CLIENT ALERT: SBA Clarifies Paycheck Protection Loan Forgiveness Criteria

By Published On: May 29, 2020

In an interim final rule (“IFR”) issued on May 22, 2020,[1] the Small Business Administration (“SBA”) clarified the method by which Paycheck Protection Program (“PPP”) Loan Program funds must be expended and documented to support loan forgiveness. This “Loan Forgiveness IFR” is effective immediately but is subject to future modification based on public comments.

In particular, the Loan Forgiveness IFR addresses the calculation of eligible costs (payroll and nonpayroll) for purposes of forgiveness based upon when the costs were incurred or paid (clarifying which costs are eligible for forgiveness).  In addition, the IFR addresses limitations on loan forgiveness resulting from the reduction of certain full-time equivalent employee numbers (explaining how such amounts are to be calculated and addressing furloughed employees), and limitations to loan forgiveness based upon certain reductions of employee rates of pay (including how this limitation operates in conjunction with the FTE limitation where there might appear to be overlap).

Since the establishment of the PPP Loan Program under the CARES Act, there have been questions concerning whether eligible costs (payroll and nonpayroll) must be both “incurred” and “paid” during the covered period to be eligible for forgiveness.  With respect to eligible payroll costs, the SBA has clarified in the IFR that costs will be generally eligible for forgiveness if “paid” or “incurred” during the eight-week (56-day) “Covered Period” or “Alternative Payroll Covered Period.”  For purposes of loan forgiveness, payroll costs are considered paid on the day that paychecks are distributed or an ACH credit transaction is originated and are considered incurred on the day the employee’s pay is earned.  Payroll costs “incurred” but not paid during the last pay period of either the “Covered Period” or “Alternative Payroll Covered Period” are eligible for forgiveness if paid on or before your next regular payroll date.

With respect to eligible nonpayroll costs, the SBA has clarified that an allowable nonpayroll cost will be eligible for forgiveness if it is paid during the  “Covered  Period”[2], i.e. within 56 days of the day that the loan was disbursed to the borrower, or if it was incurred during the “Covered Period” and paid before the next regular billing date, even if the billing date is after the “Covered Period.”  By way of example, assume that a borrowers’ “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.  According to the SBA, the May and June bills are eligible for forgiveness because they were paid within the “Covered Period” and the borrower may seek loan forgiveness for the portion of the electricity bill attributable to electricity usage through July 26 because (i) the underlying cost was incurred during the “Covered Period” (which ended on July 26) and (ii) the bill was paid on the next regular billing date.

With respect to FTEs and rate-of-pay reductions, the statutory CARES Act language establishing the PPP Loan Program provided that a borrower’s loan forgiveness will be reduced if (i) the borrower reduces its number of FTE employees during the loan period or (ii) if the borrower reduces the salary or wages of an employee earning less than $100,000 annually by more than 25%.  In the Loan Forgiveness IFR, the SBA acknowledged that an employee whose work hours were cut, thereby reducing the employer’s FTE count, typically also would experience a reduction in his or her salary/wages simply by virtue of working fewer hours in a pay period.  Strictly construing the FTE and salary reduction limitations, this could, in effect, subject the employer to a double loan forgiveness penalty – one loan reduction for the decrease in  FTEs and one loan reduction for the employee’s pay decrease.  To prevent that result, the SBA has clarified that the salary/wage reduction will apply only to a portion of the decrease in employee salary and wages that is not attributable to an FTE reduction.  In other words, if the rate of pay stays the same (or, more precisely, is not reduced by more than 25%) the amount of the loan forgiven will not be reduced on account of the overall reduced pay experienced by the employee.

Finally, the SBA expanded on its previously announced policy that a borrower’s loan forgiveness amount will not be reduced under the FTE reduction limitations if an employee refuses an employer’s good faith written offer either to re-employ the employee or to restore the employee’s reduced work hours to their prior level, instructing that such an employer must inform the applicable state unemployment insurance agency of any such rejected offer within 30 days of the rejection.  The SBA has stated that it intends to provide further information in this area, including clarification of the expected means of reporting on its website at a later date.

For more information on the SBA’s Paycheck Protection Loan Program and loan forgiveness requirements, please do not hesitate to contact FTLF attorneys:


[1] The final rule is scheduled to be published in the Federal Register on June 1, 2020.  A copy of the unpublished version is available via the SBA and Treasury websites as well as through the Federal Register website at: https://www.federalregister.gov/documents/2020/06/01/2020-11536/business-loan-program-temporary-changes-paycheck-protection-program-requirements—loan-forgiveness

[2] Unlike payroll costs, borrowers are required to use the “Covered Period” when calculating nonpayroll costs eligible for forgiveness and cannot use the “Alternative Payroll Covered Period.”