May 27, 2020

Treasury Issues Additional Guidance on PPP Loan Forgiveness: The Devil Is in the Details (and There Are Many Details)

Written By

Thomas E. Rutledge
Member, Stoll Keenon Ogden PLLC

Last Friday evening, May 22, the U.S. Department of the Treasury issued two new “interim final rules” dealing with the Paycheck Protection Program (PPP), each focused upon loan forgiveness. The first was titled Business Loan Program Temporary Changes; Paycheck Protection Program – SBA Loan Review Procedures and Related Borrower and Lender Responsibilities, and focuses upon the requirements of lenders in deciding whether PPP loans will be forgiven and certain aspects of the loan review to be undertaken by the SBA (the “Lender Interim Rule”). The second was titled Business Loan Program Temporary Changes; Paycheck Protection Program – Requirements – Loan Forgiveness and is more focused on borrower requirements in seeking forgiveness (the “Borrower Interim Rule”).

It is fair to say that while each answers certain questions, there remains a great deal of uncertainly as to forgiveness, including the fact that as to an important point it does not seem that a consistent answer can be given.

Is PPP Loan Interest Forgivable?

If not forgiven, PPP loans have a term of two years at an interest rate of 1 percent. If a loan is forgiven the SBA pays to the lender bank the amount of the forgiven loan. But does that payment include interest at the 1 percent rate, and if not does the borrower owe that amount to the bank? The Lender Interim Rule, at page 5, states, “Loans under the PPP will be 100 percent guaranteed by SBA, and the full principal amount of the loans may qualify for loan forgiveness,” which would indicate that the interest is not includable in the forgiveness. But then the same document, at page 13, provides that the “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.” That indicates that as to the borrower the interest accruing at 1 percent is forgiven, and the bank will be made whole by the SBA.

The point is not whether or not the 1 percent interest is or is not to be forgiven, but rather that PPP “guidance” is (all to) often incomplete and inconsistent.

Records Retention

Borrowers are required to maintain PPP loan records for six years from the latter of forgiveness or payment in full. See Lender Interim Rule at p. 8.

How Quickly Will Decisions Be Made on Loan Forgiveness?

Consistent with the CARES Act, the lender must issue a decision to SBA on a loan forgiveness application not later than 60 days after receipt of a complete loan forgiveness application from the borrower. See Lender Interim Rule at p. 12; CARES Act § 1106(g). Presumably if the lender requests additional supporting information or documentation, the 60-day clock will reset upon the arrival of that information and documentation.

Appealing a Denial of Forgiveness?

The reason for any denial of an application for forgiveness, in whole or in part, must be reported to both the SBA and the borrower. See Lender Interim Rule at p. 13. With respect to any denial, there will be a process by which the borrower may appeal. The rules for any such appeal will be issued in future guidance.

SBA Review of PPP Loans

As previously announced, the SBA may investigate and review PPP loans for eligibility in the program and compliance with its rules, a review we previously considered. It was previously announced that every PPP loan of $2 million or more (including loans to affiliates totaling more than $2 million) will be reviewed, and any smaller loan may be reviewed. In the Lender Interim Rule, additional guidance as to the content of those reviews was detailed, namely:

Borrower Eligibility: 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). These include, but are not limited to, SBA’s regulations under 13 CFR 120.110 (as modified and clarified by the PPP Interim Final Rules) and 13 CFR 121.301(f) and the information, certifications, and representations on the Borrower Application Form (SBA Form 2483 or lender’s equivalent form) and Loan Forgiveness Application Form (SBA Form 3508 or lender’s equivalent form).

Loan Amounts and Use of Proceeds: The Administrator may review whether a borrower calculated the loan amount correctly and used loan proceeds for the allowable uses specified in the CARES Act.

Loan Forgiveness Amounts: The Administrator may review whether a borrower is entitled to loan forgiveness in the amount claimed on the borrower’s Loan Forgiveness Application (SBA Form 3508 or lender’s equivalent form).

Turning to the Borrower Interim Rule, there is a combination of confirmation of guidance provided in the Loan Forgiveness Application and some additional detail.

The Alternative Payroll Covered Period

A crucial element of the PPP is the requirement that the loan proceeds be expended for permitted purposed in the covered period of eight weeks / fifty-six days. See CARES Act § 1102(a)(2)(F) (“During the covered period, an eligible recipient may, in addition to the allowable uses of a loan made under this subsection, use the proceeds of the covered loan for: ….”). Many borrowers have found that matching the payroll component with the covered period to be challenging, requiring stub periods (with attendant accounting and third-party costs) at the beginning and ending of the covered period. In response the Loan Forgiveness Application, supplemented by this Borrower Interim Rule, have made available an “Alternative Payroll Period.” See Borrower Interim Rule pp. 9-10. It is provided that:

In general, payroll costs paid or incurred during the eight-consecutive week (56 days) covered period are eligible for forgiveness. Borrowers may seek forgiveness for payroll costs for the eight weeks beginning on either:

i. the date of disbursement of the borrower’s PPP loan proceeds from the Lender (i.e., the start of the covered period); or
ii. the first day of the first payroll cycle in the covered period (the “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 incurred during the borrower’s last pay period of the covered period or the alternative payroll covered period are eligible for forgiveness if paid on or before the next regular payroll date; otherwise, payroll costs must be paid during the covered period (or alternative payroll covered period) to be eligible for forgiveness. Payroll costs are generally incurred on the day the employee’s pay is earned (i.e., on the day the employee worked). 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).

The Administrator of the Small Business Administration (Administrator), in consultation with the Secretary of the Treasury (Secretary), recognizes that the eight-week covered period will not always align with a borrower’s payroll cycle. For administrative convenience of the borrower, a borrower with a bi-weekly (or more frequent) payroll cycle may elect to use an alternative payroll covered period that begins on the first day of the first payroll cycle in the covered period and continues for the following eight weeks.

If payroll costs are incurred during this eight-week alternative payroll covered period but paid after the end of the alternative payroll covered period, such payroll costs will be eligible for forgiveness if they are paid no later than the first regular payroll date thereafter.

The Administrator, in consultation with the Secretary, determined that this alternative computational method for payroll costs is justified by considerations of administrative feasibility for borrowers, as it will reduce burdens on borrowers and their payroll agents while achieving the paycheck protection purposes manifest throughout the CARES Act, including section 1102. Because this alternative computational method is limited to payroll cycles that are bi-weekly or more frequent, this computational method will yield a calculation that the Administrator does not expect to materially differ from the actual covered period, while avoiding unnecessary administrative burdens and enhancing auditability.

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.

As previously observed, the alternative payroll covered period is a significant liberalization of the rules (that this liberalization may conflict with the wording of the CARES Act is true, but who is going to object?). One clear takeaway is that if the alternative payroll covered period is used, the wages paid for the days between funding of the PPP loan and the last day of the then payroll period are not eligible for payment from the PPP loan or for forgiveness.

Proration and Payment of Non-Payroll Costs

While an alternative period for measuring payroll expenses has been created no similar period has been created for non-payroll expenses that may be satisfied with PPP loan proceeds. Hence, while additional guidance is now available, borrowers taking advantage of the alternative payroll covered period need to be careful that they do not inadvertently use that period for non-payroll expenses.

As previously noted in the first review of the Loan Forgiveness Application, borrowers are now allowed to make payment for non-payroll permitted expenses outside the eight-week covered period if paid on or before the next scheduled payment date. Under the Borrower Interim Rule (pp. 12-13):

A nonpayroll cost is eligible for forgiveness if it was:

i. paid during the covered period; or

ii. 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.

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.

Furloughed Employees

It was confirmed that PPP loan proceeds may be used to pay compensation to furloughed employees. While the Borrower Interim Rule (p. 11) refers to “salary, wages, commissions, or similar compensation,” presumably it as well includes health insurance benefits continued for furloughed employees even if they are not receiving cash compensation. For what appears to be the first time the interim rules reference a provision in the CARES Act, “including in section 1106(d)(4) of the Act, which provides that additional wages paid to tipped employees are eligible for forgiveness.” With this Borrower Interim Rule, it would appear that a restaurant may make wage payments in lieu of tips that are not being received and claim forgiveness for those amounts. In addition, tips paid by customers to employees count as compensation paid that the borrower may include in the loan forgiveness application. Of course, those amounts will need to be documented.


Many employers have wondered whether they could give bonuses, paid from PPP loan funds, to employees. Concern has been raised that doing so would be outside the ordinary course and perhaps be a red flag to the lender considering loan forgiveness or the SBA/Treasury on subsequent review. Under the Borrower Interim Rule (p. 11), as long as the bonus do not on an annualized basis push the employee’s compensation over $100,000, they are permitted, count toward the 75 percent threshold, and may be forgiven.

Limits on Payments to or on behalf of Owner-Employees

The Borrower Interim Rule provides further rules as to what compensation may be paid to or on behalf of owner-employees from forgivable PPP loan proceeds. Frankly, this guidance is confusing as it is based upon the treatment of common-law employees and what the tax code considers to be an employee, and interface that is at best muddled. The Borrower Interim Rule provides:

Are there caps on the amount of loan forgiveness available for owner-employees and self-employed individuals’ own payroll compensation?

Yes, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation can be no more than the lesser of 8/52 of 2019 compensation (i.e., approximately 15.38 percent of 2019 compensation) or $15,385 per individual in total across all businesses. See 85 FR 21747, 21750. 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 by the amount of their owner compensation replacement, calculated based on 2019 net profit. [footnote deleted]. 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. No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners, as such expenses are paid out of their net self-employment income.

The take-away is that every S-corporation, partnership (including LLCs taxed as either a partnership or an S-corporation) or single-member LLC (whether taxed as a sole-proprietorship or a S-corporation) is going to need the input of its CPA in making sure that the loan forgiveness application neither overstates nor understates that amount of forgiveness sought with respect to owner compensation.

Advance Payments of Interest on Mortgage Obligations (Don’t Go There)

The Borrower Interim Rule makes express (p. 13) that advance payments of interest on mortgage obligations are not a permitted use of PPP loan proceeds.

Limits on PPP Loan Forgiveness Based Upon Employee Count and Compensation

Okay, I hope all that is clear, because we are about to get to the complicated part. For companies without stable employment and compensation levels, the CARES Act limits the degree to which PPP loans may be forgiven. How those rules will be applied has been clarified/modified in the Borrower Interim Rule.

Recall that in submitting your PPP application, you provided information as to your payroll either based upon 2019 figures (likely you took this approach if your business is seasonal) or for 12-months ending in 2020. Keep in mind the full name of the PPP is the “Paycheck Protection Program.” Its goal is to maintain payroll, and your ability to have your PPP loan forgiven is dependent in part on maintaining the payroll that was certified in your loan application. This expectation is accounted for under two rules set forth in CARES Act §§ 1106(d)(2) and 1106(d)(3).

Reduction in Number of Employees

First, and this part we discussed previously, the amount of your PPP loan that may be forgiven is limited to the extent you have a reduction in the number of full-time equivalent employees (“FTEE”; while the Rules use the term “FTE,” as FTEE was used in previous publications, I will stick with that term). The loan forgiveness limit is a fraction in which the numerator is the average FTEE over the eight-week covered period (or now that alternative payroll covered period). The denominator is:

a. the average FTEE between February 15, 2019 and June 30, 2019 or March 1, 2019 and June 30, 2019; or

b. the average FTEE between January 1, 2020 and February 29, 2020.

Seasonal employers are required to use (a); other employers may use (a) or (b) and presumably will use the smaller of the two. That fraction will be applied to the amount of the PPP loan (and not just the portion applied to payroll expenses) in determining a cap on the amount that may be forgiven.

If you have laid-off or terminated employees, you can make new hires (they do not have to be the former employees) to bring your FTEE census back to where it was. Ultimately you want that denominator as close to the numerator as is possible so that the ratio is 1. Even if you have increased your FTEE so that the ratio is higher than 1, it is capped at 1. To that end, while a normal work-week is 40 hours, your employee putting in 48 hours is not 1.2 FTEE. No employee can be more than a single FTEE.

Under the Borrower Interim Rule, if you offer to rehire a lay-ed off or terminated employee, and they decline the offer, then in effect that employee is excluded from the reduction in forgiveness calculation. In effect you get to count them in the borrowing base in applying for a PPP loan, but the fact that they are no longer with the borrower is not held against the borrower in seeking forgiveness. There are, however, requirements to be met in taking advantage of this relief, namely:

Employees whom the borrower offered to rehire are generally exempt from the CARES Act’s loan forgiveness reduction calculation. This exemption is also available if a borrower previously reduced the hours of an employee and offered to restore the employee’s hours at the same salary or wages. Specifically, 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:

i. 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;
ii. 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;
iii. the offer was rejected by such employee;
iv. the borrower has maintained records documenting the offer and its rejection; and
v. 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. Borrower Interim Rule p. 14.

Further guidance has been promised as to how the employer is to communicate to the unemployment insurance office the fact that the employee has rejected the offer to return to employment. Under this rule, if a borrower has laid-off employees, and it cannot rehire those same employees, the borrower is relieved of the expensive and perhaps futile task of hiring replacements simply to avoid the reduction in PPP loan forgiveness. In addition, reductions in workforce consequent to employees fired for cause, voluntarily resignations or employee-initiated requests for a reduced schedule/reduced hour will not be counted in determining whether the borrower has maintained its FTEE count. Borrower Interim Rule p. 22.

All of which begs an important question, namely what constitutes a FTEE. The CARES Act did not define the term (notwithstanding that it is central to this limitation on PPP loan forgiveness). The Borrower Interim Rule has filed that gap. Initially, a FTEE is an employee working 40 hours. As noted about, an employee working more than 40 hours a week is not more than one FTEE. As for employees working fewer (not “less”) than 40 hours a week, there are two permitted alternatives. Under the first there is a straight-line review of hours worked to determine a portion of an FTEE. The Borrower Interim Rule (p. 17) provides:

First, the borrower may calculate the average number of hours a part-time employee was paid per week during the covered period. For example, if an employee was paid for 30 hours per week on average during the covered period, the employee could be considered to be an FTEE employee of 0.75. Similarly, if an employee was paid for ten hours per week on average during the covered period, the employee could be considered to be an FTEE employee of 0.25.

Alternatively, the borrower “may elect to use a full-time equivalency of 0.5 for each part-time employee.” Borrower Interim Rule pp. 17-18. While this option may be advantageous to borrowers who do maintain records of hours worked or who have a significant number of employees working less than 20 hours a week, the former option is better for borrowers with significant numbers of employees working between 20 and 40 hours a week. But a borrower is limited to one or the other, it cannot mix the tests in its workforce. “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.” Each borrower will want to run the calculations under both formula and determine which is better for their circumstance.

Compensation Reductions

Second, if you have employees who were making less than $100,000 on an annual basis in 2019, and they took a pay cut in the eight-week “covered period” (or now the alternative payroll covered period) of more than 25 percent, then the amount that can be forgiven will be reduced on a dollar-for-dollar basis. For example, if an employee was making $22 per hour, and is reduced to $15 per hour, the reduction in compensation exceeds 25 percent. Under the current interpretation, the loan forgiveness will be reduced by $1.50 per hour (i.e., the reduction in compensation exceeding the 25 percent cap) worked by that employee. It is important to note that this calculation is performed on an employee by employee basis; raises or bonuses given to certain employees do not cancel out compensation cuts taken by other. Borrower Interim Rule p. 19. Also, the Borrower Interim Rule makes clear that this calculation is made on a per-hour basis. An employee making $10 per hour and normally working 40 hours per week who is then reduced to 20 hours a week has not for purposes of this rule had his or her compensation reduced even as his or her take-home has been halved. The Borrower Interim Rule (p. 19) provides an example:

Example: A borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period with an FTE of 1.0. In this case, the first $250 (25 percent of $1,000) is exempted from the reduction. Borrowers seeking forgiveness would list $400 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by eight weeks). The provision implements section 1106(d)(3) of the CARES Act, which provides that “the amount of loan forgiveness shall be reduced by the amount of any reduction in total salary or wages of any employee [who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000] during the covered period that is in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period.”

FTEE and Compensation Reductions are NOT Cumulative

Finally, some unequivocally good news, namely that the reduction in FTEE and compensation tests are not cumulative. All else being equal, a laid-off employee would reduce the borrower’s forgiveness ratios twice: first he or she is no longer a FTEE, reducing the numerator in the first test, and his or her wages are clearly reduced more than 25 percent because they have been reduced by 100 percent. The Borrower Interim Rule (p. 20) does away with that double-counting, providing “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 Interim Rule goes on to provide an 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 (FTE employee of 0.5). There was no change to the employee’s hourly wage during the covered period. Because the hourly wage did not change, the reduction in the employee’s total wages is entirely attributable to the FTE employee reduction and the borrower is not required to conduct a salary/wage reduction calculation for that employee.

The 75 Percent/25 Percent Split is Not a Cliff

Only persons living under large rocks in the hinterlands (I’m jealous) are unaware of the PPP requirement (actually a requirement of the Treasury/SBA imposed in the first PPP Interim Rule, 85 FR 20811) that in order for there to be loan forgiveness 75 percent of the loan proceeds are to be spent on payroll expenses with not more than 25 percent spent on utilities, mortgage interest and other permitted expenses. Some have wondered whether a failure to meet the 75 percent threshold rendered none of the loan forgivable, or rather only reduced the forgivable amount. The Borrower Interim Rule (cryptically at pp. 21-22) indicates that failing to meet the 75 percent payroll threshold is not a cliff, but rather only reduces the amount of forgiveness. “This does not change or affect the requirement that at least 75 percent of the loan forgiveness amount must be attributable to payroll costs.” Reviewing this point in an article in Forbes, “If a borrower has $25,000 of interest, rent and utility expenses and $70,000 of payroll expenses, then only $23,333 of the interest, rent and utility expenses will be forgiven ($23,333 divided $93,333 is 25 percent).”


Stoll Keenon Ogden understands that these are trying times for our clients and our country. Our firm operations have continued uninterrupted and our attorneys are equipped to serve as we always have – for more than 120 years.

Please also be sure to consult the Stoll Keenon Ogden Coronavirus Resource webpage for additional articles and information related to the latest information on new laws and directives enacted by federal, state, and local governments in response to the Coronavirus pandemic.

Written By