll costs “incurred and paid”:
    • Non-payroll costs must be incurred or be paid during the 8 week period to be eligible for forgiveness. If these non-payroll costs are incurred during the period but not paid during the period, they must be paid on or before the next regular billing date (even if that date falls after the 8 week period). An example from the SBA:
      • Example: A borrower’s covered period begins on June 1 and ends on July 26. The borrower pays its May and June electricity bill during the covered period and pays its July electricity bill on August 10, which is the next regular billing date. The borrower may seek loan forgiveness for its May and June electricity bills, because they were paid during the covered period. In addition, the borrower may seek loan forgiveness for the portion of its July electricity bill through July 26 (the end of the covered period), because it was incurred during the covered period and paid on the next regular billing date.
  • Additional examples (in each case, subject to the limitation that 25% of the loan forgiveness amount may be attributed to non-payroll costs):
    • If a borrower’s covered period begins on April 16 and the borrower had an unpaid rent payment from March 1, if the borrower makes that rent payment during the covered period, that payment would count towards forgiveness
    • If borrower’s covered period begins on April 16 and ends on June 10, and borrower’s mortgage interest payments are due on the 5th of each month, if the borrower did not make their April 5th payment, the borrower may make that mortgage interest payment during the covered period so that it is counted towards forgiveness as well as mortgage interest payments made on May 5th and June 5th (although with respect to the June 5th payment, only amounts incurred through the end of the covered period (June 10th) would be eligible for forgiveness
  • Payments for interest on mortgage obligations or rent obligations include both real and personal property
  • Advance mortgage interest payments are not eligible for loan forgiveness. As a reminder, principal on mortgage obligations are not eligible for forgiveness


2. New Information Related to the PPP Loan Review Process

Lender’s review process

  • Lenders are expected to perform a good-faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning amounts eligible for loan forgiveness
  • If the lender identifies errors in the borrower’s calculation or material lack of substantiation in the borrower’s supporting documents, the lender should work with the borrower to remedy the issue
  • Lenders must make a decision on loan forgiveness and submit to the SBA within 60 days of receiving a borrowers completed application. Then, the SBA has 90 days to review the forgiveness application and remit the appropriate forgiveness amount to the lender – the lender must notify the borrower of the forgiveness amount


SBA’s review process

  • The SBA may review any loan at any time, regardless of the size of the loan, to confirm eligibility, whether the loan amount was calculated correctly, if loan funds were used for eligible costs and whether the borrower is eligible for the amount of forgiveness they apply for
    • If the SBA begins reviewing a PPP loan, the SBA will notify the lender in writing and the lender must notify the borrower in writing of the review within 5 business days of receipt
    • If the SBA determines that the borrower was not eligible for the PPP loan, the loan will not be eligible for forgiveness. If the SBA determines the borrower is ineligible for the loan amount or loan forgiveness amount claimed by a borrower, the SBA will direct the lender to deny the forgiveness application (in whole or in part, as applicable) and the SBA may seek repayment of the outstanding loan balance or pursue other available remedies
  • An appeal process for SBA determinations on forgiveness will be established under a separate Interim Final Rule. At this time, we know that there will be a 30 day window for borrowers to appeal the SBA’s determination


3. Legislation on PPP Loan Forgiveness Under Review in Congress

  • The new guidance kept the loan forgiveness covered period at 8 weeks, however, there is legislation being considered in Congress to extend the loan forgiveness period to up to 24 weeks
  •  This new guidance maintained that borrowers must spend at least 75% of loan funds on payroll costs to qualify for loan forgiveness, however, the same legislation noted above also includes an elimination of this 75% minimum requirement

Borrowers should continue to operate under the assumption that the forgiveness period will be 8 weeks and that at least 75% of loan funds must be used on payroll costs. We continue to monitor this situation and will alert you in the event that these rules change.


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