Interim Final Rule Summary

May 26, 2020

Author: Lindsey Jackson, CPA | Tax Manager

Late Friday the SBA published an Interim Final Rule addressing several items related to PPP loan forgiveness.  The IFR is rather lengthy at 26 pages, but does address many frequently asked questions we have received the past couple of weeks. 

Several key takeaways from the latest release are listed below:

Loan Forgiveness Process:

  • If a loan forgiveness application is submitted to a SBA lender, the lender has 60 days to review and submit the requested forgiveness amount to the SBA.
  • The SBA then has 90 days to respond to the lender’s request where the lender will then communicate the decision to the applicant.
  • Procedural guidelines and timeline if a PPP borrower began making payments on the loan received before a forgiveness amount was determined.

Payroll Costs Eligible:

  • Costs must be paid or incurred.  Payroll that is earned prior to the Covered Period or the Alternative Payroll Covered Period but paid during either the Covered Period or Alternative Payroll Covered Period chosen by the applicant will qualify for forgiveness.  Meaning eligible costs must meet one of the following scenarios:
    • Eligible payroll costs are incurred prior to the applicant’s chosen determination period, and are paid during the chosen determination period.
    • Eligible payroll costs are both incurred and paid during the applicant’s chosen determination period.
    • Eligible payroll costs are incurred during the applicant’s chosen determination period and paid during the next natural payroll cycle immediately following the close of the determination period.
  • Salary, wages, commissions, bonuses, and hazard pay are considered covered payroll costs.
    • 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.   
  • Clarification on limits to owner employees and self-employed individuals’ payroll compensation
    • May not report more than the lesser of 8/52 of their 2019 compensation or $15,385 per individual in total across all businesses 
    • Owner employees are capped by the amount of their 2019 cash compensation and the employer retirement and health care contributions.
    • Schedule C filers are capped by the amount of their owner compensation replacement calculated based on 2019 net profit as stated in previous guidance released by the SBA
    • 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) 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. 

Non-Payroll Costs Eligible:

  • No prepayments are allowed.  If expenses are prepaid prior to the Covered Period they are not eligible.  If expenses are paid during the Covered Period, but are a prepayment for costs to be incurred outside of the Covered Period, they are not eligible. 
  • Reinforcement of the loan forgiveness application stating that eligible expenses must have had their related contracts in place prior to 2.15.2020 and must be paid during the Covered Period or immediately after the Covered Period during the next natural billing cycle.

Wage and Full Time Equivalent Employee Reductions:

  • Regulatory exemption to the wage and FTE reduction rules provided for borrowers who offer to rehire or restore employee hours, even if the employee does not accept.  These employees are excluded from the reduction calculation if the following steps are taken:
    • Written offer to rehire or restore hours.
    • Offer was at the same pay level (salary or hourly rate) prior to reduction
    • Offer is rejected by the employee
    • Records are maintained supporting the offer and subsequent employee rejection
    • The state unemployment insurance office was notified of the employee’s rejection within 30 days.
  • Full time equivalent (FTE) employees are identified as those meeting a 40 hour work week requirement.  The IFR states that while a 30 hour work week was considered, it was ultimately rejected for purposes of the loan forgiveness reduction calculation.  
  • Clarification that applicants will not be double penalized by both wage and FTE reductions on a single employee.  The salary/wage reduction applies only to the portion of decline that is not attributable to a FTE reduction and an example is provided for the calculation based on an hourly employee.
  • If any wage or FTE reductions are restored by 6/30/2020, an applicant may avoid a reduction in loan forgiveness.
  • Employees fired for cause will not reduce loan forgiveness.
  • Employees who voluntary resign or request a reduction in hours will not reduce loan forgiveness.

Please contact your Frost representative(s) with any questions on how these items may relate to your situation.