PPP Update #10 - Potential Changes & Forgiveness Regulations

Posted on Tue, May 26, 2020 ©2021 Drucker & Scaccetti

New Info Post-it

As guidance in this area is being released regularly, we recommend you read all of our blogs on this subject.  All the blogs in the Paycheck Protection Program series are here: #1, #2#3#4#5#6#7,#8,#9,#10,#11,#12,#13, #14, #15#16#17, #18,

#19, #20, #21, #22, #23




Treasury kicked off the holiday weekend on Friday, May 22, by releasing its 14th Interim Final Rule (IFR) addressing loan forgiveness for the Paycheck Protection Program (PPP) loans.  This new IFR clarified certain issues while leaving others outstanding.  Today’s blog will focus on the clarifications so borrowers, many nearing the end of their 8-week Covered Period, can make decisions around what is known.  Additionally, we will discuss the Paycheck Protection Flexibility Act, which could change many of the PPP forgiveness-related provisions. 


Paycheck Protection Flexibility Act

The Paycheck Protection Flexibility Act (PPFA) is a bipartisan proposal that would increase the flexibility of the PPP rules surrounding forgiveness.  The draft text of the PPFA can be found here.  The PPFA was introduced on May 15th in the U.S. House of Representatives and many reports indicate there will be a vote in the House this week.  The key provisions of the bill are:


  1. Loan maturity – PPP loan maturity would be changed from 2 years to at least 5 years, and maximum of 10 years.


  1. Covered period – The definition of the covered period, for forgiveness, would be changed to begin on the date funds are received and end on the earlier of (a) 24 weeks later or (b) December 31, 2020. Recall the current definition provides for 8 weeks.


  1. Forgiveness reductions & timing to correct – Employers have until June 30, 2020, to correct any decrease in full-time equivalents or decreases in wages exceeding 25%. The June 30, 2020, date would be extended to December 31, 2020, for the full-time equivalents test only and a new exception is introduced.  This may be altered in a final version to cover both tests.


  1. 75% payroll requirement – Currently, loan forgiveness requests must comprise at least 75% Payroll Costs for full forgiveness. The proposed legislation would remove the 75% payroll requirement.


  1. Payroll tax deferral – A borrower that requests loan forgiveness becomes ineligible for the payroll tax deferral provision of the CARES Act once loan forgiveness is approved by the lender. The proposed legislation would remove this caveat and allow a PPP borrower to utilize the payroll tax deferral regardless of loan forgiveness.


Note:  As a draft bill, the above provisions could be adjusted, and items added or removed.


14th IFR – Payroll & Non-Payroll Clarifications


You can access the 14th IFR here.


Relative to employee payroll, the following are important clarifications:


  1. Costs incurred or paid – Cost incurred or paid, without duplication of the expense, are included in payroll & non-payroll costs. The IFR follows the forgiveness application in describing “incurred.”  For payroll costs, incurred should capture the last payroll paid immediately after the 8-week Covered Period ends.  For non-payroll costs, incurred should capture an expense otherwise billed the following month but for which the days of service fall within the 8-week Covered Period.  For both payroll and non-payroll costs, remember to include only the days falling within the 8-weeks Covered Period.


  1. Alternative Payroll Covered Period – The IFR confirms this election is available for bi-weekly, or more frequent, payroll cycles only. The election applies only to payroll costs and allows a borrower to begin their covered period on the first day of the first payroll cycle that starts within the normal, 8-week covered period.


  1. Payments to furloughed employees, bonuses & hazard pay – The IFR confirms the definition of payroll costs includes all payments to furloughed employees, bonuses & hazard pay.


  1. Prepayment of interest – The IFR specifically addresses prepayment of interest on covered mortgage obligations and indicates such payments are not eligible for forgiveness.


14th IFR – Owner Compensation

The 14th IFR confirms owner compensation is limited to the lesser of 8/52 of 2019 compensation or $15,385 with some nuance for each business type:


  • C & S Corporation Owners – Owner-employee compensation is inclusive of non-cash compensation related to employer retirement and health care contributions made on their behalf.


  • Schedule C (Sole Proprietors or Single Member LLCs) – Consistent with prior guidance, owner compensation replacement is limited to 8/52 of 2019 Schedule C net profit excluding retirement and health insurance contributions.


  • Partners in Partnerships – Owner compensation replacement is based upon 2019 net earnings from self-employment reduced by (1) claimed Section 179 expense, (2) unreimbursed partnership expenses, and (3) depletion from oil and gas properties. The adjusted amount is multiplied by 92.35% before determining 8/52 and comparing to $15,385.  Like Schedule C, retirement and health insurance contributions are ignored.


14th IFR – Forgiveness Reductions

The forgiveness application provided insight into how the SBA intended to apply the forgiveness reductions but lacked certain specifics.  The IFR clarified some areas but not all.  Below we address important items to consider:


  1. FAQ Exception for Attempted Rehire – Recall FAQ #40 provided an exception to the reduction in full-time equivalents (FTEs) if a borrower attempted to rehire an individual who rejected such offer. By inclusion of this exception in the IFR, the exception is now considered law.  The IFR requires utilizing this exception including a previously unknown requirement: the borrower must inform the applicable state unemployment insurance office of such employee’s rejected offer of re-employment within 30 days of the employee’s rejection of the offer


  1. Who does the Wage Reduction test apply to? – The IFR clarifies the Wage Reduction test applies to each new 2020 employee and each existing employee not paid more than the annualized equivalent of $100,000 in any pay period in 2019. The issue regarding “any pay period” remains unanswered.  For example, if an employee receives a bonus and you must annualize the bonus.  This could cause attaining the $100,000 threshold despite not actually earning more than $100,000 during 2019.  It does not appear this is the intent; you should focus on reviewing 2019 wages to determine the $100,000 threshold.  Finally, the IFR includes an example of how the Wage Reduction test should work but the example frustratingly contradicts the forgiveness application (i.e., uses average weekly wages instead of annualized and rounds to the nearest hundredth instead of tenth).


  1. Do FTE Reduction & Wage Reduction apply simultaneously? – In item 5(f), the IFR indicates the intent is to not doubly penalize a borrower. Specifically, the Wage Reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction.  An example is provided to help the borrower understand the intent.  Review of the example yields that an individual’s pay rate must be reduced for the Wage Reduction to apply; this assumes the exceptions noted below in #4 apply equally to both tests.


  1. Do the exceptions apply to the FTE Reduction only or do they also apply to the Wage Reduction? – The forgiveness application made it seem that the exceptions for (1) attempted rehire, (2) fire for cause, (3) voluntary resignation and (4) voluntary requests for a schedule reduction applied to the FTE Reduction only and not the Wage Reduction. Item 5(h) of the IFR appears to indicate the FTE reduction events (we included all 4 above but they reference only the last 3) will not cause a borrower’s loan forgiveness to be reduced.  However, the response in this section addresses only the FTE reduction.  It appears the intent is for the exceptions to apply equally to both tests.


What’s Next?

Should the PPFA become law, a lot will change.  However, borrowers should be weary of waiting to act before the 8-week Covered Period expires, lest they risk an opportunity to maximize forgiveness under “today’s rules.”


We will continue providing updates when relevant information becomes available.  If you have questions about how to navigate the PPP Forgiveness Application process, or how other CARES Act incentives may apply to your business, please call on us.  You can stay up to date on PPP guidance and tax issues relating to the coronavirus at our COVID-19 Tax Resource Center.

Topics: US Treasury, #AlwaysGrowing, coronavirus, COVID-19, CARES Act, loan forgiveness, Small Business Administration, Paycheck Protection Program Loans, PPP Loan, Interim Final Rule, paycheck protection flexibility act, loan maturity, payroll requirement

Read & Submit A Comment