SBA Releases New Guidance on PPP Loan Forgiveness

May 27, 2020



On Friday, May 22nd, the U.S. Small Business Administration (SBA) released guidance on the Paycheck Protection Program loan forgiveness. The 26-page Interim Final Rule (IFR) provides some clarity concerning loan forgiveness requirements and is intended to help Paycheck Protection Program borrowers prepare and submit loan forgiveness applications as provided for in the CARES Act. The Interim Final Rule expands on information and new terminology presented on the application that was released last week as well as provides examples on how the calculation will work. In addition, the Interim Final Rule provides the following new clarifications:

Employee’s Hazard Pay and Bonuses

The Interim Final Rule states that if a borrower pays furloughed employees their salary, wages, or commissions during the covered period, those payments are eligible for forgiveness as long as they do not exceed an annual salary of $100,000, as prorated for the covered period. This includes payments to employees even if those employees are not able to perform their day-to-day duties, whether due to lack of economic demand or public health considerations.

Caps for Owner-employees and Self-employed Individuals

The guidance states that 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 or $15,385 per individual in total across all businesses. 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 their average monthly net profit which is calculated by taking the lesser of their 2019 Schedule C net profit amount or $100,000 and divide by 12 and multiply by 2.5.


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 and then 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.

Advance Payments of Mortgage Interest

The Interim Final Rule clarifies that advance payments of interest on a covered mortgage obligation are not eligible for loan forgiveness. Principal on mortgage obligations is also not eligible for forgiveness under any circumstances. Prepayments of other non-payroll costs are presumably eligible for loan forgiveness (i.e. rent and utilities).

Interaction of Limitations for Reduction in Number of Employees and Reduction Related to Salary and Wages

The guidance provided clarification on how the two limitations will interact by stating that the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the Full-Time Equivalency (FTE) reduction. This approach will help ensure that borrowers are not doubly penalized for reductions.


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.

Offer to Rehire – New Requirement for Exemption

The Interim Final Rule reaffirms guidance previously provided that employees whom the borrower offered to rehire are generally exempt from the 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. However, the Interim Final Rule includes the following new step in order to qualify for this exemption: “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.”


If you’d like to learn more about the PPP loan forgiveness guidance, you can view our webinar on demand (registration link below).



Check out our webinar page for upcoming and on-demand webinars.


As always, Lanigan Ryan will continue to monitor this evolving situation and add updates to our COVID-19 Resource Center as they become available. As an “essential” business in the state of Maryland, we will continue to work for clients to meet upcoming deadlines, while emphasizing the safety of both our clients and our team. Please know that your Lanigan, Ryan team members are always available for questions.


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