SBA PPP – IFR 19 Allows Early Forgiveness Application; Raises Still More Questions

IFR 19
 amends IFR 14 (the First Loan Forgiveness Rule) and IFR 15 (the First Loan Review Rule) to implement changes required by the PPPFA, for use in connection with the updated forgiveness application, but also throws in a few other confusing quirks.  With the release of IFR 19, we are two IFRs away from them reaching the legal drinking age, but after spending a few hours trying to parse the intent of IFR 19, one has to wonder if it has a fake ID stashed somewhere, because it is a bit wobbly.

·         Perhaps the biggest – and most confusing change – is that IFR 19 now allows borrowers to apply early for forgiveness prior to the end of their covered periodonce the borrower has used all of its PPP proceeds.  This is good news and will allow banks and borrowers – theoretically – to spread out the flow of forgiveness applications.  HOWEVER, APPLYING EARLY DOES NOT END THE “COVERED PERIOD.”  The CARES Act, all prior applicable IFRs, the loan application and even IFR 19 itself still require the borrower to run the FTE Reduction and Salary/Wage Reduction calculations for the full 8-week or 24-week forgiveness “covered period”.

o   IFR 19 addresses merely one aspect of this by requiring borrower who have then made salary or wage reductions, to account for those salary/wage reductions as if they continue for the balance of the full 8-week or 24-week covered period.

§  For example, say you have reduced an employee’s salary from $1,000 per week to $700 per week, which is $50 in excess of a permitted $250 (25% of $1000) decrease.

§  Even if you apply for forgiveness after 10 weeks, you have to include $50 x the full 24 weeks = $1,200 as your forgiveness reduction amount (rather than including only $50 x the 10 weeks in which you used your PPP proceeds).

§  It appears that would apply even if you later raised her compensation back to something more than $750, as there is not (yet) a process for amending an application.

o   It DOES NOT however say the same thing with respect to FTE reductions, even though … logically(?) … those should be treated precisely in the same manner as a salary wage reduction.  Thus, we DO NOT KNOWhow a borrower applying early for forgiveness should treat an FTE reduction that exists at the time of that early application.

o   An even more challenging question arises as to what, IF ANYTHING, happens if a borrower reduces FTE, salaries or wages for its employeesAFTER applying early, but BEFORE the end of the covered period.  The application forms still refer to reductions as of the end of the Covered Period.  Is that now meant to be a negative covenant that the borrower WILL not reduce FTE, salaries or wages from the date of its application until the end of the covered period?  If so, presumably SBA will require some sort of certification or reaffirmation of the original forgiveness application to ensure no such reductions happened, which negates some of the benefit of applying early.

o   IFR 19 also does nothing to clear up the question of what it means to “eliminate” any reduction in FTE, salaries or wages that occurred between February 15 and April 26 for purposes of fitting in the corrective safe harbor.  IFR 19 still simply provides that if the “borrower eliminates any reductions” on or before December 31, it is exempt from such reduction.    It is unclear how long such elimination must be maintained before such reductions could be reinstated without impacting forgiveness.  Some have theorized that a one-day elimination is sufficient, but that seems directly opposed to the goal of paycheck protection.  Absent guidance to the contrary however, there is still no clear answer.

o   This concern is mitigated somewhat for borrowers who are eligible to use the new PPP-EZ forgiveness application form (and instructions), because those borrowers must certify that they have not made any reduction in FTE, salaries or wages, though the same question applies as to whether that then effectively becomes a negative covenant prohibiting such borrowers from making a reduction prior to the end of their covered period.

·         IFR 19 provides that borrowers may apply for forgiveness on or before the maturity dateof their PPP loan.  This imposes, for the first time, a forgiveness application deadline.  It also clarifies that, yes, a borrower can still apply for forgiveness up to that maturity date even if it has not done so in the first 10 months and has thus started making payments on their PPP loan.  While this is helpful to spread the timing load of the forgiveness applications, it also extends the duration of potentially problematic economic negotiations between buyers and sellers of PPP borrowers.  (See our M&A alert on “Buying and Selling PPP Borrowers” for much more detail on these M&A issues, including the important implications on a buyer’s employee retention tax credits.For instance, is PPP loan for which forgiveness may still be applied treated as “debt” in calculating the cash-free, debt-freepurchase price?)

·         IFR 19 also formally implements a lower limit on “owner compensation” that was first introduced in the revised application forms.

o   For employees who are not owners and not self-employed, forgivable compensation amounts are capped at the lesser of:

§  For an 8-week covered period:  $15,385 per individual, which is 8/52 of $100k, or

§  For a 24-week covered period: $46,154 per individual, which is 24/52 of $100k.

o   For owner employees and self-employed individuals, it gets more complicated.

§  For an 8-week covered period:  the per-individual cap is the lesser of the $15,385 or 8/52 (15.38%) of such owner’s 2019 compensation (on the theory that such owner should not be getting a raise from a borrower taking a PPP loan).

§  For a 24-week covered periodthe per-individual cap is the lesser of $20,833 or 2.5/12 (20.83%) of such owner’s 2019 compensation (on the theory that the borrower was only able to include 2.5 months of payroll in calculating its PPP loan amount, and to allow more could create an incentive to layoff other workers to pay such owner).

NOTE:  This limit applies in the aggregate across ALL businesses in which that owner has an interest.

·         There are also some more detailed and complicated limits  on benefit amounts that are beyond my comprehension, but I’ve pasted a summary from Randy Clark on our tax team at the bottom of this email. (Please email Randy, not me with questions on those nuances, because he can actually answer them, unlike me.)

·         IFR 19, together with the updated forgiveness application and instructions, also clarifies that borrowers are still eligible to use the “alternative payroll covered period” which allows them to start their forgiveness covered period on the first payroll date after receipt of their PPP loan.  Helpfully, this is available for both 8-week and 24-week forgiveness periods. (Just a reminder that the 8-week forgiveness period is only available as an option for borrowers who had their loans before June 5.)

·         IFR 19 also implements the PPPFA’s other safe harbors exempting borrowers from FTE reduction limitations on their forgiveness.  These are detailed in the prior email below, and IFR 19 clarifies an ambiguity that we noted by exempting borrowers unable to return to their prior level of business capacity due to “directly or indirectly” complying with HHS, CDC, or OSHA guidelines.  This is intended to recognize that many borrowers were limited in their activities due to state and/or local shutdown orders, which SBA is expressly recognizing “are based in part on guidance from the three federal agencies.” This is a helpful clarification.  Borrowers should keep careful records documenting the applicable “requirements or guidance” for each of their locations.

Conformed copies of the Loan Forgiveness Rule and Loan Review Rule, each as modified by IFR 19 are attached; note that there are some issues with the formatting and footnotes, so be sure to check the actual rules online to confirm accuracy.


·         C corporation owner-employees (who are not technically self-employed, so the example addresses the normal compensation/benefits cap) are capped by their cash compensation plus retirement and health benefits, not their owner compensation replacement. 

·         S corporation owner employees are also not self-employed.  Their compensation for an S corporation owner already includes health insurance contributions so those can’t be double counted.

·         Both retirement and health insurance contributions for self-employed individuals, discussed below, are not counted in the forgivable owner compensation replacement because they are already taken into account in the self-employment income that formed the basis of the “owner compensation replacement” calculation.

·         Forgiveness for amounts paid to a Schedule C filer (sole proprietors reporting their income on Schedule C to their Form 1040) is capped at the applicable owner compensation replacement.

·         Schedule F is specific to self-employed farming income but it is conceptually the same as a Schedule C filer.

· For general partners, the formula for the forgivable amount generally takes self-employment income as reported on the 2019 K-1, reduced by some expenses that are not already taken into account in reaching that K-1-reported self-employment number but are real deductions to the partner, then multiplies it by 92.35% to take into account that a partner gets a deduction for the “employer’s” share of self-employment taxes on that income. That reduces the potentially forgivable “owner compensation replacement” but more closely approximates the wages that would be received by an employee and are not increased by the employer’s share of payroll taxes.