PPP Update #14 – You Can Apply for Forgiveness Early, but Buyer Beware

Posted on Thu, Jun 25, 2020 ©2021 Drucker & Scaccetti

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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




The Treasury continues to rewrite guidance based upon the changes passed within the Paycheck Protection Program Flexibility Act (PPPFA). Overnight on Monday, June 22, the Treasury released the 20th Interim Final Rule (IFR). There are no surprises on what to expect with the 20th IFR: some clarifications, a few new things, and you guessed it, more unanswered questions. Today, we will focus on a significant new item and some of the clarifications.


The 20th IFR, which revised the 14th and 15th IFRs, can be accessed here. The 14th IFR was the first set of regulations specific to forgiveness. The 15th IFR covered the loan review process the SBA and lenders will undertake.


Timing for Submission of Forgiveness Application

The immediate question asked after the PPPFA was passed was “Do I have to wait 24 weeks to apply for forgiveness?” The Treasury answered this question in the 20th IFR but with a significant catch.


A borrower may submit the loan forgiveness application any time on or before the maturity date of the loan, including before the end of the Covered Period, if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness.


Wonderful, but where is the catch?

If the borrower applies for forgiveness before the end of the Covered Period and has reduced an employee’s salaries or wages in excess of 25% (the wage reduction test), the borrower must account for the excess salary reduction for the full Covered Period (either 8 or 24 weeks).


What does that mean? – An Illustrative Example

A simplistic view of how the wage reduction works is that any excess wage reduction over 25% becomes disallowed forgiveness. Any excess over a 25% reduction is extrapolated over the entire Covered Period.


Say a borrower is using the 24-week Covered Period and the borrower reduced an employee’s weekly salary from $1,000 per week to $700 per week, a $300 reduction.


The $300 reduction is comprised of $250 that is allowed (25% of $1,000) and $50 that can reduce the borrower’s forgiveness. Since the borrower is using a 24-week Covered Period, the reduction in forgiveness applicable to this employee is $1,200 ($50 * 24 weeks). Even if the borrower applies for forgiveness in week 10, where the employee’s salary would have only been reduced for 10 weeks ($50 * 10 = $500), the borrower will have to reduce their forgiveness by the full $1,200.


What should I do?

If you are a borrower that has reduced salary of one or more employees, you should not apply early. Instead, you should focus on trying to meet the safe harbor whereby you restore the employee’s salary by the end of the Covered Period.


Additional Clarifications

Owner & Owner-Employee Clarifications
Consistent with our prior blogs, the 20th IFR confirms the limitations on owner compensation apply to all business types and clarifies owner-employees are C-Corporation and S-Corporation owners. The following specifics are provided regarding owner compensation relative to the covered period and the business type:

  • 8-week Covered Period – Owner compensation is limited to the lesser of 8/52 of 2019 compensation or $15,385 per individual.
  • 24-week Covered PeriodOwner compensation is limited to the lesser of 2.5/12 of 2019 compensation or $20,833 per individual
  • C-Corporation Owner-Employee – Owner compensation, for purposes of the limits described above, is calculated as the sum of cash compensation, employer retirement contributions, and employer health insurance contributions.
  • S-Corporation Owner-Employee – Owner compensation, for purposes of the limits described above, is calculated as the sum of cash compensation and employer retirement contributions. It is assumed employer paid health insurance is already included in cash compensation as required by other areas of tax law.
  • Schedule C & F Owners – Unchanged from the discussion on owner compensation replacement in PPP Update #13.
  • Partners with Net Earnings from Self-Employment** – Owner compensation, for purposes of the limits described above, is calculated as 2019 net earnings from self-employment reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties. The result is then multiplied by 0.9235.

**Note: The regulations use the term ‘general partners’ which has yet to be defined in any of the IFRs. See PPP Update #5, “What additional guidance was provided for partnerships?,” for our interpretation of ‘general partners.’


Additional Clarifications Around New FTE Exemptions

First, a reminder of what the new exemptions to the full-time equivalent (FTE) reduction are (summarized below; see Section 3 of the PPPFA for specific details):

  1. Borrower is unable to rehire the same employees employed on February 15, 2020, or similarly qualified employees, by December 31, 2020.
  2. Borrower is unable to return to same level of business activity before February 15, 2020 due to compliance with COVID‐19 requirements and guidance.


Also recall that FAQ#40 provided an exception to the FTE reduction if a borrower attempted to rehire an individual who rejected the offer (see PPP Updates #8 & #10).


In addressing the FTE exemptions, the 20th IFR begins by consolidating the prior exemption for an attempt to rehire with the new exemption if the borrower is unable to rehire the same or similarly qualified employees described above. This is a sensible conclusion as both exemptions targeted an inability to rehire.


Regarding the FTE exemptions, in addition to the combination described above, there are two other notable takeaways:

  1. The exemptions were clearly defined but no one knew how to prove they qualified for them. The IFR outlines the documentation requirements to establish borrower qualification for each exemption.
  2. Compliance with COVID-19 requirements and guidance includes both direct and indirect compliance. In describing indirect compliance, the IFR mentions a significant amount of the reduction in business activity stemming from COVID requirements or guidance is the result of state and local government shutdown orders that are based in part on the guidance from the three federal agencies referenced in the language of the PPPFA.


Loan Review – Quasi-Appeal Process?

The 15th IFR previously informed borrowers that if they disagree with a lender’s denial of the forgiveness application, the borrower can make a request to the SBA to review the application. For this discussion we will call this a “quasi-appeal,” trademark pending.


The 20th IFR clarified that the SBA can deny a review request by the borrower. The details of this quasi-appeal process can be found in Section III, Part 2(b) of the 20th IFR (page 30 of the original IFR text; pre-Federal Register publication).


This request is not to be confused with the official appeal process mentioned in the 15th IFR if the SBA determines a borrower is ineligible for a PPP loan, ineligible for the amount they received, or ineligible for the loan forgiveness claimed. The SBA has yet to issue a separate interim final rule addressing what this formal process will look like. So, officially, your guess is as good as ours.


We will continue providing PPP 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: partnerships, self-employed, Treasury, coronavirus, COVID-19, CARES Act, payroll costs, loan forgiveness, Paycheck Protection Program, PPP Loan, Interim Final Rule, paycheck protection flexibility act, 24-week, 8-week, Forgiveness Application

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