The SBA has resumed the issuance of FAQs on the Paycheck Protection Program, issuing a new FAQ on PPP Loan Forgiveness.[1]  Presumably the SBA believed they should publish this document as they are approaching the date the agency announced they may be accepting applications for forgiveness that have been processed by lenders.

The FAQ is divided into four major categories:

• General Forgiveness FAQs

• Loan Forgiveness Payroll Costs FAQs

• Loan Forgiveness Nonpayroll Costs FAQs

• Loan Forgiveness Reductions FAQs.

Corporate shareholder-employees will find some good news in the FAQs, but those who were looking to attempt to pre-pay retirement or health benefits will not be happy with the guidance in the FAQs.

General Loan Forgiveness FAQs

The general category looks at issues that apply outside of the areas covered by the more detailed sections of the FAQ.  The section begins by noting that sole proprietors with no employees should strongly consider filing the short form application for forgiveness (Loan Forgiveness Application Form 3508EZ or lender equivalent):

1. Question: Which loan forgiveness application should sole proprietors, independent contractors, or self-employed individuals with no employees complete?

Answer: Sole proprietors, independent contractors, and self-employed individuals who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form automatically qualify to use the Loan Forgiveness Application Form 3508EZ or lender equivalent and should complete that application.

The FAQ indicates a significant amount of flexibility on the part of the SBA in finding scanned forms and forms signed by electronic signatures as acceptable, though noting that other applicable non-SBA regulations may affect the issue:

2. Question: Can PPP lenders use scanned copies of documents, E-signatures, or E-consents for loan forgiveness applications and loan forgiveness documentation?

Answer: Yes. All PPP lenders may accept scanned copies of signed loan forgiveness applications and documents containing the information and certifications required by SBA Form 3508, 3508EZ, or lender equivalent. Lenders may accept any form of E-consent or E-signature that complies with the requirements of the Electronic Signatures in Global and National Commerce Act (P.L. 106-229).

If electronic signatures are not feasible, then when obtaining a wet ink signature without in-person contact, lenders should take appropriate steps to ensure the proper party has executed the document.

This guidance does not supersede signature requirements imposed by other applicable law, including by the lender’s primary federal regulator.

The FAQ reminds all parties that no payments need to be made before the application for forgiveness is submitted so long as it is submitted timely (no more than 10 months after the end of the Applicable Period):

3. Question: If a borrower submits a timely loan forgiveness application, does the borrower have to make any payments on its loan prior to SBA remitting the forgiveness amount, if any?

Answer: As long as a borrower submits its loan forgiveness application within ten months of the completion of the Covered Period (as defined below), the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by SBA. If the loan is fully forgiven, the borrower is not responsible for any payments. If only a portion of the loan is forgiven, or if the forgiveness application is denied, any remaining balance due on the loan must be repaid by the borrower on or before the maturity date of the loan. Interest accrues during the time between the disbursement of the loan and SBA remittance of the forgiveness amount. The borrower is responsible for paying the accrued interest on any amount of the loan that is not forgiven. The lender is responsible for notifying the borrower of remittance by SBA of the loan forgiveness amount (or that SBA determined that no amount of the loan is eligible for forgiveness) and the date on which the borrower’s first payment is due, if applicable.

Loan Forgiveness Payroll Cost FAQs

Some of what may be considered by most to be surprising guidance in this FAQ is found in the Loan Forgiveness Payroll Cost section.

The first few questions are not where the surprises lie—they rather confirm what some had found surprising in earlier guidance.  The first question deals with payroll costs incurred during the Covered Period but not paid until shortly after the period ends.

1. Question: Are payroll costs that were incurred during the Covered Period1 or the Alternative Payroll Covered Period2 but paid after the Covered Period or the Alternative Payroll Covered Period eligible for loan forgiveness?

Answer: Yes, if the payroll costs are paid on or before the next regular payroll date after the Covered Period or Alternative Payroll Covered Period.

The FAQ continues with the following example:

Example – Loan Forgiveness Payroll Cost FAQ Q1

A borrower received its loan before June 5, 2020 and elects to use a 24-week Covered Period. The borrower’s Covered Period runs from Monday, April 20 through Sunday, October 4. The borrower has a biweekly payroll cycle, with a pay period ending on Sunday, October 4. However, the borrower will not make the corresponding payroll payment until the next regular payroll date of Friday, October 9. Under these circumstances, the borrower incurred payroll costs during the Covered Period and may seek loan forgiveness for the payroll costs paid on October 9 because the cost was incurred during the Covered Period and payment was made on the first regular payroll date after the Covered Period.

Similarly, costs incurred before the Covered Period but paid in the Covered Period are also counted as payroll costs:

2. Question: Are payroll costs that were incurred before the Covered Period but paid during the Covered Period eligible for loan forgiveness?

Answer: Yes.

The FAQ offers an example of this as well:

Example – Loan Forgiveness Payroll Cost FAQ Q2

A borrower received its loan before June 5, 2020 and elects to use a 24-week Covered Period. The borrower’s Covered Period runs from Monday, April 20 through Sunday, October 4. The borrower has a biweekly payroll cycle, with a payroll cycle ending on Saturday, April 18. The borrower will not make the corresponding payroll payment until Friday, April 24. While these payroll costs were not incurred during the Covered Period, they were paid during the Covered Period and are therefore eligible for loan forgiveness.

The FAQ notes that taxpayers with bi-weekly or more frequent payroll cycles may be able to avoid calculating partial pay period payroll costs if they elect to use the Alternative Payroll Covered Period, but those with longer pay periods will have to deal with partial pay period costs.

3. Question: Are borrowers required to calculate payroll costs for partial pay periods?

Answer: If the borrower uses a biweekly or more frequent (e.g., weekly) payroll cycle, the borrower may elect to calculate eligible payroll costs using the eight-week (for borrowers that received their loans before June 5, 2020 and elect this Covered Period length) or 24-week period that begins on the first day of the first payroll cycle following the PPP Loan Disbursement Date (referred to as the Alternative Payroll Covered Period). However, if a borrower pays twice a month or less frequently, it will need to calculate payroll costs for partial pay periods. The Covered Period or Alternative Covered Period for any borrower will end no later than December 31, 2020.

Again, the agency offers up an example to illustrate the issue:

Example – Loan Forgiveness Payroll Cost FAQ Q3

A borrower uses a biweekly payroll cycle. The borrower’s 24-week Covered Period begins on Monday, June 1 and ends on Sunday, November 15. The first day of the borrower’s first payroll cycle that starts in the Covered Period is June 7. The borrower may elect an Alternative Payroll Covered Period that starts on June 7 and ends on November 21 (167 days later). Payroll costs incurred (i.e., the pay was earned on that day) during this Alternative Payroll Covered Period are eligible for loan forgiveness if the last payment is made on or before the first regular payroll date after November 21.

The FAQ also confirms that gross and not net payroll is used in the computation of payroll costs for forgiveness:

4. Question: For purposes of calculating cash compensation, should borrowers use the gross amount before deductions for taxes, employee benefits payments, and similar payments, or the net amount paid to employees?

Answer: The gross amount should be used when calculating cash compensation.

Repeating a holding found in earlier interim final rules, the FAQ confirms that amounts paid by an employer to cover an employee’s lost tips, bonuses or other forms of incentive pay are considered acceptable payroll costs for forgiveness purposes:

5. Question: Are only salaries or wages covered by loan forgiveness, or can a borrower pay lost tips, lost commissions, bonuses, or other forms of incentive pay and have such costs qualify for loan forgiveness?

Answer: Payroll costs include all forms of cash compensation paid to employees, including tips, commissions, bonuses, and hazard pay. Note that forgivable cash compensation per employee is limited to $100,000 on an annualized basis.

The first warning against accelerating payments that relate to future periods into the Covered Period is found in the FAQ discussing health care benefits:

6. Question: What expenses for group health care benefits will be considered payroll costs that are eligible for loan forgiveness?

Answer: Employer expenses for employee group health care benefits that are paid or incurred by the borrower during the Covered Period or the Alternative Payroll Covered Period are payroll costs eligible for loan forgiveness. However, payroll costs do not include expenses for group health care benefits paid by employees (or beneficiaries of the plan) either pre-tax or after tax, such as the employee share of their health care premium. Forgiveness is not provided for expenses for group health benefits accelerated from periods outside the Covered Period or Alternative Payroll Covered Period.

If a borrower has an insured group health plan, insurance premiums paid or incurred during the Covered Period or Alternative Payroll Covered Period qualify as “payroll costs,” as long as the premiums are paid during the applicable period or by the next premium due date after the end of the applicable period. As noted, only the portion of the premiums paid by the borrower for coverage during the applicable Covered Period or Alternative Payroll Covered Period is included, not any portion paid by employees or beneficiaries or any portion paid for coverage for periods outside the applicable period. Loan Forgiveness Payroll Costs FAQ 8 outlines the rules that apply to owner health insurance.

A similar warning against accelerating costs is found when the FAQ discusses retirement benefits as payroll costs:

7. Question: What contributions for retirement benefits will be considered payroll costs that are eligible for loan forgiveness?

Answer: Generally, employer contributions for employee retirement benefits that are paid or incurred by the borrower during the Covered Period or Alternative Payroll Covered Period qualify as “payroll costs” eligible for loan forgiveness. The employer contributions for retirement benefits included in the loan forgiveness amount as payroll costs cannot include any retirement contributions deducted from employees’ pay or otherwise paid by employees. Forgiveness is not provided for employer contributions for retirement benefits accelerated from periods outside the Covered Period or Alternative Covered Period. Loan Forgiveness Payroll Costs FAQ 8 outlines the treatment of retirement benefits for owners, which are different from this general approach.

While some may be disappointed with this “anti-acceleration” guidance, the SBA had never issued any guidance that suggested such payments incurred after the Covered Period would be considered acceptable costs, even though the agency clearly allowed costs incurred before the Covered Period but paid during the Covered Period to be counted towards loan forgiveness.

However, the guidance on owner compensation does contain a few surprising pieces of guidance—and these surprises are generally good news for shareholder-employees compared to what most had inferred to be the rules given prior SBA guidance.

The SBA FAQ on owner compensation is broken down into separate discussions for different entity types.  The FAQ begins with a generally applicable paragraph before looking at specific entity types.

8. Question: How is the amount of owner compensation that is eligible for loan forgiveness determined?

Answer: The amount of compensation of owners who work at their business that is eligible for forgiveness depends on the business type and whether the borrower is using an eight-week or 24-week Covered Period. In addition to the specific caps described below, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at $20,833 per individual in total across all businesses in which he or she has an ownership stake. For borrowers that received a PPP loan before June 5, 2020 and elect to use an eight-week Covered Period, this cap is $15,385. If their total compensation across businesses that receive a PPP loan exceeds the cap, owners can choose how to allocate the capped amount across different businesses. The examples below are for a borrower using a 24-week Covered Period.

This guidance does provide some additional clarity on the limits that apply when an individual has an ownership interest in multiple businesses that obtained PPP loans, allowing that the owners can choose how to spread the capped amount between the various businesses.

The FAQ then goes on to provide the rules for C corporation shareholder-employees:

C Corporations: The employee cash compensation of a C-corporation owner-employee, defined as an owner who is also an employee (including where the owner is the only employee), is eligible for loan forgiveness up to the amount of 2.5/12 of his or her 2019 employee cash compensation, with cash compensation defined as it is for all other employees. Borrowers are also eligible for loan forgiveness for payments for employer state and local taxes paid by the borrowers and assessed on their compensation, for the amount paid by the borrower for employer contributions for their employee health insurance, and for employer retirement contributions to their employee retirement plans capped at the amount of 2.5/12 of the 2019 employer retirement contribution. Payments other than for cash compensation should be included on lines 6-8 of PPP Schedule A of the loan forgiveness application (SBA Form 3508 or lender equivalent), for borrowers using that form, and do not count toward the $20,833 cap per individual.

Note that only cash compensation is subject to the limit on owner compensation and that the definition is the same as it is for other employees.  Earlier guidance had been interpreted by many commentators to require that the caps be applied to all payroll costs of the shareholder-employee.  These “extra” costs (certain benefits and taxes) go on line 6-8 of PPP Schedule A along with the similar costs of rank and file employees.

S Corporations: The employee cash compensation of an S-corporation owner-employee, defined as an owner who is also an employee, is eligible for loan forgiveness up to the amount of 2.5/12 of their 2019 employee cash compensation, with cash compensation defined as it is for all other employees. Borrowers are also eligible for loan forgiveness for payments for employer state and local taxes paid by the borrowers and assessed on their compensation, and for employer retirement contributions to their employee retirement plans capped at the amount of 2.5/12 of their 2019 employer retirement contribution. Employer contributions for health insurance are not eligible for additional forgiveness for S-corporation employees with at least a 2% stake in the business, including for employees who are family members of an at least 2% owner under the family attribution rules of 26 U.S.C. 318, because those contributions are included in cash compensation. The eligible non-cash compensation payments should be included on lines 7 and 8 of PPP Schedule A of the Loan Forgiveness Application (SBA Form 3508), for borrowers using that form, and do not count toward the $20,833 cap per individual.

The difference for S corporation shareholders (and those subject to the family attribution rules) is that health insurance benefits are considered part of cash compensation and not allowed in addition to cash compensation as they are for a C corporation shareholder.  But the amounts paid for certain payroll taxes and retirement plan payments are not subject to the owner-employee caps.

Self-employed Schedule C (or Schedule F) filers: The compensation of self-employed Schedule C (or Schedule F) individuals, including sole proprietors, self-employed individuals, and independent contractors, that is eligible for loan forgiveness is limited to 2.5/12 of 2019 net profit as reported on IRS Form 1040 Schedule C line 31 (or 2.5/12 of 2019 net farm profit, as reported on IRS Form 1040 Schedule F line 34) (or for new businesses, the estimated 2020 Schedule C (or Schedule F) referenced in question 10 of “Paycheck Protection Program: How to Calculate Maximum Loan Amounts – By Business Type”3 ). Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness; health insurance and retirement expenses are paid out of their net self-employment income. If the borrower did not submit its 2019 IRS Form 1040 Schedule C (or F) to the Lender when the borrower initially applied for the loan, it must be included with the borrower’s forgiveness application.

In the case of the sole proprietor, the limit is what had been expected from prior guidance.  Since all of the “extra” payroll costs (retirement benefits, health benefits and state taxes) for the proprietor are not allowed as deductions in computing Schedule C or F income, the SBA takes the position that such costs are part of the net earnings shown on Schedule C or F from which the limitation is computed.

General Partners: The compensation of general partners that is eligible for loan forgiveness is limited to 2.5/12 of their 2019 net earnings from self-employment that is subject to self-employment tax, which is computed from 2019 IRS Form 1065 Schedule K-1 box 14a (reduced by box 12 section 179 expense deduction, unreimbursed partnership expenses deducted on their IRS Form 1040 Schedule SE, and depletion claimed on oil and gas properties) multiplied by 0.9235. Compensation is only eligible for loan forgiveness if the payments to partners are made during the Covered Period or Alternative Payroll Covered Period. Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness. If the partnership did not submit its 2019 IRS Form 1065 K-1s when initially applying for the loan, it must be included with the partnership’s forgiveness application.

This treatment also is in line with what most commentators had expected based on prior guidance.

The SBA this time decided to indirectly comment on the reduction of self-employment income of general partners by using the 0.9235 factor in a footnote to the FAQ.  That footnote reads:

This treatment follows the computation of self-employment tax from IRS Form 1040 Schedule SE Section A line 4 and removes the “employer” share of self-employment tax, consistent with how payroll costs for employees in the partnership are determined.

While that statement is true, most who have questioned its inclusion have noted that the same reduction applies to self-employment income from Schedule C and E on Form 1040, but the SBA did not reduce proprietor’s income by this factor for PPP loan purposes.

LLC owners: LLC owners must follow the instructions that apply to how their business was organized for tax filing purposes for tax year 2019, or if a new business, the expected tax filing situation for 2020.

The LLC section may provide some guidance for cases where the LLC made a change in its check the box election for 2020—the borrower must use the rules for the type of tax entity the LLC was treated as for 2019.  However, that still leaves unanswered questions about how such compensation would be paid to the owners.

Loan Forgiveness Nonpayroll Costs FAQs

The nonpayroll cost FAQ starts with a similar pair of questions dealing with the “paid and incurred” status of nonpayroll costs, with answers provided that are similar to those given for payroll costs.

1. Question: Are nonpayroll costs incurred prior to the Covered Period, but paid during the Covered Period, eligible for loan forgiveness?

Answer: Yes, eligible business mortgage interest costs, eligible business rent or lease costs, and eligible business utility costs incurred prior to the Covered Period and paid during the Covered Period are eligible for loan forgiveness.

Example – Loan Forgiveness Nonpayroll Cost FAQ Q1

A borrower’s 24-week Covered Period runs from April 20 through October 4. On May 4, the borrower receives its electricity bill for April. The borrower pays its April electricity bill on May 8. Although a portion of the electricity costs were incurred before the Covered Period, these electricity costs are eligible for loan forgiveness because they were paid during the Covered Period.

2. Question: Are nonpayroll costs incurred during the Covered Period, but paid after the Covered Period, eligible for loan forgiveness?

Answer: Nonpayroll costs are eligible for loan forgiveness if they were incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.

Example – Loan Forgiveness Nonpayroll Cost FAQ Q2

A borrower’s 24-week Covered Period runs from April 20 through October 4. On October 6, the borrower receives its electricity bill for September. The borrower pays its September electricity bill on October 16. These electricity costs are eligible for loan forgiveness because they were incurred during the Covered Period and paid on or before the next regular billing date (November 6).

The FAQ clarifies that while a borrower may elect an Alternative Payroll Covered Period, that does not affect the beginning and ending of the Covered Period for nonpayroll costs:

3. Question: If a borrower elects to use the Alternative Payroll Covered Period for payroll costs, does the Alternative Payroll Covered Period apply to nonpayroll costs?

Answer: No. The Alternative Payroll Covered Period applies only to payroll costs, not to nonpayroll costs. The Covered Period always starts on the date the lender makes a disbursement of the PPP loan. Nonpayroll costs must be paid or incurred during the Covered Period to be eligible for loan forgiveness. For payroll costs only, the borrower may elect to use the Alternative Payroll Covered Period to align with its biweekly or more frequent payroll schedule.

As well, the FAQ points out that interest on unsecured debt is not an eligible nonpayroll cost:

4. Question: Is interest on unsecured credit eligible for loan forgiveness?

Answer: No. Payments of interest on business mortgages on real or personal property (such as an auto loan) are eligible for loan forgiveness. Interest on unsecured credit is not eligible for loan forgiveness because the loan is not secured by real or personal property. Although interest on unsecured credit incurred before February 15, 2020 is a permissible use of PPP loan proceeds, this expense is not eligible for forgiveness.

The FAQ clarifies that even though a lease may have expired after February 15, 2020, if the borrower renewed that same lease after that date the payments will continue to qualify as nonpayroll costs:

5. Question: Are payments made on recently renewed leases or interest payments on refinanced mortgage loans eligible for loan forgiveness if the original lease or mortgage existed prior to February 15, 2020?

Answer: Yes. If a lease that existed prior to February 15, 2020 expires on or after February 15, 2020 and is renewed, the lease payments made pursuant to the renewed lease during the Covered Period are eligible for loan forgiveness. Similarly, if a mortgage loan on real or personal property that existed prior to February 15, 2020 is refinanced on or after February 15, 2020, the interest payments on the refinanced mortgage loan during the Covered Period are eligible for loan forgiveness.

Example – Loan Forgiveness Nonpayroll Cost FAQ Q5

A borrower entered into a five-year lease for its retail space in March 2015. The lease was renewed in March 2020. For purposes of determining forgiveness of the borrower’s PPP loan, the March 2020 renewed lease is deemed to be an extension of the original lease, which was in force before February 15, 2020. As a result, the lease payments made under the renewed lease during the Covered Period are eligible for loan forgiveness.

Question 6 will surprise many readers. The original IFR for self-employed individuals had indicated a very broad reading of transportation utility costs, but the FAQ seems to have greatly restricted that category:

6. Question: Covered utility payments, which are eligible for forgiveness, include a “payment for a service for the distribution of . . . transportation” under the CARES Act. What expenses does this category include?

Answer: A service for the distribution of transportation refers to transportation utility fees assessed by state and local governments. Payment of these fees by the borrower is eligible for loan forgiveness.

In a footnote the FAQ directs readers to https://www.fhwa.dot.gov/ipd/value_capture/defined/transportation_utility_fees.aspx for information on Transportation Utility Fees.  That page describes transportation utility fees as follows:

Transportation utility fees are a financing mechanism that treats the transportation system like a utility in which residents and businesses pay fees based on their use of the transportation system rather than taxes based on the value of property they occupy. The fees are not subject to voter approval and are based on the number of trips generated by different land uses. Utility fee rates may be determined by the number of parking spaces, square footage, or gross floor area. This approach links the costs of maintaining transportation infrastructure with the benefits derived from the mobility a transportation system provides.

The first transportation utility fees in the United States were implemented in Oregon in the 1980s. Since then they have been used successfully in smaller cities in Washington, Idaho, Utah, Colorado, Texas, Missouri, and Florida. The fees are used primarily by local governments to fund roadway maintenance. They are also known as street maintenance fees, road use fees, street utility fees, and pavement maintenance utility fees.

Transportation utility fees differ from other types of impact fees in that they are levied on all property occupants - owners and renters alike - rather than on property owners alone. They are also paid on an ongoing monthly basis like a utility bill and not in annual or quarterly installments the way real estate taxes are collected. Given that use of the transportation system is not metered in the way that home electricity or sewer utilization is, the fee is calculated on estimated trip generation rates for different land uses. Most transportation utility fee programs in the United States use of trip generation rates prepared by the Institute of Transportation Engineers (ITE).[2]

However, the FAQ does allow that both electricity supply charges and electricity distribution charges are nonpayroll costs, even if they are separately stated on an invoice:

7. Question: Are electricity supply charges eligible for loan forgiveness if they are charged separately from electricity distribution charges?

Answer: Yes. The entire electricity bill payment is eligible for loan forgiveness (even if charges are invoiced separately), including supply charges, distribution charges, and other charges such as gross receipts taxes.

Loan Forgiveness Reductions FAQs

The final section of the FAQ discusses loan forgiveness reduction issues.

The first question deals with employees who refuse an offer to return to work.

1. Question: Will a borrower be subject to a reduction to its forgiveness amount due to a reduction in FTE employees during the Covered Period if the borrower offered to rehire one or more laid off employees but the employees declined?

Answer: In calculating its loan forgiveness amount, a borrower may exclude any reduction in FTE employees if the borrower is able to document in good faith the following: (1) an inability to rehire individuals who were employees of the borrower on February 15, 2020 and (2) an inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020. Borrowers are required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer. The documents that borrowers should maintain to show compliance with this exemption include the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual.

One key issue to note here is the need to have written evidence of an attempt to rehire a similarly qualified individual. Merely having an employee refuse to return to work isn’t enough to eliminate that employee’s FTE in computing a reduction unless the employer attempts to replace that employee.

The second question gives guidance to seasonal employers on the proper reference period to use.

2. Question: If a seasonal employer elects to use a 12-week period between May 1, 2019 and September 15, 2019 to calculate its maximum PPP loan amount, what period in 2019 should be used as the reference period for calculating any reductions in the loan forgiveness amount?

Answer: A seasonal employer that elects to use a 12-week period between May 1, 2019 and September 15, 2019 to calculate its maximum PPP loan amount must use the same 12-week period as the reference period for calculation of any reduction in the amount of loan forgiveness.

Question 3 clarifies that even employees who have annualized income in excess of $100,000 must still be counted in determining if there is an FTE reduction:

3. Question: When calculating the FTE Reduction Exceptions in Table 1 of the PPP Schedule A Worksheet on the Loan Forgiveness Application (SBA Form 3508 or lender equivalent), do borrowers include employees who made more than $100,000 in 2019 (those listed in Table 2 of the PPP Schedule A Worksheet)?

Answer: Yes. The FTE Reduction Exceptions apply to all employees, not just those who would be listed in Table 1 of the Loan Forgiveness Application (SBA Form 3508 or lender equivalent). Borrowers should therefore include employees who made more than $100,000 in the FTE Reduction Exception line in Table 1 of the PPP Schedule A Worksheet.

Question 4 goes into significant detail on the calculations used in computing the reduction in salary/wages:

4. Question: How do borrowers calculate the reduction in their loan forgiveness amount arising from reductions in employee salary or hourly wage?

Answer: Certain pay reductions during the Covered Period or the Alternative Payroll Covered Period may reduce the amount of loan forgiveness a borrower will receive. If the salary or hourly wage of a covered employee is reduced by more than 25% during the Covered Period or the Alternative Payroll Covered Period, the portion in excess of 25% reduces the eligible forgiveness amount unless the borrower satisfies the Salary/Hourly Wage Reduction Safe Harbor (as described in the Loan Forgiveness Application (SBA Form 3508 or lender equivalent)). The examples below assume that each employee is a “covered employee.”

In a footnote the SBA clarifies who is a covered employee for these purposes:

A “covered employee” is an individual who: (1) was employed by the borrower at any point during the Covered Period or Alternative Payroll Covered Period and whose principal place of residence is in the United States; and (2) received compensation from the borrower at an annualized rate less than or equal to $100,000 for all pay periods in 2019 or was not employed by the borrower at any point in 2019.

The question continues with the following illustrative examples:

Example 1, Loan Forgiveness Reduction FAQs, Q4

A borrower received its PPP loan before June 5, 2020 and elected to use an eight-week covered period. Its full-time salaried employee’s pay was reduced during the Covered Period from $52,000 per year to $36,400 per year on April 23, 2020 and not restored by December 31, 2020. The employee continued to work on a full-time basis with a full-time equivalency (FTE) of 1.0. The borrower should refer to the “Salary/Hourly Wage Reduction” section under the “Instructions for PPP Schedule A Worksheet” in the PPP Loan Forgiveness Application Instructions. In Step 1, the borrower enters the figures in 1.a, 1.b, and 1.c, and because annual salary was reduced by more than 25%, the borrower proceeds to Step 2. Under Step 2, because the salary reduction was not remedied by December 31, 2020, the Salary/Hourly Wage Reduction Safe Harbor is not met, and the borrower is required to proceed to Step 3. Under Step 3.a., $39,000 (75% of $52,000) is the minimum salary that must be maintained to avoid a penalty. Salary was reduced to $36,400, and the excess reduction of $2,600 is entered in Step 3.b. Because this employee is salaried, in Step 3.e., the borrower would multiply the excess reduction of $2,600 by 8 (if it had instead selected a 24-week Covered Period, it would multiply by 24) and divide by 52 to arrive at a loan forgiveness reduction amount of $400. The borrower would enter on the PPP Schedule A Worksheet, Table 1, $400 as the salary/hourly wage reduction in the column above box 3 for that employee.

Example 2, Loan Forgiveness Reduction FAQs, Q4

A borrower received its PPP loan before June 5, 2020 and elected to use a 24-week Covered Period. An hourly employee’s hourly wage was reduced from $20 per hour to $15 per hour during the Covered Period. The employee worked 10 hours per week between January 1, 2020 and March 31, 2020. The borrower should refer to the “Salary/Hourly Wage Reduction” section under the “Instructions for PPP Schedule A Worksheet” in the PPP Loan Forgiveness Application Instructions. Because the employee’s hourly wage was reduced by exactly 25% (from $20 per hour to $15 per hour), the wage reduction does not reduce the eligible forgiveness amount. The amount on line 1.c would be 0.75 or more, so the borrower would enter $0 in the Salary/Hourly Wage Reduction column for that employee on the PPP Schedule A Worksheet, Table 1.

If the same employee’s hourly wage had been reduced to $14 per hour, the reduction would be more than 25%, and the borrower would proceed to Step 2. If that reduction were not remedied as of December 31, 2020, the borrower would proceed to Step 3. This reduction in hourly wage in excess of 25% is $1 per hour. In Step 3, the borrower would multiply $1 per hour by 10 hours per week to determine the weekly salary reduction. The borrower would then multiply the weekly salary reduction by 24 (because the borrower is using a 24-week Covered Period). The borrower would enter $240 in the Salary/Hourly Wage Reduction column for that employee on the PPP Schedule A Worksheet, Table 1. If the borrower applies for forgiveness before the end of the 24-week Covered Period, it must account for the salary reduction (the excess reduction over 25%, or $240) for the full 24-week Covered Period.

Example 3, Loan Forgiveness Reduction FAQs, Q4

An employee earned a wage of $20 per hour between January 1, 2020 and March 31, 2020 and worked 40 hours per week. During the Covered Period, the employee’s wage was not changed, but his or her hours were reduced to 25 hours per week. In this case, the salary/hourly wage reduction for that employee is zero, because the hourly wage was unchanged. As a result, the borrower would enter $0 in the Salary/Hourly Wage Reduction column for that employee on the PPP Schedule A Worksheet, Table 1. The employee’s reduction in hours would be taken into account in the borrower’s calculation of its FTE during the Covered Period, which is calculated separately and may result in a reduction of the borrower’s loan forgiveness amount.

The final question clarifies that only salaries and wages are considered for the reduction in salary/wages, with other compensation not included in the calculation:

5. Question: For purposes of calculating the loan forgiveness reduction required for salary/hourly wage reductions in excess of 25% for certain employees, are all forms of compensation included or only salaries and wages?

Answer: For purposes of calculating reductions in the loan forgiveness amount, the borrower should only take into account decreases in salaries or wages.

[1] Paycheck Protection Program Frequently Asked Questions (FAQs) on PPP Loan Forgiveness, Small Business Administration, August 4, 2020 version, August 4, 2020,  https://home.treasury.gov/system/files/136/PPP--Loan-Forgiveness-FAQs.pdf (retrieved August 4, 2020)

[2] “Transportation Utility Fees,” Center for Innovative Finance Support, Federal Highway Administration, US Department of Transportation, https://www.fhwa.dot.gov/ipd/value_capture/defined/transportation_utility_fees.aspx (retrieved August 4, 2020)