Late Friday evening, May 22nd, the SBA released interim final rules related to some of the talking points we recently outlined. What follows constitutes responses to, and clarifications of, some of those trickier points that the Loan Forgiveness Application left open, in addition to a couple of surprises. (Who doesn't love surprises?!) The 26-page document is a welcome release of information that will greatly assist those seeking PPP loan forgiveness. Let's take a look at several of the most important items addressed.

We have a better answer on which payroll costs are eligible for forgiveness! Only those payroll costs that were either (1) incurred and paid during the Covered Period (or Alternative period) or (2) incurred during the Covered Period and paid before the next payroll period count toward the forgiveness calculation. Thus, if you fell behind in making payroll and you paid a prior period's payroll costs after receiving the loan, those prior period payroll costs will not be eligible for forgiveness.

But wait, there's more! The SBA has made it clear that bonuses and hazard pay that do not cause an employee's salary to exceed the statutorily annualized $100,000 limit are permissible. There is no discussion of, or attempt to quantify, a "reasonable" or "excessive" bonus - they simply treat bonuses and hazard pay as cash compensation which falls under the same parameters as other compensation, with a limit of $15,385 per employee for the 8-week covered period.

And, there's good news on nonpayroll costs! Unlike payroll costs, nonpayroll costs that were incurred prior to the Covered Period but were paid with PPP loan funds during the Covered Period are eligible for forgiveness! Additionally, eligible nonpayroll expenses incurred during the Covered Period and paid after the eight weeks expire can be included in the forgiveness computation as long as they were paid before the next regular billing date. This treatment was adopted for administrative ease and because only 25% of the forgiven amount can derive from nonpayroll costs, so the expectation is that this will cause a de minimis addition to forgiven amounts.

Two more comments on FTE:

What happens if an employee's wages are reduced? A reduction of salaries and wages up to 25% is permitted without reducing the loan forgiveness amount. A calculation should be performed on each employee to ensure you do not run afoul of this safe harbor cut-off. Reductions in excess of 25% serve to reduce loan forgiveness. Note that this reduction does not apply to employees whose salaries were reduced to the $100,000 maximum.

By way of example, a borrower reduced a full-time employee's weekly salary from $1,000 per week during the reference period (in this case, the reference period must be January 1, 2020 - March 31, 2020) to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period with an FTE of 1.0. In this case, the first $250 (25% of $1,000) is exempted from the reduction, so $750 becomes the test amount for the reference period. Borrowers seeking forgiveness would list a $50 per week salary/hourly wage reduction (or $400 salary/hourly wage reduction for that employee for the covered period).

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. So, if FTE alone decreases and there is no change in the employee's rate of pay, no separate wage reduction calculation is necessary.