PPP Loan Forgiveness Rules

Last week, the Small Business Administration (SBA) and Treasury Department issued interim rules on Paycheck Protection Program (PPP) loan forgiveness.  These rules correspond with the PPP loan forgiveness application, and we’ve gone through them for you and highlighted the answers to some commonly asked questions. As we do not provide legal or financial advise however, please be sure to consult with your CPA or lender directly if you have any questions or need further guidance on any of the information below.

What is the loan forgiveness timeline?

The new regulations do not specify a timeframe for a business owner to submit their forgiveness application to their lender. Still, some lenders may create a deadline following the end of the 56-day initial spending period. Once a lender receives a borrower’s forgiveness application, they have 60 days to review it, make a forgiveness determination, and send the forgiveness request to the SBA.  If a borrower disagrees with the forgiveness amount, they can request reconsideration.  If a lender determines if a borrower does not qualify for any forgiveness, they need to provide the SBA with additional information about the denial. They also must send the borrower a notice about the denial in writing.  The borrower then has 30 days to request that the SBA review the borrower’s decision. Once the forgiveness request is sent to the SBA by the lender, the SBA has 90 days to review the loan and process the bank’s forgiveness amount reimbursement.  If the SBA finds the borrower ineligible for the loan, there is no loan forgiveness.  The SBA may also review the whole application for other forgiveness elements and make adjustments to the forgiveness amount.  There is a review and appeals process for borrowers in this situation. Any PPP loan proceeds that do not qualify for forgiveness must be repaid within the two-year loan period, at a one percent interest rate.

How does a borrower set their eight-week spending period?

Borrowers must spend the amount they hope to have forgiven within eight weeks after getting their loan funds. The default spending period begins on the day the borrower receives its funds from the lender.  However, the new regulation allows some borrowers an option when setting their 8-week period. If the borrower has a bi-weekly or more frequent payroll period, they can begin their eight-week cycle on the first day of the first payroll cycle following the initial loan disbursement.  If an employer pays their employees in arrears, that is alright, as long as the employee gets the final amount of funds they made for working during the eight weeks during the next pay cycle following the end of the 56-day spending period.

Can borrowers count employee bonuses and hazard pay towards forgivable payroll costs?

Yes, as long as an employee’s total annual monetary compensation does not exceed $100,000 per year, then an employer can count any bonuses or hazard payment made during the eight weeks as a qualified payroll cost.  If an employee’s bonus or additional pay causes him or her to exceed the $100,000 threshold, the person’s qualified monetary wages are capped at $15, 384.62 (8/52 of $100,000).

Can borrowers count wages or healthcare expenses paid to furloughed workers as qualified payroll costs?

Yes, the interim final rule explicitly permits this.

How do the salary calculation and forgivable wages work for loan borrowers that are sole proprietors?

A sole proprietor or self-employed borrower can only claim the lesser of 8/52 of their 2019 compensation or $15,385 (8/52 of the $100,000 loan salary limit). Individuals who are self-employed or sole proprietors cannot count retirement or health insurance expenses toward their forgivable payroll costs because those are paid out of net self-employment income.

How do borrowers account for expenses in the eight weeks?

Qualified payroll costs and specified non-payroll costs of interest on mortgages, rent, and utilities, as outlined on the loan forgiveness application paid or incurred during the 8-week spending period, are eligible for loan forgiveness. If an expense is incurred but not billed or paid during the eight weeks, a borrower can still account for it, provided that they pay for the cost on or before the next regular billing date. Mortgage principal or advance interest payments are not forgivable expenses.

How do borrowers account for people who refuse to return to work?

Borrowers can exclude a person who refuses to return to work from their full-time employee count for forgiveness purposes provided the following conditions are met:

  • The person got a good-faith and written offer to rehire or restore hours during the eight weeks.
  • The person would have been paid the same salary and given the same number of hours as they had during the last pay period before their separation or hours reduction.
  • The person rejected the written offer.
  • The borrower has appropriate documentation of the written offer, salary and hours, and offer rejection.
  • The borrower informs the appropriate state unemployment office within 30 days.  Instructions on how to do this will be made available on

If all of these conditions are met, then the borrower does not need to count this person as unemployed when comparing their 8-week spending period with their 12-week reference period.

How do borrowers account for people who are fired for cause or resign voluntarily during the 56 days?

If someone resigns voluntarily or is fired for cause during the 8-week spending period, the person will not count against the borrower’s full-time employee count for forgiveness purposes.  However, the borrower will need appropriate documentation of a voluntary resignation or reasons for firing to provide to the lender/SBA as required.

How does a borrower tabulate the number of full-time employees?

The CARES Act does not define full-time employees, but the SBA determined a work-week to be 40 or more hours per week.  Employers must divide the average amount of hours paid per employee by 40, capping the quotient at one. Every employee that works 40 hours a week should be counted as one FTE, and those that work less are considered to be fractional FTEs. For administrative convenience, employers can count all part-time employees as .5 FTE, or they may do an actual calculation for each, so a 30-hour a week employee would be .75 FTE, and a 10-hour a week employee would be .25 FTE.

How do borrowers account for any salary reductions?

Employers cannot reduce the salary of any employee that made less than $100,000 in annualized pay in 2019 by more than 25% and still get full loan forgiveness for that employee. The way an employer calculates this is to review if the employee’s salary over the first eight weeks of the PPP loans is more or less than 75% of their pay-rate in the most recent quarter in which they worked before the employer got the PPP loan. If their pay-rate is less, forgiveness will be reduced by the difference between current pay and 75% of their original salary.  The salary reduction penalty only applies to a rate-of-pay reduction. Reduced hours do not count as a salary reduction for this part of the loan forgiveness application. However, reducing someone’s hours will impact the full-time employee count.

How long does a borrower have to restore a person’s hours or salary for loan forgiveness purposes?

Borrowers have until June 30, 2020.

Will the SBA audit individual loans? If so, what will the process be? 

The SBA may review any individual loan, including the borrower’s eligibility, the loan amount, the use of its proceeds, and the loan forgiveness amount.  An SBA loan review can happen at any time the SBA chooses – borrowers need to maintain their records for six years after the loan is forgiven or paid in full, and lenders also have record retention requirements. If the SBA reviews a borrower’s loan and needs more information, they will contact the lender or borrower in writing. There will also be an appeals process, to be delineated in a future regulation.

Why would the SBA deem a borrower ineligible for loan forgiveness?

A borrower could be ineligible because they did not meet any of the loan eligibility criteria, including the economic uncertainty criteria, business size criteria, recipient of a retention tax credit, or other reasons.  However, the SBA has issued a good faith standard for borrowers with loan amounts of under $2 million. Those entities will automatically be considered to meet the threshold of “economic uncertainty.” However, it is possible that a borrower that with a smaller loan amount will have their loan forgiveness application reviewed for other reasons, including ineligibility for another purpose.

What do lenders need to review a PPP loan forgiveness application?

The documentation lenders require for loan forgiveness application review are all included in the loan forgiveness application.

What happens to the fees the SBA pays to a lender if a borrower is found to be ineligible?

If a borrower is deemed ineligible for a loan, or the loan amount or forgiveness amount was awarded incorrectly, the lender will forfeit their fees or a portion of their fees paid by the SBA.