As guidance in this area is being released regularly, we recommend you read all of our blogs on this subject. All the blogs in the Paycheck Protection Program series are here: Updates#1, #2, #3, #4, #5, #6, #7,#8,#9,#10,#11,#12,#13, #14, #15, #16, #17, #18,#19, #20, #21, #22
Welcome to the 15th iteration of what is new with the Paycheck Protection Program. There are no prizes for remembering anything in the first 14, but we hope to provide some clarity on specific issues addressed in the Frequently Asked Questions (FAQs) on PPP Loan Forgiveness (Forgiveness FAQs) issued on August 4. The Forgiveness FAQs are the first piece of significant additional guidance issued since our last update on June 25th covering changes resulting from the Paycheck Protection Program Flexibility Act.
For anyone applying for PPP Loan Forgiveness, the Forgiveness FAQs are a must read. The PPP guidance theme we have become accustomed to continues: (1) confirmation of unknown items, (2) some clarifications, and (3) some new information. Our focus remains on significant clarifications and new information. Due to the significance of this issue to our readers, today’s blog is lengthy, so grab a snack and let’s get started.
Repayment of Interest and Principal
Recall that a borrower is not required to make payments on a loan until the lender receives payment from the Small Business Administration (SBA) for any amount of forgiveness. To qualify for this deferral, the borrower must apply for forgiveness within 10 months of completing the Covered Period.
If the full loan is forgiven, the borrower will not owe interest or principal. If only a portion of the loan is forgiven, or the forgiveness application is denied, the unforgiven principal and associated accrued interest must be repaid by the borrower by the maturity date of the loan.
Assuming the borrower submits a forgiveness application, interest accrues beginning with the disbursement of the loan and ending on the date the SBA remits the loan forgiveness to the lender. The borrower pays the accrued interest on any amount of the loan not forgiven. The lender must notify the borrower when the SBA remittance of the loan forgiveness amount occurs.
Practical Point: Work with your advisors to project your loan forgiveness. If you anticipate anything less than full forgiveness, you should determine when to apply to minimize accrued interest and maximize the loan term. Your lender may also be willing to extend the maturity date of the loan based upon the changes made to the loan maturity discussed in PPP Update #11.
Payroll Costs for Employees
Recall that Payroll Costs comprise cash compensation and non-cash compensation paid or incurred during the Covered Period (or Alternative Payroll Covered Period). Non-cash compensation includes employer-paid health insurance premiums, retirement contributions and state unemployment taxes. Expenses eligible for forgiveness included expenses paid or incurred during the covered period. For a deeper discussion of these items, see PPP Update #9.
The Forgiveness FAQs address these important items:
- Cash Compensation: Payroll costs incurred before the Covered Period but paid during the Covered Period are eligible for forgiveness. If you delayed paying cash compensation until after receiving your PPP loan, those delayed payments are eligible expenses for forgiveness.
- Non-Cash Compensation: In prior guidance, non-cash compensation eligible for forgiveness included amounts paid or incurred. The Forgiveness FAQs retain this treatment for the employer-paid state unemployment taxes but modify the paid or incurred standard for employer-paid health insurance and retirement contributions.
For the health insurance, the Forgiveness FAQs added a previously unknown caveat to qualify the health insurance premiums as forgivable. Specifically, the Forgiveness FAQs provide “only the portion of premiums paid by the borrower for coverage during the applicable Covered Period or Alternative Payroll Covered Period is included, not any portion paid by employees or beneficiaries or any portion paid for covered for periods outside the applicable period.” The result of the caveat is a hybrid method where you must review what periods the premiums paid or incurred covered and then allocate the appropriate portion to your Covered Period.
For retirement contributions, the Forgiveness FAQs specify that retirement benefits accelerated from periods outside the Covered Period or Alternative Payroll Covered Period are not eligible for forgiveness. By usage of the word accelerate, it is assumed prepayments of retirement benefits normally falling outside the Covered Period are not eligible for forgiveness.
Payroll Costs for Owners
We have created the following chart based upon information discussed within the Forgiveness FAQs relative to owner payroll costs. References to the 8-week and 24-week Covered Period are included where a difference in calculation exists. References to Covered Period are interchangeable with the Alternative Payroll Covered Period.
The Forgiveness FAQs include a previously unknown clarification relative to owners: the caps discussed in the chart below, which depend upon the Covered Period chosen, apply across all businesses in which the owner has an ownership interest. For example, if you own two businesses that received PPP loans and elect the 24-week covered period for both businesses, your cash compensation eligible for forgiveness is capped at $20,833 in total between both businesses. The Forgiveness FAQs provide flexibility relative to how the $20,833 is allocated between both businesses.
The Forgiveness FAQs include 3 important clarifications for Nonpayroll Costs:
- Interest on Unsecured Debt: The Forgiveness FAQs confirm interest on unsecured debt incurred before February 15, 2020, is an eligible use of PPP funds but is not eligible for forgiveness. Only interest on secured debt is eligible for forgiveness.
- Renewed Leases/Refinanced Mortgages: The Forgiveness FAQs confirm payments on leases and payments of interest on mortgages that existed on February 15, 2020, but were renewed/refinanced after February 15, 2020, qualify for forgiveness.
- Transportation Defined:
Included in the definition of covered utility payments is the payment for a service for the distribution of transportation. The Forgiveness FAQs clarify “a service for the distribution of transportation” refers to transportation utility fees assessed by state and local governments. More information can be found here.
Loan Forgiveness Reductions
Recall there are two potential reductions to forgiveness: (1) based upon a reduction in full-time equivalents (FTEs), and (2) based upon a reduction in an employee’s salary or hourly rate exceeding 25%. The reductions, associated exceptions and potential safe-harbors were discussed in prior PPP Updates including #10, #11, and #14.
The Forgiveness FAQs clarify these items:
- Seasonal Employers: For all reduction-based calculations, a reference period is required. The Forgiveness FAQs confirm that a seasonal employer who elected to use a 12-week period in 2019 between May 1st and September 15th to calculate their maximum PPP loan amount must use the same 12-week reference period for the associated reduction testing. It is unclear how this will work for a reduction in salary or hourly rate since seasonal employers often have different employees from year-to-year.
- Salary/Hourly Wage Reduction – Covered Employee Defined: The Forgiveness FAQs provide a new definition for a Covered Employee as it relates to the salary/hour wage reduction. To be subject to the salary/hourly wage reduction, an employee must first meet the definition of a Covered Employee. A Covered Employee is an individual who: (1) was employed by the borrower at any point during the Covered Period or Alternative Covered Period and whose principal place of residence is in the United States; and (2) received compensation from the borrower at an annualized rate less than or equal to $100,000 for all pay periods in 2019 or was not employed by the borrower at any point in 2019.
- Salary/Hourly Wage Reduction – Examples: The Forgiveness FAQs, on pages 9 & 10, provide three examples of how the salary/hourly wage reduction functions. The first example covers a salary reduction not restored by the end of the covered period and demonstrates the mechanics of how the reduction is calculated. The second example covers an hourly rate reduction while the third example demonstrates the interplay of the salary/hourly wage reduction and the FTE reduction. You should review these examples to determine how the reductions may apply to your situation.
- Salary/Hourly Wage Reduction – Forms of Compensation Considered: The final Forgiveness FAQ is short but brings significant complexity. The FAQ provides that in determining the salary/hourly wage reduction, a borrower should only account for decreases in salaries and wages. While the answer appears straightforward, consider that in calculating Payroll Costs for the Covered Period, all forms of cash compensation paid to employees including tips, commissions, bonuses, and hazard pay are included. Given the discrepancy in definitions between Payroll Costs and the data required to determine the salary/hourly wage reduction, many businesses may find it cumbersome to pull the comparative data to determine the reduction. Consult your PPP advisor to determine if there is a more practical approach for your specific situation.
Processing of Applications
We intentionally delayed blogging on the Forgiveness FAQs given many borrowers could not apply for forgiveness when they were issued on August 4. On July 23, the SBA issued a procedural notice to all SBA employees and PPP Lenders indicating their PPP Forgiveness Platform would go live and begin accepting Lender submissions on August 10.
Almost simultaneously with issuing the notice, we saw various lending institutions notify their borrowers that despite the SBA opening their portal on August 10, they would not accept forgiveness applications before the end of August or sometime in September. This information was corroborated by a recent AICPA Town Hall we attended where similar information was shared.
There continues to be discussions in Congress regarding potential automatic forgiveness for loans of certain sizes and other potential modifications to the PPP program. While the Forgiveness FAQs addressed some open questions, others remain. Many lending institutions have pressed pause to avoid confusion around the forgiveness process like what occurred with the loan originations.
While frustrating for many borrowers, this will hopefully lead to a smoother process once banks accept PPP Forgiveness Applications. Given there is an automatic deferral of 10 months from the end of the Covered Period, there is no rush to apply if you anticipate receiving full forgiveness. Meanwhile, we recommend you work with your advisors to project anticipated forgiveness and assemble any required supporting documentation.
We will continue providing PPP updates when significant relevant information becomes available. If you have questions about how to navigate the PPP Forgiveness Application process, or how other CARES Act incentives may apply to your business, please call on us. You can stay up to date on PPP guidance and tax issues relating to the coronavirus at our COVID-19 Tax Resource Center.