As the Small Business Administration (SBA) gets ready to accept lenders’ Paycheck Protection Program (PPP) loan forgiveness applications on August 10, the Administration and Treasury issued guidance in the form of 10 pages of Frequently Asked Questions (“FAQ”) designed to further aid borrowers and lenders with the forgiveness process. Click here to read the entire set of FAQ.
Many of the questions and answers in this set of FAQ are similar to, or restatements of, queries addressed in previous releases. The new FAQ does include some helpful examples to calculate various Loan Forgiveness Reductions. Also, clarifications were provided for previously unanswered questions including:
- Forgivable payroll costs include all forms of cash compensation paid to employees, including tips, commissions, bonuses, and hazard pay.
- Expenses for group health benefits accelerated from periods outside the Covered Period or Alternative Payroll Covered Period are not eligible for forgiveness. That is, only the portion of the premiums paid by the borrower for coverage during the applicable Covered Period or Alternative Payroll Covered Period is included in the forgiveness amount.
- --Remember that the Covered Period is either the 24-week (168-day) period beginning on the PPP loan disbursement date, or if the borrower received its PPP loan before June 5, 2020, the borrower may elect to use an eight-week (56-day) Covered Period. The Covered Period can’t extend past December 31, 2020.
- --The Alternative Covered Period is available to borrowers with a biweekly (or more frequent) payroll schedule, who can elect to calculate eligible payroll costs using the 24-week (168-day) period (or, at the election of borrowers with loans received before June 5, 2020, the eight-week (56-day) period) that begins on the first day of their first pay period following the date of their PPP loan disbursement.
- As with health benefits, contributions for retirement benefits may not be accelerated into the Covered Period. Interestingly, the language for retirement benefits does not mirror the language regarding health benefits, leaving open the question as to whether costs for retirement benefits incurred prior to the Covered Period but paid during the Covered Period are eligible for forgiveness.
- The FAQ on Loan Forgiveness Payroll Costs deals extensively with how the amount of owner compensation for each entity type that is eligible for loan forgiveness is determined.
- --Generally, 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.
- --The FAQ makes it clear that the cap is a total across all businesses that received a PPP loan. Owners can choose how to allocate the capped amount across different businesses.
- --There is a clarification with respect to “general partners” – the cap must be multiplied by 0.9235 to arrive at the forgivable amount. Also, and most importantly, compensation is eligible for loan forgiveness only if the payments to partners are actually made during the Covered Period or Alternative Payroll Covered Period.
- --The FAQ also answers the question we had regarding health benefits provided by an S Corporation to shareholder employees. Not only are the employer contributions for the health benefits of employees who own at least 2% of the S Corporation not eligible for forgiveness, neither are the employer contribution for health benefits of their family members.
- Nonpayroll costs incurred prior to the Covered Period but paid during the Covered Period are eligible for loan forgiveness.
- --Nonpayroll costs includes business mortgage interest costs, business rent or lease costs, and business utility costs.
- --Nonpayroll costs incurred during the Covered Period but paid after the Covered Period 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.
- --Note that the Alternative Covered Period doesn’t apply to nonpayroll costs.
- One previously open question was whether payments on renewed leases or refinanced mortgages are eligible for forgiveness. The FAQ says that payments made on recently renewed leases or interest payments on refinanced mortgage loans are eligible for loan forgiveness if the original lease or mortgage existed prior to February 15, 2020.
- Earlier guidance indicated that “transportation costs” included fuel for company owned vehicles. The latest FAQ limits such costs to “transportation utility fees assessed by state and local governments.” Further guidance is clearly needed.
We hope to get answers to a few more open questions from the Treasury and SBA. We also anticipate additional Congressional action which may include:
- Allowing certain borrowers to get a second PPP advance.
- Automatically forgiving loans under a certain dollar amount.
- --The current threshold under consideration is $150,000.
- Allowing a tax deduction for expenses paid with forgiven PPP loans.
The FAQs leave one important question unanswered. It is clear that borrowers may apply for forgiveness when they have exhausted the PPP loan funds, even if that is before the expiration of the 24-week covered period. However, what we don’t know is whether that shorter time frame constitutes a covered period of its own. How do you calculate maximum forgivable compensation? How do you determine the extent of FTE and salary reductions? We hope that this question will be answered shortly so borrowers may proceed with short period forgiveness applications.
We will update you as new guidance is released or new legislation is passed. In the meantime, please contact your Friedman LLP advisor with any questions.