By: Julie Dillon
As we navigate these uncertain times, one of the areas on the forefront of the minds of many business owners is the Payroll Protection Program (“PPP”) forgiveness process. If you still have questions about PPP forgiveness, you are not alone. Additional clarification and new guidance continues to be published by the Small Business Administration (“SBA”), the Department of Treasury, and the Internal Revenue Service. On August 4, 2020, the SBA, in consultation with the Department of Treasury, prepared a list of 23 frequently asked questions (“FAQs”) to add clarification about the forgiveness process. The FAQs are divided into four sections, as noted below, each addressing different aspects of the process and calculations.
The terms “Covered Period” or “Alternative Covered Period” are used many times throughout the Loan Forgiveness FAQs. For clarity, “Covered Period” is either (1) the 24-week (168 days) period beginning on the PPP loan disbursement date or (2) if the borrower received the PPP loan before June 5, 2020, the borrower may elect to use an eight-week (56 days) period starting on the PPP loan disbursement date. The “Alternative Covered Period” is either (1) the 24-week (168 days) period or (2) the eight-week (56days) period, starting on the first day of the first payroll cycle following the PPP loan disbursement date. Under both the Covered Period and Alternative Covered Period, the end date will be no later than December 31, 2020.
General Loan Forgiveness:
This section addresses three questions related to the general filing and administrative process of loan forgiveness. It explains that sole proprietors, independent contractors, or self-employed individuals with no employees at the time of the PPP loan application will automatically qualify to use the Loan Forgiveness Application Form 3508EZ, or the lender equivalent.
Also addressed is the permissible use of scanned copies and e-signature requirements; and it confirms that no payments would be required on outstanding PPP loans until the forgiveness amount is remitted to the lender by the SBA, as long as the borrower submits their loan application within 10 months of the completion of the Covered Period. If the loan is fully forgiven, no payments will be required, including for accrued interest amounts.
Loan Forgiveness Payroll Costs:
This section tackles eight questions on payroll costs as they relate to loan forgiveness. The SBA clarifies that payroll incurred in the Covered Period and not paid until after the Covered Period, and payroll costs incurred before the Covered Period and paid in the Covered Period, are both eligible for forgiveness. It also explained that gross payroll should be used when calculating compensation and that payroll costs include all forms of cash compensation paid to employees, such as tips, commissions, bonuses, and hazard pay. Additionally, the SBA stated that employer expenses for both group healthcare benefits and employer contributions for retirement benefits qualify as “payroll costs.”
The SBA provided additional guidance on how to calculate forgiveness of owner compensation for each type of entity. The general rule is that the amount of owner compensation that is eligible for forgiveness under the eight-week Covered Period is capped at $15,385, and under the 24-week Covered Period, the cap is increased to $20,833 per individual. It also confirmed that these caps apply at the individual level; and that, on an individual basis, the shareholder cannot exceed these caps across all of the entities that they own.
Loan Forgiveness Nonpayroll Costs:
Nonpayroll costs are an additional source of questions for borrowers and seven FAQs were written to address them in this section. Similar to payroll costs, the SBA explained that that nonpayroll costs incurred before the Covered Period and not paid until after the Covered Period, and nonpayroll costs incurred before the Covered Period and paid in the Covered Period, are both eligible for forgiveness. They also clarified that payments of interest on business mortgages for real property or loans on personal property (such as auto loans) are eligible for forgiveness; however, interest on unsecured debt is not eligible for forgiveness. Additionally, the entire amount of utility payments, including supply charges, distribution charges, and other charges, are eligible for forgiveness.
Loan Forgiveness Reductions:
Five FAQs are used to address other questions related to loan forgiveness reductions in this section. These FAQs attempt to clarify how the reduction of full-time employees (“FTEs”) and the reduction of wages in excess of 25% would ultimately affect the borrower.
The SBA provides guidance for when the borrower has a reduction in FTEs during the Covered Period. It states that if the borrower has made good-faith efforts to do the following: (1) rehire one or more individuals that were employees of the borrower on February 15, 2020, or (2) has attempted to hire similarly qualified individuals for unfilled positions on or before December 31, 2020, the borrower may exclude any of these reductions in FTEs from their forgiveness calculation.
Additionally, if the borrower reduces the salary or hourly wage of a covered employee 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 (Form 3508 or lender equivalent). When calculating the decrease of 25%, the borrower should only take into account decreased salaries or wages, not other items of compensation. The related FAQs also provide examples of different scenarios.
Following this guidance, on August 11, 2020, the SBA issued two more FAQs related to the PPP and three FAQs related to the Economic Injury Disaster Loans (“EIDL”). FAQs No. 50 and 51 were added to the running list related to the PPP. These establish that the payment or nonpayment of fees or an agent or other third party is not material to the SBA’s guarantee of a PPP loan or to the SBA’s payment of fees to lenders; and they also permit payments for vision and dental benefits to be included as healthcare benefits and eligible insurance premiums to be paid with PPP Funds. The three EIDL FAQs were added to the list published on August 4, 2020. These describe how a lender will confirm, through the PPP Forgiveness Platform, the amount of any EIDL advance to be deducted from the PPP borrower’s loan forgiveness amount when both the EIDL and PPP funds have been received. They instruct lenders that any remaining balance due on a PPP loan after the SBA remits the forgiveness amount to the lender must be repaid by the borrower by the maturity date of the PPP loan; and they outline what a lender should do if a borrower received an EIDL advance in excess of the amount of its PPP loan. The loans will not be eligible for forgiveness, and must be repaid by the borrower before the maturity date, either two or five years.
To find the entire text of the FAQs as of August 11, 2020, please click on the following links: https://home.treasury.gov/system/files/136/PPP--Loan-Forgiveness-FAQs.pdf
As always, the HPG team is ready to address any specific questions you may have. Please feel free to reach out to your tax professional, or you may reach our team at covidhelp@hpg.com.