One week after releasing the Paycheck Protection Program (PPP) Loan Forgiveness application, the Small Business Administration (SBA) posted additional guidance on loan forgiveness rules. On May 22, SBA released its Interim Final Rule on Forgiveness. While most guidance supported the instructions within the Loan Forgiveness Application, additional information was provided to Borrowers.
- Treatment of Bonuses and Hazard Pay: SBA clarified that these payments are considered payroll costs and are eligible for forgiveness. The Interim Final Rule says, "The CARES Act defines the term “payroll costs” broadly to include compensation in the form of salary, wages, commissions, or similar compensation.” It goes on to state, that “The Administrator, in consultation with the Secretary, has also determined that, if an employee’s total compensation does not exceed $100,000 on an annualized basis, the employee’s hazard pay and bonuses are eligible for loan forgiveness because they constitute a supplement to salary or wages, and are thus a similar form of compensation."
- Prorated Non-Payroll Costs: The Interim Final Rule confirms that both non-payroll costs paid and also non-payroll costs incurred during the covered period and paid on or before the next regular billing date are eligible for forgiveness. For those costs incurred, only the portion of the bill incurred will be eligible for forgiveness. The Interim Final Rule provides the following example:
“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. The Administrator, in consultation with the Secretary, has determined that this interpretation provides an appropriate degree of borrower flexibility while remaining consistent with the text of section 1106(b). The Administrator believes that this simplified approach to calculation of forgivable nonpayroll costs is also supported by considerations of administrative convenience for borrowers, and the Administrator notes that the 25 percent cap on nonpayroll costs will avoid excessive inclusion of nonpayroll costs.”
- No Double Penalty: The Interim Final Rule clarified that SBA's intention is to not double penalize a Borrower who has an employee(s) that could be included in both the FTE reduction calculation and the salary\wage reduction calculations. The rule states, "The [CARES] Act does not address the intersection between the FTE employee reduction provision in section 1106(d)(2) and the salary/wage reduction provision in section 1106(d)(3). To help ensure uniformity across all borrowers in applying the FTE reduction provision and the salary/wage reduction provision, the Administrator, in consultation with the Secretary, has determined that 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.”
- Reporting to Unemployment: Previously, question #40 in the Frequently Asked Questions (FAQ) document stated that borrowers would not be penalized in their loan forgiveness reduction calculation if those borrowers made a good faith, written offer of rehire (for the same salary/wage and the same number of hours) to a laid-off employee if that employee rejects that offer. The FAQ also noted that employees who rejected offers of pre-employment may forfeit their eligibility for continued unemployment compensation. The Interim Final Rule on Loan Forgiveness also states that the borrower must inform "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." SBA noted that it would provide additional guidance on this matter.
In addition to this guidance, a second Interim Final Rule covering SBA Loan Review Procedures and Related Borrower and Lender Responsibilities was also released on May 22. Highlights of this rule include the following:
- SBA may review any PPP loan (regardless of size), where reviews may include borrower eligibility, loan amounts and use of proceeds, and loan forgiveness amounts. Reviews may occur at any time in SBA’s discretion.
- If SBA determines that a borrower is ineligible for a PPP loan, the loan will not be forgiven. Further, “SBA may seek repayment of the outstanding PPP loan balance or pursue other available remedies.”
- For loan forgiveness, lenders will confirm receipt of the borrower certifications contained in the Loan Forgiveness Application Form, confirm receipt of applicable documentation, and confirm borrowers’ calculations. Borrowers are responsible for providing an accurate calculation of loan forgiveness, and borrowers will attest to the accuracy of the calculation on the Loan Forgiveness Application.
- Lenders must issue a decision on loan forgiveness within 60 days of receipt of a loan forgiveness application to the SBA.
For more information on PPP loan forgiveness or complying with program guidelines, please contact your HBK Advisor.