On May 22, 2020, the Small Business Administration ("SBA") published its interim final rule SBA-2020-0032 (the "Forgiveness Rule"), providing additional guidance on loan forgiveness for Paycheck Protection Program ("PPP") loans issued under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). As described in our previous update, the CARES Act created the PPP loan program, which provides loans to small businesses and which are subject to forgiveness, subject to the terms of the CARES Act. The Forgiveness Rule provides guidance on how borrowers of PPP loans are able to calculate their forgiveness amounts.

General 

In general, borrowers are entitled for an amount of their PPP loan to be forgiven in a maximum amount equal to the sum of the following costs incurred and payments made during the Covered Period (as described below) for (1) Payroll Costs (as described below), (2) interest payments on any business mortgage obligation on real or personal property that was incurred before February 15, 2020 (but not any prepayment or payment of principal), (3) payments on business rent obligations on real or personal property under a lease agreement in force before February 15, 2020, and (4) business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access (for which service began before February 15, 2020). The amounts set forth in clauses (2), (3) and (4) (collectively, "Non-Payroll Costs") are limited to 25% of the loan forgiveness amount. This amount is subject to reduction based on certain reductions in full-time equivalent employees and reductions in salary of individual employees, as described below.

Payroll Costs

"Payroll Costs" consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees, and; for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation. The cash portion of Payroll Costs included for calculating PPP loan forgiveness for any individual employee may not exceed $100,000 on an annual basis, as prorated for the covered period.

Borrowers may seek forgiveness for Payroll Costs for the eight weeks beginning on either (1) the date of disbursement of the borrower's PPP loan (the "Covered Period") or (2) for borrowers that use a bi-weekly or more frequent payroll cycle only, an alternative eight week period beginning on the first day of the first payroll cycle during the Covered Period (the "Alternative Payroll Covered Period"). Because this applies only to borrowers with a bi-weekly (i.e. 26 pay periods per year) or more frequent payroll cycle, it appears that borrowers who use a twice-a-month (i.e. 24 pay periods per year) or fewer are not eligible to use 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). The SBA has clarified that borrowers may include Payroll Costs that are both incurred and paid during the Covered Period (or Alternative Payroll Covered Period) only once. However, the SBA has not expressly stated whether a borrower may include Payroll Costs that were paid during the Covered Period (or Alternative Payroll Covered Period) but incurred prior to the Covered Period (or Alternative Payroll Covered Period).

If an employee who has been placed on furlough is paid salary, wages or commissions during the Covered Period (or Alternative Payroll Covered Period), such compensation may be included in Payroll Costs on the same basis as non-furloughed employees. 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 SBA has not stated what the date of incurrence would be for such employees if they do not have a regular work schedule that would have applied during the covered period, but given the language permitting the incurrence "on the schedule established by the borrower," borrowers may be able to exercise discretion to determine the schedule. In addition, hazard pay and bonuses paid to any employee during the Covered Period (or Alternative Payroll Covered Period) may be included in Payroll Costs, so long as total cash consideration for such employee does not exceed the $100,000 annual cap, as prorated.

Additional rules apply to Payroll Costs for owner-employees and self-employed individuals. Such borrowers should consult the Forgiveness Rule for additional information.

Non-Payroll Costs

A Non-Payroll Cost is eligible for inclusion if it was (1) paid during the Covered Period or (2) 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. Because of this, borrowers may be eligible to include greater than eight weeks of Non-Payroll Costs in their forgiveness calculation. For example, a borrower with a Covered Period beginning on April 15 that pays its electric bill on the 1st of each month would be eligible to include the electric bill paid May 1 and June 1 as well as the portion of the July 1 bill allocated to through the end of the Covered Period (June 9). However, given that Non-Payroll Costs are limited to 25% of the total forgiveness amount, this expanded eligibility may not be helpful to all borrowers.

Note that the Alternative Payroll Covered Period does not apply to Non-Payroll Costs. Borrowers using the Alternative Payroll Covered Period for the calculation of forgivable Payroll Costs will still use the regular Covered Period for determining Non-Payroll Costs.

Reductions to Loan Forgiveness Amount

In general, a reduction in full-time equivalent ("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. The borrower must first select a reference period: (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. If the average number of FTE employees during the Covered Period or the Alternative Payroll Covered Period is less than during the reference period, the total eligible expenses available for forgiveness is reduced proportionally by the percentage reduction in FTE employees. For example, if a borrower had 10.0 FTE employees during the reference period and this declined to 8.0 FTE employees during the Covered Period (or the Alternative Payroll Covered Period, if applicable), the percentage of FTE employees declined by 20 percent and thus only 80 percent of the maximum forgivable amount may be forgiven. 

For purposes of defining FTE employees, the SBA requires borrowers to use a 40 hour work week standard. Borrowers seeking forgiveness must document their average number of FTE employees during the Covered Period (or the Alternative Payroll Covered Period) and their selected reference period. For purposes of this calculation, borrowers must divide the average number of hours paid for each employee per week during the relevant period by 40, capping this quotient at 1.0. For example, an employee who was paid 48 hours per week during the covered period would be considered to be an FTE employee of 1.0.

For employees who were paid for less than 40 hours per week, borrowers may choose to calculate the full-time equivalency in one of two ways. 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 FTE 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 FTE employee of 0.25. Second, for administrative convenience, borrowers may elect to use a full-time equivalency of 0.5 for each part-time employee. 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. In either case, the borrower shall provide the aggregate total of FTE employees for both the selected reference period and the Covered Period or the Alternative Payroll Covered Period, by adding together all of the employee-level FTE employee calculations. The borrower must then divide the average FTE employees during the Covered Period or the Alternative Payroll Covered Period by the average FTE employees during the selected reference period, resulting in the reduction quotient.

In addition, a reduction in an employee's salary or wages in excess of 25 percent will generally result in a reduction in the loan forgiveness amount, unless an exception applies. Specifically, for each new employee in 2020 and each existing employee who was not paid more than the annualized equivalent of $100,000 in any pay period in 2019, the borrower must reduce the total forgiveness amount by the total dollar amount of the salary or wage reductions that are in excess of 25 percent of base salary or wages between January 1, 2020 and March 31, 2020 (the reference period), subject to exceptions for borrowers who restore reduced wages or salaries (described below). This reduction calculation is performed on a per employee basis, not in the aggregate. Based on the foregoing, a new employee hired since January 1, 2020 is not exempt from the salary reduction test regardless of whether their compensation is in excess of $100,000. The forgiveness amount is only reduced by the amount of any salary reductions in excess of 25% (e.g. if an employee's weekly pay was reduced from $1,000 to $700, the reduction in forgiveness would be $50 per week, multiplied by the eight-week duration of the period). The amount of the reduction is applied to reduce the forgiveness amount on a dollar-for-dollar basis.

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 are not attributable to the FTE reduction. For example, if 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), and there was no change to the employee's hourly wage during the Covered Period (or Alternative Payroll Covered Period, if applicable), 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.

If certain employee salaries and wages were reduced between February 15, 2020 and April 26, 2020 (the "Safe Harbor Period") but the borrower eliminates those reductions by June 30, 2020 or earlier, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in salaries and wages described in the preceding paragraphs. Similarly, if a borrower eliminates any reductions in FTE employees occurring during the safe harbor period by June 30, 2020 or earlier, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in FTE employees.

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 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. Note that this safe harbor appears to only apply to the extent the borrower rehires during the Covered Period or the Alternative Payroll Covered Period. For borrowers that did layoffs or reduced the hours of employees wishing to rehire or restore by June 30 to take advantage of the provision described in the previous paragraph, to the extent their Covered Period or the Alternative Payroll Covered Period ends earlier than June 30, will need to make the written offer to rehire or restore no later than the end of the Covered Period or the Alternative Payroll Covered Period.

Additionally, if an employee of the borrower is fired for cause, voluntarily resigns, or voluntarily requests a reduced schedule during the Covered Period or the Alternative Payroll Covered Period (a "FTE Reduction Event"), the borrower may count such employee at the same full-time equivalency level before the FTE Reduction Event when calculating the FTE employee reduction penalty. Borrowers that avail themselves of this exemption should maintain records demonstrating that each such employee was fired for cause, voluntarily resigned, or voluntarily requested a schedule reduction.

The Small Business Administration has also published its form of PPP loan forgiveness application. The forgiveness application provides a list of documentation that needs to be submitted along with the application, and a list of other documentation that must be retained and provided upon request. Borrowers should review the forgiveness application and the Forgiveness Rule in preparation for applying for forgiveness, and should ensure they are retaining all relevant documentation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.