New Interim Final Rule 14 Provides Clarity on PPP Loan Forgiveness Application

On May 22, 2020, the U.S. Department of the Treasury (the Treasury) and the Small Business Administration (SBA) issued a new Interim Final Rule (IFR 14) related to loan forgiveness and the Paycheck Protection Program (PPP). The additional guidance provides additional insight and clarity to the PPP’s loan forgiveness application. A summary of the updated guidance is provided below.

IFR 14[1] outlines the general process for forgiveness and provides guidance to help borrowers “take immediate steps to maximize their loan forgiveness amounts.” The guidance states that the borrower must submit the Loan Forgiveness Application (SBA Form 3508 or lender equivalent) and required documentation to its lender. The lender then has 60 days to determine the amount of the loan proceeds that are forgivable, if any, and request the related payment from the SBA. Once the forgiveness decision is submitted to the SBA, the SBA has 90 days to review the loan, if necessary, and will provide funding for the appropriate forgiven amount of the loan and for the related interest accrued. If the SBA determines that either some or no portion of the loan is forgivable, it will notify the lender, who will notify the borrower of the decision.

For a summary on the loan review process, see DHG’s Knowledge Share article for IFR 15 discussing SBA Loan Review Procedures and Related Borrower and Lender Responsibilities.

Eligible Payroll Costs:

The IFR reiterates the instructions included in the Loan Forgiveness Application by stating that payroll costs paid or incurred during the covered period or alternative payroll covered period would be eligible for forgiveness. This includes payroll costs incurred during the last pay period of the covered period or alternative payroll covered period as long as those costs are paid before or on the next regular payroll date. Further, regarding employees who are on payroll but not performing work, “payroll costs are incurred based on the schedule established by the borrower (typically, each day that the employee would have performed work).”

IFR 14 further clarifies that payroll costs are defined broadly. Forgivable payroll costs include salary, wages or commission to furloughed employees (including “additional wages paid to tipped employees”), as well as hazard pay and bonuses as long as the employee’s total compensation does not exceed $100,000 on an annualized basis. Hazard pay and bonuses constitute a supplement to salary and wages, and IFR 14 states that these costs are considered a similar form of compensation.

IFR 14 also addresses payroll costs to be forgiven for owner-employees and self-employed individuals stating that payroll costs are capped at the lesser of:

  • $15,385 ($100,000 cap x 8/52 weeks), or
  • 8/52 (or 15.38%) of 2019’s compensation.

Owner-employees are capped by the amount of their 2019 cash compensation and employer provided health care and retirement. Schedule C filers are capped at their amount of owner compensation replacement as calculated on 2019 Schedule C net profit. General partners in a partnership are capped at 2019 net earnings from self-employment

Reduction to Loan Forgiveness Amount

If a reduction occurs during the covered period in full-time equivalent (FTE) employees or in an employee’s salary or wages, a reduction in the amount of the loan to be forgiven may occur. For any reduction in FTE in the covered period, as compared to the reference period, IFR 14 notes the loan amount to be forgiven would be reduced “by the same percentage as the percentage reduction in FTE employees.” For salary or wage reductions in excess of 25 percent, the loan amount to be forgiven would be reduced “by the total dollar amount of the salary or wage reductions that are in excess of 25 percent of base salary or wages between January 1, 2020 and March 31, 2020.”

However, this reduction does not apply to “borrowers who have rehired employees and restored salary and wage levels by June 30, 2020 (with limitations).” To avail themselves of the FTE and salary safe harbor, the borrower must have decreased FTEs or salary/wages between February 15, 2020, and April 26, 2020, and restore to the levels as of February 15, 2020, by June 30, 2020.

IFR 14 further reiterates the loan forgiveness application’s definition of an FTE, stating one FTE is “an employee who works 40 hours or more, on average, each week.” Further, borrowers with part-time employees must select one of the two following methods for calculating FTEs: 1) use the actual proportion of hours to a full 40 hours, or 2) use 0.5 for each part time employee.

As noted within the Loan Forgiveness Application, a reduction will not be applicable for employers who have offered, in writing, to rehire an individual for the same compensation and hours, but was rejected (rejection records must be maintained); however, in order to claim the employee rehire exemption, IFR 14 adds an additional stipulation that “the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.” Further, the reduction exemption is applicable for employees who have been fired for cause, resigns voluntarily, or requests a schedule reduction.

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[1] Interim Final Rule for Loan Forgiveness.


Denny Ard
Managing Partner, DHG Solutions Lab

Wesley Allen,
Managing Director

Payal Shah,
Manager, Assurance


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