On Tuesday, August 4, 2020, The U.S. Small Business Administration (SBA), in consultation with Treasury, issued 23 frequently asked questions to help provide additional guidance around forgiveness of Paycheck Protection Program loans. The FAQs address four areas of PPP Forgiveness: General, Payroll Costs, Non-Payroll Costs and Reductions, and provides guidance on the calculations PPP borrowers should use to determine how much of their loan is forgivable.

While this guidance may shed some light in some circumstances, it still leaves many open questions in others, as well as the strong possibility of additional legislation being issued. Our PPP webinar in June advised patience before rushing off to apply for forgiveness, especially given that: (1) you have 10 months after your covered period ends before you need to apply, and (2) there are additional anticipated changes, regulatory and legislative, that might further change the requirements. While preparing for submission of forgiveness makes sense, it also makes sense to wait and allow the process to play out, particularly in the event that, for smaller borrowers, some of the legislative discussion might even allow for simplified automatic forgiveness for some of them.

Below is a brief description of the four sections and the key highlights under each.

General Loan Forgiveness (3 FAQs)

Question No. 1 – clarifies that 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 (and should) the PPP Loan Forgiveness Application Form 3508EZ.

Question No. 3 – clarifies the timing for repayment on any unforgiven loan amount, including any interest earned.

  • As long as a borrower submits its loan forgiveness application within ten months of the completion of the Covered Period, the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by SBA.
  • Interest accrues during the time between the disbursement of the loan and SBA remittance of the forgiveness amount. (Note that accruing interest is also forgivable.)
  • 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 Costs (8 FAQs)

Question No. 1 – affirms that any payroll costs incurred on or before the next regular payroll date after the Covered Period or Alternative Payroll Covered Period are eligible for forgiveness.

Question No. 2 – affirms payroll costs incurred before the Covered Period but paid during the Covered Period are eligible for loan forgiveness.

Question No. 3 – addresses how borrowers can calculate payroll costs for partial pay periods.

  • 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.

Question No. 5 – clarifies that payroll forgiveness includes all forms of cash compensation, including tips, commissions, bonuses and hazard pay, but forgivable cash compensation is capped at $100,000 per employee on an annualized basis.

Question No. 6 – addresses which group health care benefit expenses are considered eligible payroll costs for loan forgiveness.

  • 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.

Question No. 7 – addresses which contributions for retirement benefits will be considered payroll costs that are eligible for loan forgiveness.

  • 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.
  • Forgiveness is not provided for employer contributions for retirement benefits accelerated from periods outside the Covered Period or Alternative Covered Period.  (This is still a “fuzzy” response as it does not specifically address whether 2019 plan contributions paid during 2020 will be considered eligible. Our interpretation is that these would be includable, but that acceleration of 2020 contributions to be paid in the covered period, where in the past they would not have been, would be problematic. We anticipate additional clarification from SBA on this point.)

Question No. 8 – addresses how to determine the amount of owner compensation that is eligible for loan forgiveness.

  • 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.
  • C Corporations: is eligible for loan forgiveness up to the amount of 2.5/12 of his or her 2019 employee cash compensation. 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 the forgiveness application and do not count toward the $20,833 cap per individual.
  • 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).
  • 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. 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.
  • LLC owners: LLC owners must follow the instructions that apply to how their business was organized for tax filing purposes for the tax year 2019, or if a new business, the expected tax filing situation for 2020. Ex: if they elect to be taxed as a C corporation then those rules apply; if they elect to be taxed like a general partnership, those rules apply.

Loan Forgiveness Nonpayroll Costs (7 FAQs)

Question No. 4 – affirms that interest payments on business mortgages on real or personal property (such as an auto loan) are eligible for loan forgiveness, but interest on unsecured debt incurred before February 15, 2020 (a permissible use of PPP loan proceeds) is not eligible for forgiveness.

Question No. 5 – demonstrates that 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.

Question No. 6 – provides that payments of transportation utility fees assessed by state and local governments are eligible for loan forgiveness. Also addressed are two questions related to nonpayroll costs that were incurred or paid outside of the eight-week or 24-week covered periods and whether the Alternative Payroll Covered Period for payroll costs also applies to nonpayroll costs (it doesn’t).

Question No. 7 – clarifies that 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. This affirms that the transportation costs in the original definitions are for electric and gas distribution, not for gasoline for vehicles.

Loan Forgiveness Reductions (5 FAQs)

Question No. 1 – clarifies whether a borrower would be subject to a reduction in 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.

  • 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.
  • 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.

Question No. 2 – explains that 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 No. 3 – affirms that 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 No. 4 – explains how borrowers should calculate the reduction in their loan forgiveness amount arising from reductions in employee salary or hourly wage. 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)). Three examples of the salary/hourly wage reduction are included.

“The FAQs have addressed a number of the outstanding questions, but there are still some gray areas,” said Lisa Simpson, CPA, CGMA, director–Firm Services for the Association of International Certified Professional Accountants (AICPA). “There are still remaining open items such as how will FTE reductions work if applying for forgiveness before the end of the covered period.”

As of July 31, the PPP has funded nearly 5.1 million forgivable loans totaling more than $521 billion to help small businesses and other eligible entities impacted by the recession sparked by the COVID-19 pandemic. More than $130 billion is still available in the PPP, which has an Aug. 8 deadline for applications to be approved by SBA.

Congress is currently considering a follow-up to PPP that would provide more targeted assistance to small businesses.

We will continue to monitor the situation and keep you informed on further developments. Our Advisors are here to help you with any questions or concerns you have with PPP loans, spending or forgiveness.

About the Authors

James E. Merklin
CPA/CFF, CFE, CGMA, MAcc
Partner, Assurance and Advisory

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