New IFR on Forgiveness

Published on: 18:36PM Jun 23, 2020

The Treasury Department issued a new 31 page Interim Final Rule (IFR) on PPP loan forgiveness as updated by the PPP Flexibility Act.  This post will recap some of the updated items from that IFR..

The borrower will submit their application for forgiveness to the Bank.  The bank 60 days to review the application.  They then will forward it onto the SBA and which has 90 days to review.

Once they confirm the forgiveness amount (or send it back for additional changes), the SBA will remit to the bank the loan forgiveness amount plus any accrued interest.  As expected, interest will not be part of the loan forgiveness application. SBA will have to determine the full amount of accrued interest based on how long it takes the bank and SBA to finalize forgiveness.  This is why interest is not part of the application.

Employers with a bi-weekly or more frequent payroll cycle may elect to use the alternative covered period beginning with the first payroll after the loan proceeds are received.  This is available whether you are using the 8 or 24 week period.

Owner-employees have certain caps placed on the amount of eligible payroll costs they can use.

Self-employed Farmers

If you elect the 8 week period to apply for loan forgiveness, your cap on payroll costs will be limited to 8 weeks of net farm income reported on Schedule F.  You are not allowed to count any health insurance or retirement payments in this amount.  The overall cap is $15,385 on owner "payroll" plus you can count your employee payroll (including their health insurance, retirement payments and state and local taxes) plus interest, rents and utilities.

If you elect the 24 week period, then the owner-employee cap increases to 2.5 months of 2019 net Schedule F income or a max of $20,833 (the maximum you could borrow on a PPP loan for this item anyway).


Partners are similar to self-employed Schedule F farmers,.  Your cap is the same as listed above, but the calculation is based upon your individual 2019 Schedule K-1 line 14(a) amount (self-employment income) times 92.35%.  Line 14(a) must be reduced by any allowed Section 179 deduction, unreimbursed partnership expenses and depletion from oil and gas properties.  It is essentially the amount of net income reported on page 2 of Schedule E times 92.35%.

S Corporation Owners

Your cap is the amount of 2019 wages paid to you (based on 8 weeks or 2.5 months).  Owner's health insurance costs are not allowed to be added, but retirement payments for owners are allowed (we believe this is 2020 payments not 2019 but it is not very clear).  The IFR indicates that health insurance is already included in employee compensation (it is included in box 1), therefore, if you properly included health insurance in box 1 of the Form W-2 for the owner, you should get credit for the 2019 health insurance paid.  If not, then your allowed owner-compensation amount will be reduced.  Here is an example:

The ABC, Inc. S corporation paid Sally $45,000 in wages during 2019.  The corporation also paid $12,000 for health insurance.  If ABC, Inc. reported $45,000 of wages in Box 1 of Form W-2; the corporation is limited to $6,923 (8 weeks) or $9.375 (24 weeks) for owners-employee payroll costs.  However, if it reported the full $57,000 in box 1 these amounts increase to $8,769 and $11,875, respectively.

Many banks likely limited your loan amount to the amount of wages reported in box 5 of form W-2/3 (or Form 941s and 943).  If you had reported health insurance in box 1 you may not have gotten any PPP loan for these amounts.

If your total salary before any health insurance is over $100,000 in 2019, you are effectively capped at the $15,385 or $20,833 plus retirement payments (plus the other allowed employee payroll costs, interest, rents and utilities).

C Corporation Owners

The cap on these owner-employee compensation amounts is based on 2019 numbers plus health insurance plus retirement payments (not sure if they are referencing 2019 or 2020 health insurance and retirement payments).  If your wages were over $100,000 in 2019, then effectively you have the same cap as any other employee.  But if your compensation was low in 2019, you are prevented from boosting it in 2020 to achieve full forgiveness. 

Note: The application for forgiveness indicates that owner-employee's must be "paid" during the covered period to qualify for forgiveness.  There appears to be no direct requirement in the IFR requiring this, but to be safe we suggest always paying yourself even if you are a Schedule F farmer.  Remember, this will be reviewed by both a bank and the SBA looking for verification of all payments including "owner-employee" payroll.

The IFR clarified that non-payroll costs that are incurred during the covered period and paid after the covered period ends and are paid by the regular due-date count.  However, it is only the amount accrued during the covered period that is allowed.

The IFR example on pages 15-16 assumed a June 1 to November 15, 2020 covered period ending date.  The November electricity bill was paid on December 10 (the due date).  Only the amount of the bill from November 1 to November 15 is allowed to count.  This is likely a minor item with a covered period of 24 weeks.

If a borrower reduces pay by more than 25% for the 24 week period, but applies for forgiveness, they are required to account for the reduction based on a full 24 weeks even though they may have applied after 16 weeks (first example on page 18, second example shows how it works for eight weeks).  This penalizes you for applying for forgiveness before the 24 week covered period ends in most cases.

Finally, the FTE reduction requirement has been watered down quite a bit.  We will leave that for another blog post.