On August 4, 2020, the U.S. Small Business Administration (SBA), in consultation with the Treasury, released frequently asked questions (FAQs), on the Paycheck Protection Program (PPP) related to PPP Loan Forgiveness. The publication is divided into four sections addressing different aspects of the process to determine how much of their loan is forgivable. The following are highlights of the guidance provided.
General Loan forgiveness
The main takeaway in this section is 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 (and should) use the PPP Loan Forgiveness Application Form 3508EZ.
Loan forgiveness – payroll costs
Several issues were clarified in this section of the FAQs. First, payroll costs incurred before the next regular payroll date but after the Covered Period or Alternate Payroll Covered Period are eligible for loan forgiveness. Additionally, costs incurred before the Covered Period but paid in the Covered Period are also counted as payroll costs.
Taxpayers with bi-weekly or more frequent payroll cycles may be able to avoid calculating partial pay period payroll costs if they elect to use the Alternative Payroll Covered Period.
Amounts paid by an employer to cover an employee’s lost tips, bonuses or other forms of incentive pay are considered acceptable payroll costs for forgiveness purposes. However, forgiveness is NOT provided for expenses of group health benefits accelerated from periods outside the Covered Period or Alternative Payroll Covered Period.
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.
The FAQs then provide rules for cash compensation eligibility for loan forgiveness when doing business as various business entity types:
C Corporations & S Corporations: Loan forgiveness is allowed up to 2.5/12 of the 2019 owner-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 employees compensation. Also, employer retirement plan contributions to employee retirement plans are capped at the amount of 2.5/12 of their 2019 employer retirement contribution. For S-corporations, employer contributions for health insurance are not eligible for additional forgiveness for employees who own 2% or more of the stock, along with their family members, under family attribution rules because those contributions are included in cash compensation.
Self-employed Schedule C filers: Loan forgiveness is allowed up to 2.5/12 of the 2019 net profit as reported on Form 1040 Schedule C. Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness.
General Partners: Loan forgiveness is allowed up to 2.5/12 of the 2019 net earnings from self-employment that is subject to self-employment tax, reduced by any section 179 deductions and unreimbursed partnership expenses. Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness.
In addition to the caps previously described, 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, the cap is $15,385.
Loan forgiveness – nonpayroll costs
Eligible business mortgage interest costs, eligible business rent or lease costs, and eligible business utility costs incurred prior to the Covered Period and paid during the Covered Period are eligible for loan forgiveness. Also, nonpayroll costs are eligible for loan forgiveness if they were incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered period.
The Alternative Payroll Covered Period applies ONLY to payroll costs, not to nonpayroll costs. The Covered period always starts on the date the lender makes a disbursement of the PPP loan.
The FAQ points out that interest in unsecured debt is not an eligible nonpayroll cost. Consequently, even though interest on unsecured credit incurred before February 15, 2020 is a permissible use of PPP loan proceeds, it is not eligible for forgiveness.
Loan forgiveness reductions
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:
- An ability to rehire individuals who were employees of the borrower on 2/15/20, and
- An ability to hire similarly qualified individuals for unfilled positions on or before 12/31/20
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 key issue here is the need to have written evidence of an attempt to rehire a similarly qualified individual. Merely having an employee refuse to return to work isn’t enough to eliminate that employee’s FTE in computing a reduction unless the employer attempts to replace that employee.
We will post updates to our website as additional guidance is released.