New Guidance Issued by SBA and Treasury on Paycheck Protection Program Loan Forgiveness

With the need for clarity on Paycheck Protection Program (“PPP”) loan forgiveness becoming increasingly important to borrowers and lenders, the Small Business Administration (“SBA”), in consultation with the Treasury Department, has released updated guidance, effective as of August 4, 2020, in the form of frequently asked questions (“FAQs”).  We have reported on previously issued guidance from the SBA and Treasury on the PPP program; highlights of this new guidance follow below. 

General Loan Forgiveness

• 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 use Loan Forgiveness Form 3508EZ or lender equivalent.
• As long as a borrower submits its loan forgiveness application within ten months of the completion of the Covered Period (defined below), the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by SBA. If the loan is fully forgiven, the borrower is not responsible for any payments.  If only a portion of the loan is forgiven, or if the forgiveness application is denied, any remaining balance due on the loan must be repaid by the borrower on or before the maturity date of the loan.  Interest accrues from disbursement of the loan to SBA remittance of the forgiveness amount, and the borrower is responsible for paying the accrued interest on any amount of the loan not forgiven. 

The Covered Period is either (i) the 24-week (168-day) period beginning on the PPP loan disbursement date, or (ii) if the borrower received its loan before June 5, 2020, the borrower may elect to use an eight-week (56-day) period.  In no event may the Covered Period extend beyond December 31, 2020.

Loan Forgiveness Payroll Costs

• Payroll costs incurred during the Covered Period (or the “Alternative Payroll Covered Period” (described below) if utilized) but paid on or before the next regular payroll date are eligible for loan forgiveness. Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the 24-week period (or for loans received before June 5, 2020 at the election of the borrower, the eight-week period) that begins on the first day of their first pay period following their PPP disbursement date (i.e., the Alternative Payroll Covered Period).  As in the case of the Covered Period, the Alternative Payroll Covered Period cannot extend beyond December 31, 2020.
• Payroll costs that were incurred before the Covered Period but paid during the Covered Period are eligible for loan forgiveness.
• Borrowers are required to calculate payroll costs for partial pay periods.
• In calculating cash compensation, borrowers should use the gross amount before deductions for taxes, employee benefit payments and similar payments, and not the net amount paid to employees.
• Payroll costs include all forms of cash compensation paid to employees, including tips, commissions, bonuses and hazard pay. Forgivable cash compensation is limited to $100,000 per employee on an annualized basis.
• Employer expenses for employee group health care benefits that are paid or incurred by the borrower during the Covered Period or the Alternative Payroll Covered Period are payroll costs eligible for loan forgiveness. However, expenses for group health benefits paid by employees (or beneficiaries of the plan), either pre-tax or after-tax, such as the employee share of their health care premium are not included in payroll costs for this purpose.  There is no forgiveness for expenses for group health benefits accelerated from periods outside the Covered Period or Alternative Payroll Covered Period. 

If a borrower has an insured group health plan, insurance premiums paid or incurred during the Covered Period or Alternative Payroll Covered Period are treated 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.  As previously noted, only the portion of the premiums paid by the borrower for coverage during the applicable Covered Period or Alternative Payroll Covered Period is included, and not any portion paid by employees or beneficiaries or any portion paid for coverage for periods outside the applicable period. 

• In general, 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 for loan forgiveness purposes. This does not include retirement contributions deducted from employees’ pay or otherwise paid by employees.  There is no forgiveness for employer contributions for retirement benefits accelerated from periods outside the Covered Period or Alternative Payroll Covered Period. 
• The amount of owner compensation that is eligible for forgiveness depends on the business type and whether the borrower is using an eight-week or 24-week Covered Period (described above). In addition to specific caps noted below, the amount of loan forgiveness for owner-employees and self-employed individuals’ payroll compensation is capped at $20,833 per individual in total across all businesses in which he/she has an ownership interest.  This cap is $15,385 in the case of borrowers that received a PPP loan before June 5, 2020 and elect to use an eight-week Covered Period.  If the total compensation across businesses that receive a PPP loan exceeds the cap, owners can choose how to allocate the capped amount across the different businesses.  Assuming a borrower is using a 24-week Covered Period --
  • C corporation: The employee cash compensation of a C corporation owner-employee (including where the owner is the only employee) is eligible for loan forgiveness up to 2.5/12 of his/her 2019 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 compensation, for the amount paid by the borrower 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 retirement contribution.
  • S corporation: The employee cash compensation of an S corporation owner-employee is eligible for loan forgiveness up to 2.5/12 of the 2019 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 compensation, and for employer retirement contributions to their employee retirement plans capped at 2.5/12 of the 2019 employer retirement contribution.  Employer contributions for health insurance are not eligible for additional forgiveness for S corporation employees with at least a 2% interest in the business, including for employees who are family members of an at least 2% owner under certain IRS family attribution rules. 
  • Self-employed Schedule C (or Schedule F) filers: The compensation of self-employed Schedule C (or Schedule F) individuals, including sole proprietors, self-employed individuals and independent contractors, that is eligible for loan forgiveness is limited to 2.5/12 of 2019 net profit (net farm profit).  Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness.  Note that if the borrower did not submit its 2019 Form 1040 Schedule C (or F) to the lender when the borrower initially applied for the loan, the FAQs state that it must be included with the borrower’s forgiveness application.
  • General partners: The compensation of general partners that is eligible for loan repayment is limited to 2.5/12 of their net earnings from self-employment that is subject to self-employment tax (reduced by IRC Sec. 179 expense deduction, unreimbursed partnership expenses and depletion from oil and gas properties) multiplied by 0.9235.

Loan Forgiveness Nonpayroll Costs

• Eligible 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.
• Nonpayroll costs 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, are eligible for loan forgiveness.
• The Alternative Payroll Covered Period applies only to payroll costs, and not to nonpayroll costs. Nonpayroll costs must be paid or incurred during the Covered Period to be eligible for loan forgiveness.
• While payments of interest on business mortgages on real or personal property (e.g., an auto loan) are eligible for loan forgiveness, interest on unsecured credit is not so eligible. Note that interest on unsecured credit incurred before February 15, 2020 is a permissible use of PPP loan proceeds, but it is not eligible for forgiveness.
• If a lease that existed prior to February 15, 2020 expires on or after February 15, 2020 and is renewed, the lease payments made pursuant to the renewed lease during the Covered Period are eligible for loan forgiveness. Further, if a mortgage loan on real or personal property that existed prior to February 15, 2020 is refinanced on or after February 15, 2020, the interest payments on the refinanced mortgage loan during the Covered Period are eligible for loan forgiveness. 
• Covered utility payments, which are eligible for forgiveness, include a “payment for a service for the distribution of … transportation” under the CARES Act. This refers to transportation utility fees assessed by state and local governments.  Transportation utility fees are generally levied on all property occupants – owners and renters alike – rather than on property owners alone.  They are also paid on an ongoing monthly basis like a utility bill and not in annual or quarterly installments the way real estate taxes are collected.
• The entire electricity bill payment is eligible for loan forgiveness – even if charges are invoiced separately, including supply charges, distribution charges and other charges such as gross receipts taxes.

Loan Forgiveness Reductions

• Laid off employees declining rehire – In calculating its loan forgiveness amount, a borrower may exclude any reduction in full time equivalent (“FTE”) employees if the borrower is able to document in good faith (i) an inability to rehire individuals who were employees of the borrower on February 15, 2020 and (ii) an inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020. 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.
• A seasonal employer that elects to use a 12-week period between May 1, 2019 and September 15, 2019 to calculate its maximum PPP loan amount must use the same 12-week period as the reference period for calculating any reduction in the loan forgiveness amount.
• Reduction in loan forgiveness amount arising from reductions in employee salary or hourly wage – Certain pay reductions during the Covered Period or Alternative Payroll Covered Period may reduce the amount of loan forgiveness. Specifically, if the salary or hourly wage of a “covered employee” (defined below) is reduced 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 a Salary/Hourly Wage Reduction Safe Harbor (as described in the Loan Forgiveness Application SBA Form 3508 (or lender equivalent)).
  A “covered employee” is an individual who (i) was employed by the borrower during the Covered Period or Alternative Payroll Covered Period and whose principal residence is in the United States and (ii) 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.
• For purposes of calculating reductions in the loan forgiveness amount required for salary/hourly wage reductions in excess of 25% for certain employees, the borrower only takes into account decreases in salary or wages and not other forms of compensation.

EisnerAmper will keep you informed on new developments regarding PPP loans and any new governmental initiatives in response to the continuing COVID-19 situation.