SBA Issues New Guidance on PPP Loan Forgiveness

By Martin Fox, CPA/ABV, CVA

May 26, 2020

Now that many of the Paycheck Protection Program (PPP) loans are about half-way through their eight-week loan forgiveness period, many borrowers have been getting more and more anxious about how the SBA’s rules will actually be interpreted. While there are still several open questions, the SBA provided some answers this week.

Late Friday night (May 22, 2020), the SBA issued a 26-page document clarifying some of the rules associated with forgiveness of the Paycheck Protection Program loans. This document, along with the previously released Loan Forgiveness Application (SBA Form 3508) issued on May 20, 2020, provides the SBA’s interpretation of the rules that were part of the CARES Act.

Rather than rehash items that have been previously discussed in great detail, this article will focus on the clarification or new interpretations provided by the SBA this week.

Payroll Costs

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 proceeds from the lender (the covered period); or
  2. the first day of the first payroll cycle in the covered period (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.

Example: A borrower has a bi-weekly payroll schedule. The borrower’s eight-week covered period begins on June 1 and ends on July 26. The first day of the borrower’s first payroll cycle that starts in the covered period is June 7. The borrower may elect an alternative payroll covered period for payroll cost purposes that starts on June 7 and ends 55 days later (for a total of 56 days) on August 1. Payroll costs paid during this alternative payroll covered period are eligible for forgiveness. In addition, payroll costs incurred during this alternative payroll covered period are eligible for forgiveness as long as they are paid on or before the first regular payroll date occurring after August 1.

This was a sensible solution by the SBA and clarified the “incurred and paid” language that had been previously used. The borrower has the option to use the payroll actually paid during the covered period or wait until the day after the first payroll to begin the eight-week clock running. This is especially helpful for businesses who may have received loan funds when staffing was very low, but have seen increasing staff levels over the past few weeks.

Compensation Clarified

Hazard pay, bonuses and payments to furloughed employees are eligible for loan forgiveness as long as an employee’s total compensation does not exceed $15,385 ($100,000 x 8/52) for the covered period.

This answered a question that many employers had and the SBA states that it reflects the intent of the CARES Act statute.

We still don’t know how the SBA will define “retirement benefits” and what amounts of contributions will be allowed. Will an employer be allowed to include a full year’s retirement contribution for the previous year or the current year? Will retirement contributions be limited to required employer contributions only? Or will something in between be allowed?


As previously stated, Schedule C filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit. Likewise, general partners are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction and unreimbursed partnership expenses) multiplied by 0.9235.

What is new, however, is the reference to “owner-employees” and that compensation to these individuals will be capped at 8/52 of their 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. These rules appear to apply to shareholders of C corporations and S corporations.

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.

Loan forgiveness for Schedule C filers and general partners will not be determined at all by the amount of payments or distributions they receive from a business. The sole determination of their compensation will be the amount reported on their 2019 tax returns.

Nonpayroll Costs

Eligible Costs

Nonpayroll costs have been more narrowly defined as:

  • Interest payments on any business mortgage obligation incurred before February 15, 2020 on real or personal property.
  • Payments on business rent obligations on real or personal property under a lease agreement in force before February 15, 2020; and
  • Business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access or which service began before February 15, 2020.

We now know that eligible interest expense includes all interest on any loans secured by real estate or equipment. Contrary to some earlier language by the SBA, it does not include interest on unsecured loans.

It has also been clarified that rent expense includes rent on both real property and equipment. Therefore, the rent or lease payments on vehicles, operating equipment, office equipment, etc. will qualify as eligible non-payroll costs.

One item that is still unclear is the definition of “transportation” utility payments. An earlier Interim Final Rule issued by the SBA on April 14, 2020, stated the following example in response to the question, “How can PPP loans be used by individuals with income from self-employment who file a 2019 Form 1040, Schedule C?”

“…business utility payments (e.g., the cost of electricity in the warehouse you rent or gas you use driving your business vehicle).”

While the rules have not explicitly addressed this issue elsewhere, it is an indication that fuel expenses for business vehicles may be eligible for loan forgiveness. We still need clarification on that item. In the meantime, however, borrowers should be tracking those costs during the “covered period”.

Timing of Expenses

According to the SBA clarification, a nonpayroll cost is eligible for forgiveness 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.

Basically, what this says is that the borrower can either deduct nonpayroll costs paid during the covered period (cash basis) or incurred during the covering period (accrual basis).

Reductions to Loan Forgiveness Amounts

As stated in the original CARES Act language, the amount of eligible loan forgiveness (based on payroll costs and nonpayroll costs) is reduced if there was either:

  1. a reduction in headcount during the covered period when compared to certain previous time periods (generally, 2/15/19-6/30/19 or 1/1/20-2/29/20), or
  2. a reduction in an employee’s salary or wages in excess of 25%.

The new SBA guidance offers some relief to employers and also clarifies details of how the reductions will be calculated.

Full-Time Equivalents

Up until this week, there was no definition of “full-time equivalent” (FTE). We now know that an FTE is an employee who works 40 hours or more, on average, per week. To the extent employees work more than 40 hours, they are still considered to be one FTE. If they work fewer than 40 hours per week, they can be treated one of two ways:

  1. The average weekly hours are computed and divided by 40 hours to arrive at a fractional FTE (e.g., an employee who works 28 hours per week is 0.7 FTEs), or
  2. All part-time employees can be assigned an FTE of 0.5, regardless of the hours worked.

The same method must be used in calculating FTEs for the covered period and the comparison periods.

Terminated Employees or Voluntary Resignations

Employees who are fired for cause, voluntarily resign, or voluntarily request a reduced schedule during the covered period will be counted at the same FTE level they would have otherwise been counted if no employment change had occurred.

Also, a borrower may exclude any reduction in FTEs that is attributable to an individual employee if:

  1. the borrower made a good faith, written offer to rehire the employee (or, restore the reduced hours of the employee) during the covered period;
  2. the offer was for the same salary or wages and same number of hours as earned by the employee in the last pay period prior to the separation or reduction in hours;
  3. the offer was rejected by the employee;
  4. the borrower has maintained records documenting the offer and its rejection; and
  5. the borrower informed the state unemployment insurance office of the employee’s rejected offer within 30 days of the employee’s rejection of the offer.

Salary Reductions

In addition to a reduction in FTEs, the portion of the PPP loan otherwise eligible for loan forgiveness is reduced by the total dollar amount of  wage or salary reductions of more than 25% in the covered period when compared to the quarter ended March 31, 2020. The rule only applies to employees who were not paid more than the annualized equivalent of $100,000 in any pay period in 2019.

This reduction calculation is performed on a per employee basis, not in the aggregate. Therefore, the calculation must be computed on each individual employee.

Reductions in Both FTE’s and Salaries

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.

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.

The bottom line is that if the employees’ hours were reduced, resulting in a decrease in FTEs, but the rate of pay did not change, the borrower does not have to calculate the reduction in salary or wage for that employee. Therefore, if you saw a decrease in your FTEs due to the lockdown, but you did not change the employees’ pay rates, you will not be penalized both a reduction in FTEs and a reduction in salaries.

Restoration of Reductions in FTE’s or Salaries

If a borrower eliminates any reductions in FTEs that occurred between February 15, 2020 and April 26, 2020 (the safe harbor period) by June 30, 2020, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to a reduction in FTEs.

Likewise, if certain employee salaries and wages were reduced during the safe harbor period, but the borrower eliminates those reductions by June 30, 2020, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in salaries and wages.


As we have seen since the PPP loans first rolled out, the SBA continues to provide ongoing guidance for a program that had to be rolled out quickly due to the unique demands of the coronavirus pandemic. While the speed of guidance is frustrating at times, it’s amazing at how quickly the bill was written and the program implemented by lenders and the Treasury Department.

No doubt we will continue to get more guidance, so it’s important that PPP borrowers stay informed. All the PPP documents and guidance are published on the Treasury Department’s website at: https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses.

Grimbleby Coleman CPAs has committed itself to serving the needs of our clients and the community by closely monitoring changes in the program as they are released. Our PPP services include assistance with loan applications and documentation, consultations about the loan forgiveness eligibility, projections of estimated loan forgiveness and cash flow, and assistance with the loan forgiveness application process.

Please contact us at contactus@gccpas.net or 209-527-4220, if we can assist.