The Latest PPP Loan Forgiveness Rules: What Costs Are Eligible

Update: On June 17, the SBA released a revised PPP Loan Forgiveness Application, incorporating changes to the program made by the PPP Flexibility Act of 2020. SBA also published a new EZ version of the application for self-employed borrowers, or those who didn't reduce employee wages by more than 25%. Click here to view the EZ Forgiveness Application and here to view the Full Forgiveness Application.

Late Friday evening, May 22nd, the SBA released interim final rules related to some of the talking points about the Paycheck Protection Program Loan forgiveness rules. What follows constitutes responses to, and clarifications of, some of those trickier points that the Loan Forgiveness Application left open, in addition to a couple of surprises (who doesn't love surprises?). The 26-page document is a welcome release of information that will greatly assist those seeking PPP loan forgiveness. Let's take a look at several of the most important items addressed.

Deciphering the New PPP Loan Forgiveness Rules

We have a better answer on which payroll costs are eligible for forgiveness! Only those payroll costs that were either (1) incurred and paid during the Covered Period (or Alternative period) or (2) incurred during the Covered Period and paid before the next payroll period count toward the forgiveness calculation. Thus, if you fell behind in making payroll and you paid a prior period's payroll costs after receiving the loan, those prior period payroll costs will not be eligible for forgiveness.

But wait, there's more! The SBA has made it clear that bonuses and hazard pay that do not cause an employee's salary to exceed the statutorily annualized $100,000 limit are permissible. There is no discussion of, or attempt to quantify, a "reasonable" or "excessive" bonus--they simply treat bonuses and hazard pay as cash compensation which falls under the same parameters as other compensation, with a limit of $15,385 per employee for the 8-week covered period.

And, there's good news on nonpayroll costs! Unlike payroll costs, nonpayroll costs that were incurred prior to the Covered Period but were paid with PPP loan funds during the Covered Period are eligible for forgiveness. Additionally, eligible nonpayroll expenses incurred during the Covered Period and paid after the eight weeks expire can be included in the forgiveness computation as long as they were paid before the next regular billing date. This treatment was adopted for administrative ease and because only 25% of the forgiven amount can derive from nonpayroll costs, so the expectation is that this will cause a de minimis addition to forgiven amounts.

Calculating Full-Time Equivalency (FTE)

1. Full-time equivalency (FTE) must be computed on a per employee basis both during the reference period (see our EBLAST dated April 21, 2020) and again during the covered period. The average FTE during the covered period is divided by the average FTE during the reference period, and any reduction must proportionally reduce the amount of eligible expenses forgiven. For example: if one's average FTE was 10.0 during the reference period but only 8.0 during the covered period, a 20% reduction (8/10 forgivable) would be required in the loan forgiveness calculation. There is a safe harbor ruling that allows you to avoid this forgiveness reduction if you restore any FTE reduction made between February 15 - April 26 by June 30 to the level that existed at February 15.
2. An apples-to-apples comparison must be made across the reference period and covered period. Either the standard FTE measurement or the safe harbor FTE calculation may be used, but the same computation must be used for both periods. This will ensure a consistent comparison is made.

What happens if an employee's wages are reduced? A reduction of salaries and wages up to 25% is permitted without reducing the loan forgiveness amount. A calculation should be performed on each employee to ensure you do not run afoul of this safe harbor cut-off. Reductions in excess of 25% serve to reduce loan forgiveness. Note that this reduction does not apply to employees whose salaries were reduced to the $100,000 maximum.

By way of example, a borrower reduced a full-time employee's weekly salary from $1,000 per week during the reference period (in this case, the reference period must be January 1, 2020 - March 31, 2020) 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% of $1,000) is exempted from the reduction, so $750 becomes the test amount for the reference period. Borrowers seeking forgiveness would list a $50 per week salary/hourly wage reduction (or $400 salary/hourly wage reduction for that employee for the covered period).

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. So, if FTE alone decreases and there is no change in the employee's rate of pay, no separate wage reduction calculation is necessary.

Peter N. Riefstahl is a supervisor at Louis T. Roth & Co., PLLC, a Louisville, KY-based Certified Public Accounting firm that specializes in tax planning, accounting, and business consulting services.