SBA Releases PPP Loan Forgiveness FAQs

On August 4, the Small Business Administration (“SBA”) released an initial set of frequently asked questions regarding the forgiveness of paycheck protection program (“PPP”) loans (the questions, the “Forgiveness FAQs”). The SBA explicitly provides that both borrowers and lenders may rely on the guidance in the Forgiveness FAQs, in consultation with the applicable law and related regulations.  This resource will likely be a valuable tool to borrowers looking to understand exactly how much of their PPP loans may be forgiven. As with the general PPP frequently asked questions, the SBA may periodically update the Forgiveness FAQs as questions arise in the forgiveness process.  As of August 7, the Forgiveness FAQs provide helpful guidance on the following matters.

1) Costs paid or incurred during a covered period can be forgivable:

The SBA continues to emphasize that payroll costs eligible for forgiveness include amounts that are paid or incurred during the covered period. There had been substantial uncertainty as to whether payroll costs must be paid and incurred during the covered period to be eligible for forgiveness.  However, note that the Forgiveness FAQs are clear that employer contributions to employee retirement benefits, which are eligible payroll costs, cannot be accelerated to fit into the employer-borrower’s covered period. Generally, though, it seems that the current SBA disposition is to strive to give borrowers the flexibility to maximize forgiveness for eligible payroll costs. For example, the Forgiveness FAQs clarify that payroll costs paid during a covered period, although incurred before that period, are eligible for forgiveness:

  • Example: A borrower received its loan before June 5, 2020 and elects to use a 24-week Covered Period.  The borrower’s Covered Period runs from Monday, April 20 through Sunday, October 4.  The borrower has a biweekly payroll cycle, with a payroll cycle ending on Saturday, April 18.  The borrower will not make the corresponding payroll payment until Friday, April 24.  While these payroll costs were not incurred during the Covered Period, they were paid during the Covered Period and are therefore eligible for loan forgiveness.[1]

Likewise, eligible nonpayroll costs may be forgiven so long as either paid or incurred during the borrower’s covered period.

  • Example: A borrower’s 24-week Covered Period runs from April 20 through October 4. On October 6, the borrower receives its electricity bill for September. The borrower pays its September electricity bill on October 16.  These electricity costs are eligible for loan forgiveness because they were incurred during the Covered Period and paid on or before the next regular billing date (November 6).[2]

2) Bonuses and similar compensation are eligible payroll costs:

In addition to salaries and wages, eligible payroll costs include all types of compensation, inclusive of tips, bonuses, commissions, and hazard pay.  This is subject, though, to an employee receiving total compensation not in excess of $100,000 on an annualized basis.

3) Explicit guidance is provided for various owner-employees:

Question 8 on payroll costs provides useful instructions for owner-employees and self-employed individuals. Per earlier guidance, the amount of owner payroll compensation eligible for forgiveness is capped at $20,833 for those borrowers using 24-week covered periods.[3]  Helpfully, the Forgiveness FAQs break down the application of the cap by entity. For example, a C corporation owner-employee is eligible for forgiveness for cash compensation up to an amount equal to 2.5/12 of his or her 2019 cash compensation. This owner-employee is, in addition, eligible for forgiveness on employer-paid state and local taxes on that compensation, employer contributions to health insurance and up to 2.5/12 of the employer’s 2019 retirement contributions. This clarifies earlier guidance where it was unclear as to whether such contributions may be subject to the 2.5/12 2019 cash compensation limit for such owner-employee, rather than being subject to some additional limit.  The Forgiveness FAQs also cover S corporations, self-employed individuals, general partners, as well as LLC owners.  If you are an owner-employee, you should consult Question 8 prior to completing your PPP loan forgiveness application.

4) Instructions to Worksheet A (Forgiveness Reduction) are clarified:

In general, PPP loan forgiveness is subject to reduction if the borrower reduced its workforce or employee salaries and wages during its covered period.  PPP rules and the corresponding forgiveness applications provide for certain safe harbors to eliminate such reductions.  Reductions on account of cuts to a borrower’s workforce are calculated using reductions in “full-time equivalent employees” (“FTEs”). While Table 1 in Worksheet A of the PPP loan forgiveness application provides that a borrower should only include those employees who received (on an annualized basis) $100,000 or less in compensation in 2019, the Forgiveness FAQs clarify that a borrower should include all employees, regardless of compensation, (a) whom the borrower either attempted to rehire or replace and could not find a suitable candidate by 2020 year-end, (b) who refused an offer from the borrower to restore any reduction in salary/wages or hours, and (c) who were fired for cause or voluntarily resigned or requested reduced hours.  Any of the foregoing employee positions will not count against the borrower in determining whether its forgiveness amount must be reduced.  By clarifying that all employees, regardless of compensation, should be included in this line item (despite the application’s instructions otherwise), the borrower will boost its FTE number and potentially avoid unnecessary PPP loan forgiveness reduction.

5) Various helpful examples are given to illustrate reduction in PPP loan forgiveness on account of salary and wage cuts:

If the salary or wages of an employee paid less than $100,000 (on annualized basis) in 2019 were reduced by more than 25% in the borrower’s covered period, then the portion in excess of the 25% reduces the borrower’s PPP forgiveness amount (unless the borrower restores the wages and salary by 2020 year-end).  The Forgiveness FAQs provide examples[4] on precisely how this reduction would work for both wage and salaried employees. A borrower who has reduced employee pay by more than 25% during its covered period and does not anticipate being able to restore employee wages and salaries should review the Forgiveness FAQs examples on this point and consider its potential PPP loan forgiveness reduction amount.

While they must be reviewed in conjunction with the applicable law and regulations, these Forgiveness FAQs are a useful tool to borrowers and their advisors.  Borrowers should be sure to consult these Forgiveness FAQs as they complete their applications for forgiveness, particularly if the SBA continues to update the document as more and more borrowers seek to submit PPP loan forgiveness applications.

If you would like to speak to an attorney about a legal issue you are facing, please contact a member of our PPP and CARES Act Audit, Investigations and Defense Team, the COVID-19 Response Team , or your Burr attorney.

[1] Forgiveness FAQs, Loan Forgiveness Payroll Costs FAQs, Question 2.

[2] Forgiveness FAQs, Loan Forgiveness Nonpayroll Costs FAQs, Question 2.

[3] The cap applies across all entities in which that owner holds a stake.  The cap is $15,385 for those using 8-week covered periods.

[4] Forgiveness FAQs, Loan Forgiveness Reductions FAQs, Question 4.

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