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Federal Register / Vol. 86, No. 23 / Friday, February 5, 2021 / Rules and Regulations
incurred during the covered period and paid on the next regular billing date.
b. Are advance payments of interest on mortgage obligations eligible for loan forgiveness? 45
No. Advance payments of interest on a covered mortgage obligation are not eligible for loan forgiveness because the CARES Acts loan forgiveness provisions regarding mortgage obligations specifically exclude prepayments. Principal on mortgage obligations is not eligible for forgiveness under any circumstances.

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c. Are amounts attributable to the business operation of a tenant or subtenant of the PPP borrower or, in the context of home-based businesses, household expenses, eligible for forgiveness? 46
No, the amount of loan forgiveness requested for nonpayroll costs may not include any amount attributable to the business operation of a tenant or subtenant of the PPP borrower or, for homebased businesses, household expenses.
The examples below illustrate this rule.
Example 1: A borrower rents an office building for $10,000 per month and subleases out a portion of the space to other businesses for $2,500 per month. Only $7,500 per month is eligible for loan forgiveness.
Example 2: A borrower has a mortgage on an office building it operates out of, and it leases out a portion of the space to other businesses.
The portion of mortgage interest that is eligible for loan forgiveness is limited to the percent share of the fair market value of the space that is not leased out to other businesses. As an illustration, if the leased space represents 25% of the fair market value of the office building, then the borrower may only claim forgiveness on 75% of the mortgage interest.
Example 3: A borrower shares a rented space with another business.
When determining the amount that is eligible for loan forgiveness, the borrower must prorate rent and utility payments in the same manner as on the borrowers 2019 tax filings, or if a new business, the borrowers expected 2020
tax filings.
Example 4: A borrower works out of his or her home. When determining the amount of nonpayroll costs that are eligible for loan forgiveness, the borrower may include only the share of covered expenses that were deductible 45 This subsection was originally published at 85
FR 33004, subsection III.4.b. June 1, 2020.
46 This subsection was originally published at 85
FR 52881, subsection III.2.a. Aug. 27, 2020.

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on the borrowers 2019 tax filings, or if a new business, the borrowers expected 2020 tax filings.
d. Are rent payments to a related party eligible for loan forgiveness? 47
Yes, as long as 1 the amount of loan forgiveness requested for rent or lease payments to a related party is no more than the amount of mortgage interest owed on the property during the covered period that is attributable to the space being rented by the business, and 2 the lease and the mortgage were entered into prior to February 15, 2020.48 Any ownership in common between the business and the property owner is a related party for these purposes. The borrower must provide its lender with mortgage interest documentation to substantiate these payments. While rent or lease payments to a related party may be eligible for forgiveness, mortgage interest payments to a related party are not eligible for forgiveness.
5. Reductions to Loan Forgiveness Amount Section 7A of the Small Business Act specifically requires certain reductions in a borrowers loan forgiveness amount based on reductions in full-time equivalent employees or in employee salary and wages. It includes an important statutory exemption for borrowers that have eliminated the reduction on or before December 31, 2020 or, for a PPP loan made on or after December 27, 2020, not later than the last day of the loans covered period.49
Section 7Ad7 of the Small Business Act also allows exemptions from reductions in loan forgiveness amounts based on employee availability and business activity. In addition, SBA and Treasury have adopted regulatory exemptions to the reduction rules for borrowers that 1 have offered to restore employee hours at the same salary or wages, even if the employees have not accepted, 2 fired an employee for cause or have an employee that voluntarily resigns or voluntarily requests a schedule reduction, 3
eliminate reductions by December 31, 2020 or, for a PPP loan made after December 27, 2020, the last day of the 47 This subsection was originally published at 85
FR 52881, subsection III.2.b. Aug. 27, 2020 and has been modified for readability.
48 In this context, the related party itself would not also be eligible to request forgiveness for this amount.
49 This subsection was originally published at 85
FR 33004, subsection III.5. June 1, 2020 and amended by 85 FR 38304, subsection III.1.f. June 26, 2020, and has been modified to conform to subsequent rules or guidance and section 311 of the Economic Aid Act.

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loans covered period, or 4 have a PPP
loan of $50,000 or less. The instructions to the loan forgiveness applications and the guidance below explain how the statutory forgiveness reduction formulas work.
a. Will a borrowers loan forgiveness amount be reduced if the borrower reduced the hours of an employee, then offered to restore the reduction in hours, but the employee declined the offer? 50
No. In calculating the loan forgiveness amount, a borrower may exclude any reduction in full-time equivalent employee headcount that is attributable to an individual employee if:
i. The borrower made a good faith, written offer to restore the reduced hours of such employee;
ii. the offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the reduction in hours;
iii. the offer was rejected by such employee; and iv. the borrower has maintained records documenting the offer and its rejection.
b. What effect does a reduction in a borrowers number of full-time equivalent FTE employees have on the loan forgiveness amount? 51
In general, a reduction in FTE
employees during the covered period reduces the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees. For both First Draw PPP Loans and Second Draw PPP Loans, the borrower must first select a reference period: i February 15, 2019 through June 30, 2019; ii January 1, 2020 through February 29, 2020; or iii in the case of a seasonal employer,52 either of the two preceding methods or a consecutive 12-week period between February 15, 2019 and February 15, 2020.53 If the average number of FTE employees during the covered period is less than during the 50 This subsection was originally published at 85
FR 33004, subsection III.5.a. June 1, 2020 and amended by 85 FR 38304, section III.5. June 26, 2020 and has been modified for readability.
51 This subsection was originally published at 85
FR 33004, subsection III.5.b. June 1, 2020 and amended by 85 FR 38304, section III.1.f. June 26, 2020 and has been modified to conform to sections 306, 311 and 336 of the Economic Aid Act and for readability.
52 The term seasonal employer is defined in section 7a36Axiii of the Small Business Act.
53 This decision to permit seasonal employers to use, as a reference period, any consecutive 12-week period between February 15, 2019 and February 15, 2020 is an exercise of the Secretarys rulemaking authority under section 1109 of the CARES Act.
This reference period is consistent with section 336
of the Economic Aid Act, which amends the calculation of the maximum loan amount for seasonal employers.

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