This article was updated on August 5, 2020. Further updates will be provided as new information becomes available.
On August 4, the U.S. Small Business Administration (SBA), in consultation with the Department of the Treasury, provided new FAQs on loan forgiveness under the Paycheck Protection Program (PPP). Following is a summary of key questions addressed and changes or clarifications of prior guidance from the SBA. The entire list of FAQs can be found at https://home.treasury.gov/system/files/136/PPP--Loan-Forgiveness-FAQs.pdf
Q: Which loan forgiveness application should sole proprietors, independent contractors or self-employed individuals with no employees complete?
A: Loan Forgiveness Application Form 3508EZ or lender equivalent.
Q: If a borrower submits a timely loan forgiveness application, does the borrower have to make any payments on its loan prior to SBA remitting the forgiveness amount, if any?
A: No. As long as a borrower submits a loan forgiveness application within 10 months of the completion of the Covered Period, they are not required to make any payments until the forgiveness amount is remitted to the lender by the SBA. The borrower is responsible for paying accrued interest on any amount of the loan that is not forgiven. Interest begins to accrue on the date of disbursement of the loan.
Q: Are payroll costs that were incurred before the Covered Period but paid during the Covered Period eligible for loan forgiveness [emphasis added]?
A: Yes. The FAQs provide the following example: A borrower received its loan before June 5, 2020 and its Covered Period runs from April 20 through October 4. The borrower has a biweekly payroll cycle, with a cycle ending on Saturday, April 18. The borrower will not make the corresponding payroll payment until Friday, April 24. While these payroll costs were not incurred during the Covered Period, they were paid during the Covered Period and are therefore eligible for loan forgiveness.
Q: Are borrowers required to calculate payroll costs for partial pay periods?
A: If a borrower has a biweekly or more frequent (e.g., weekly) payroll cycle, they may elect to calculate eligible payroll costs using the period that begins on the first day of the first payroll cycle following the loan disbursement, which is referred to as the Alternative Covered Period. If a borrower pays twice a month or less frequently, they will need to calculate payroll costs for partial pay periods.
Q: For purposes of calculating cash compensation, should borrowers use the gross amount before deductions for taxes, employee benefits payments and similar payments, or the net amount paid to employees?
A: Borrowers should use gross compensation.
Q: What expenses for group healthcare benefits will be considered payroll costs that are eligible for loan forgiveness?
A: Employer expenses for employee group health care benefits paid or incurred by the borrower during the Covered Period or the Alternative Payroll Covered Period are payroll costs eligible for loan forgiveness. Payroll costs do not include expenses for group healthcare benefits paid by employees. Forgiveness is not provided for expenses for group healthcare benefits accelerated from periods outside the Covered Period or Alternative Payroll Covered Period. Group healthcare benefits paid or incurred on behalf of owner-employees are treated differently and included within the compensation limits noted below.
Q: What contributions for retirement benefits will be considered payroll costs that are eligible for loan forgiveness?
A: Employer contributions for employee retirement benefits paid or incurred by the borrower during the Covered Period or Alternative Payroll Covered Period, not including any retirement contributions deducted from employees’ pay or otherwise paid by employees. Forgiveness is not provided for employer contributions for retirement benefits accelerated from periods outside the Covered Period or Alternative Covered Period. Retirement benefits paid or incurred on behalf of owner-employees are treated differently and included within the compensation limits noted below.
Q: How is the amount of owner compensation that is eligible for loan forgiveness determined?
A: The amount of compensation of owners who work at their business that is eligible for forgiveness depends on the business type (see below) and whether the borrower is using an eight-week or 24-week Covered Period. 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 business in which he or she has an ownership stake. For borrowers that received a PPP loan before June 5 and elect to use an eight-week Covered Period, this cap is $15,385.
C Corporations: Up to the amount of 2.5/12 of 2019 employee cash compensation. Borrowers are also eligible for loan forgiveness of borrower-paid employer state and local taxes, employer contributions for employee health insurance, and employer retirement contributions to employee retirement plans, capped at the amount of 2.5/12 of the 2019 employer retirement contribution. Payments other than for cash compensation do not count toward the $20,833 cap per individual.
S Corporations: Up to the amount of 2.5/12 of 2019 employee cash compensation. Borrowers are also eligible for loan forgiveness of borrower-paid employer state and local taxes and employer retirement contributions to employee retirement plans, capped at the amount of 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% stake in the business, including for employees who are family members of an at least 2% owner. Eligible noncash compensation payments do not count toward the $20,833 cap per individual. [Emphasis added]
Self-employed Schedule C (or Schedule F) filers: Up to 2.5/12 of 2019 net profit as reported on IRS Form 1040 Schedule C line 31 (or 2.5/12 of 2019 net farm profit, as reported on IRS Form 1040 Schedule F line 34). Separate payments for health insurance, retirement or state or local taxes are not eligible for additional loan forgiveness.
General Partners: Up to 2.5/12 of 2019 net earnings from self-employment that is subject to self-employment tax multiplied by 0.9235. Compensation is only eligible for loan forgiveness if payments to partners are made during the Covered Period or Alternative Payroll Covered Period. Separate payments for health insurance, retirement or state or local taxes are not eligible for additional loan forgiveness.
Q: Are non-payroll costs incurred prior to the Covered Period but paid during the Covered Period eligible for loan forgiveness?
A: Yes.
Q: Are non-payroll costs incurred during the Covered Period but paid after the Covered Period eligible for loan forgiveness?
A: Yes, if paid on or before the next regular billing date.
Q: If a borrower elects to use the Alternative Payroll Covered Period for payroll costs, does the Alternative Payroll Covered Period apply to nonpayroll costs?
A: No. The Alternative Payroll Covered Period applies only to payroll costs.
Q: Are payments made on recently renewed leases or interest payments on refinanced mortgage loans eligible for loan forgiveness if the original lease or mortgage existed prior to February 15, 2020?
A: Yes
Q: Covered utility payments, which are eligible for forgiveness, include a “payment for a service for the distribution of …transportation” under the CARES Act. What expenses does this category include?
A: A service for the distribution of transportation refers to transportation utility fees assessed by state and local governments. Payment of these fees by the borrower is eligible for loan forgiveness. Further information on transportation utility fees is provided at: https://www.fbwa.dot.gov/ipd/value_capture/defined/transportation_utility_fees.aspx
Q: Will a borrower be subject to a reduction in its forgiveness amount due to a reduction in FTE employees during the Covered Period if the borrower offered to rehire one or more laid off employees but the employees declined?
A: No, if the borrower is able to document an inability to: (1) rehire individuals who were employees of the borrower on February 15, 2020 and (2) 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 rejection of the offer.
Q: When calculating the FTE Reduction Exceptions in Table 1 of the PPP Schedule A Worksheet on the Loan Forgiveness Application (SBA Form 3508 or lender equivalent), do borrowers include employees who made more than $100,000 in 2019 (those listed in Table 2 of the PPP Schedule A Worksheet)?
A: Yes.
Q: For purposes of calculating the loan forgiveness reduction required for salary/hourly wage reductions in excess of 25% for certain employees, are all forms of compensation included, or only salaries and wages?
A: No, just decreases in salaries or wages.
Questions about the PPP or other CARES Act programs? Contact us or explore our COVID-19 resource center.
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