PPP Loan Forgiveness Updates and FAQs

On August 4 and August 11, the SBA posted additional FAQs regarding PPP forgiveness matters. There are a lot of information and some examples included in these FAQs. Below, I attempted to extract the topics that have been the most debated/questioned. This “summary” is far lengthier than I prefer – but is organized for you to more quickly zero in on a specific topic. The most noteworthy clarifications are highlighted.

1. IF a forgiveness application is submitted within 10 months of the end of the covered period:

  • No payments are due until after the SBA remits forgiven amounts and the lender notifies the borrower of the day on which the borrower’s first payment is due.
  • If forgiven in full, no payments are due as all principal and interest from the date the loan was disbursed will be covered by the SBA.
  • If partially forgiven or if the forgiveness application is denied, the balance, including related accrued interest, must be repaid on or before the maturity date of the loan.
  • Interest accrues from the date the loan was disbursed, but will be forgiven to the extent principal is forgiven.

2. Payroll costs

  • Clarifies “paid or accrued” during covered or alternative covered periods. Includes payroll that is accrued (i.e., incurred) before the elected covered period begins, but paid during the covered period. Also includes payroll incurred during the covered period, but paid on the 1st regular pay date following the end of the covered period.
  • For payrolls paid twice a month or less frequently, borrowers will need to calculate payroll costs for partial pay periods.
  • Gross payroll costs (before taxes, employee benefit payments, and similar withholdings) is to be used for “cash compensation”.
  • Payroll costs eligible for forgiveness include payments of lost tips, lost commissions, bonuses, and other forms of incentive pay as cash compensation, limited to $100,000 on an annualized basis.
  • Group health care benefits eligible for forgiveness do not include amounts paid by employees (pre-tax or after tax), as those amounts are included in “cash compensation”. Forgiveness is NOT provided for expenses for group health benefits accelerated from periods outside the covered/alternate covered period. (i.e., borrowers cannot prepay future health care premiums)
  • Insured group health plan premiums paid or incurred during the covered/alternate 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. Only the portion of the premiums paid for coverage during the applicable covered period is included, and NOT any portion for coverage for periods outside the applicable period.
  • Group Health Care Benefits – now officially defined to include insurance premiums for health, vision and dental benefits.

3. Retirement benefits

  • Paid or incurred during the covered/alternate covered period
  • Does not include any contributions deducted from employee pay or otherwise paid by employees.
  • Forgiveness is NOT provided for employer contributions accelerated from periods outside the covered/alternate covered period. (i.e., borrowers cannot prepay retirement contributions)
    Editorial comment: This is understood to require that payments must be consistent with payment patterns of the past. For example, if profit sharing contributions accrued as of 12/31/20×1 are typically paid on 9/15/20×2, the payment cannot be advanced into a covered period and claimed as an eligible paid payroll cost.

4. Owner compensation

  • Now defined as an owner who is also an employee (including if the owner is the only employee) An Interim Final Rule issued Aug. 24 limits the definition of owner-employees in C- or S-corporations to those with ownership equal to or greater than 5%.
  • The amount of loan forgiveness for owner-employees and self-employed individuals payroll compensation is capped at $20,833 per individual for a 24 week covered period (15,385 for an 8-week covered period). These caps are in TOTAL across all businesses in which he/she has an ownership stake. If total compensation across businesses that receive a PPP loan exceeds the cap, owners can choose how to allocate the capped amount across different businesses.
  • C Corporations:
    -Forgiveness limited to 2.5/12 of his/her 2019 employee cash compensation, with “cash compensation” defined as it is for all other employees.
    -Forgiveness is available for payment of employer state and local payroll taxes, for employer contributions for their employee health insurance, and for employer retirement contributions to their employee retirement plans (capped at 2.5/12 of the 2019 employer contribution). Such payments on behalf of owners are not considered cash compensation and are NOT included in the $20,833 cap.
  • S Corporations:
    -Forgiveness limited to 2.5/12 of his/her 2019 employee cash compensation, with “cash compensation” defined as it is for all other employees.
    -Forgiveness is available for payment of employer state and local payroll taxes, and for employer retirement contributions to their employee retirement plans (capped at 2.5/12 of the 2019 employer contribution). Such payments on behalf of owners are not considered cash compensation and are NOT included in the $20,833 cap
    -Employer contributions for health insurance are NOT eligible for additional forgiveness for S-corp employees with at least a 2% stake in the business, including attribution rules applicable to family members of the >=2% owner. This is because those contributions are included in “cash compensation.”
  • Self-employed Schedule C or F filers:
    -Forgiveness limited to 2.5/12 of 2019 net profit, as reported on IRS From 1040 (Sch C line 31 or Sch F line 34), or for new businesses the estimated 2020 Schedule C or F referenced in question 10 of “PPP: How to Calculate Maximum Loan Amounts – By Business Type”.
    -Separate payments for health insurance, retirement, or state/local taxes are not eligible for additional loan forgiveness.
  • General Partners:
    -Forgiveness limited to 2.5/12 of 2019 net earnings from self-employment that is subject to SE tax, computed from:
    -2019 IRS From 1065 Schedule K-1 box 14a
    -Reduced by box 12 Sec 179, unreimbursed partnership expenses deducted on their IRS Form 1040 Schedule SE, and depletion claimed on oil & gas properties
    -Multiplied by 0.9235
    -Separate payments for health insurance, retirement, or state/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 tax year 2019, or if a new business, the expected tax filing situation for 2020

5. Nonpayroll costs

  • An Interim Final Rule issued Aug 24 clarifies and limits the eligibility of rent / lease payments for forgiveness:
      • If a borrower pays rent to a lessor, but also subleases part of the rented space, then the portion of the rent paid by the borrower that is attributable to the subleased space is not an eligible cost for forgiveness.
  • Mortgage interest costs, business rent or lease costs, and utility costs incurred prior to the covered period but paid during the covered are eligible for forgiveness.
  • Costs incurred during the covered period and paid on or before the next regular billing date after the covered period are eligible for forgiveness.
  • Alternate covered period does NOT apply to nonpayroll costs. Covered period always begins on the date the PPP loan was disbursed.
  • Interest on SECURED loans (such as mortgages, auto loans) is eligible for forgiveness. Interest paid on unsecured credit IS NOT ELIGIBLE FOR FORGIVENESS. However, such interest on unsecured credit incurred before February 15, 2020 IS A PERMISSIBLE use of PPP loan proceeds, but is not eligible for forgiveness.
  • Leases or loans that existed prior to 2/15/2020 that are renewed or refinanced on/after 2/15/2020 are eligible for forgiveness (related lease or interest payments)
  • The entire electricity bill payment is eligible for forgiveness even in charges are billed separately (supply, distribution, and other charges such as gross receipts taxes)

6. Loan forgiveness reductions

  • RE: inability to rehire employees: Borrowers are required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer. 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.
  • The period selected by a seasonal employer to calculate its maximum PPP loan amount must use the SAME period as the reference period for calculating any reduction in the amount of loan forgiveness.
  • FTE reduction exceptions of employees making > $100K (listed in Table 2 of PPP Schedule A Worksheet) should be added to the exceptions total in Table 1 of PPP
    Schedule A Worksheet.
  • Reductions in employee salary or hourly wage:
    -See the last 2 pages of the FAQ for 3 examples.
    -Are all forms of compensation included in the salary reduction test? For purposes of calculating reductions in the loan forgiveness amount, the borrower should only take into account decreases in salaries and wages.

This summary of the most recent FAQs must be referenced along with previously issued FAQs and Interim Final Rules to discern the proper reporting of costs eligible for PPP loan forgiveness. Even with all these tools, some grey areas remain, and caution must be used when applying the guidance to borrower-specific situations. DHJJ continues to monitor the SBA, Treasury and AICPA sites for clarification. Please call your DHJJ CPA for the latest information at 630-420-1360.