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What’s in the latest PPP loan forgiveness FAQs?

FAQs on PPP Loan Forgiveness Issued by SBA with Some Surprises on Shareholder-Employee Payroll Costs

The Small Business Administration (SBA), in consultation with the Department of the Treasury, issued additional guidance regarding PPP Loan Forgiveness for funds advanced as part of section 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as amended by the Paycheck Protection Program Flexibility Act (Flexibility Act).

The FAQs confirm whether certain types of costs are counted as permitted costs and eligible for loan forgiveness. See the full FAQ document for examples of select types of costs or situations.

Highlighted below are key points clarified by area:

  1. Payroll costs
  2. Non-Payroll Cost
  3. Forgiveness Reductions
  4. General Application Information

We have noted clarified/new points as follows:

YES = Eligible For Forgiveness, and NO = Not Eligible For Forgiveness


YES: Payroll costs that were incurred during the Covered Period or the Alternative Payroll Covered Period but paid after the Covered Period or the Alternative Payroll Covered Period, as long as they are paid on or before the next regular payroll date after the chosen period.

YES: Payroll costs that were incurred before but paid during the Covered Period.

YES: All forms of cash compensation paid to employees, including tips, commissions, bonuses, and hazard pay. (“Note that forgivable cash compensation per employee is limited to $100,000 on an annualized basis,” SBA says.)

IMPORTANT NOTE:  The FAQ specifies that when calculating cash compensation, use the gross amount before deductions for taxes, employee benefits payments, and similar payments, not the net amount paid to employees.

Forgivable Payroll Expenses

Group Health Care Benefits

YES:  Employer expenses for employee group health care benefits (including dental and vision) that are paid or incurred by the borrower during the Covered Period or the Alternative Payroll Covered Period.

NO: Expenses for group health care benefits (including dental and vision) paid by employees (or beneficiaries of the plan) either pre-tax or after tax, such as the employee share of their health care premium.

NO: Expenses for group health benefits accelerated from periods outside the Covered Period or Alternative Payroll Covered Period.

Specifically, the SBA says, “If a borrower has an insured group health plan, insurance premiums paid or incurred during the Covered Period or Alternative Payroll Covered Period qualify 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 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, not any portion paid by employees or beneficiaries or any portion paid for coverage for periods outside the applicable period.”

See the “Owner compensation” section below for guidance on eligibility for owner’s health insurance.

Retirement Contributions

YES: Generally, employer contributions for employee retirement benefits that are paid or incurred by the borrower during the Covered Period or Alternative Payroll Covered Period.

NO: “The employer contributions for retirement benefits included in the loan forgiveness amount as payroll costs cannot include any retirement contributions deducted from employees’ pay or otherwise paid by employees,” the FAQ says.

NO: Employer contributions for retirement benefits accelerated from periods outside the Covered Period or Alternative Covered Period.

See the “Owner compensation” section below for treatment of retirement benefits for owners.

Partial Pay Periods:

The FAQ provides the following guidance and example for whether and how borrowers must calculate payroll costs for partial pay periods: “If a borrower pays twice a month or less frequently, it will need to calculate payroll costs for partial pay periods.”

Example: A borrower uses a biweekly payroll cycle. The borrower’s 24-week Covered Period begins on Monday, June 1, and ends on Sunday, Nov. 15. The first day of the borrower’s first payroll cycle that starts in the Covered Period is June 7. The borrower may elect an Alternative Payroll Covered Period that starts on June 7 and ends on Nov. 21 (167 days later). Payroll costs incurred (i.e., the pay was earned on that day) during this Alternative Payroll Covered Period are eligible for loan forgiveness if the last payment is made on or before the first regular payroll date after Nov. 21.”

Owner Compensation:

“The amount of compensation of owners who work at their businesses that is eligible for forgiveness depends on the business type and whether the borrower is using an eight-week or 24-week Covered Period,” SBA says.

Compensation Limitations

The FAQs provide that the maximum amount of compensation that can be counted towards forgiveness for an individual with any ownership interest in an S corporation, C corporation, partnership or sole proprietorship (Schedule C business) cannot exceed the lesser of $20,833 or 20.833% of their 2019 compensation, and the cap applies cumulatively to all companies that the owner/employee is paid by. The allocation of this will be as selected by the borrower companies.

The $20,833 / 20.833% presumes a “Covered Period” of 24 weeks. A borrower that elects to use an 8 week Covered Period will be limited to the lesser of $15,385 or 15.385%.  The below information assumes a 24 week covered period.

C-Corporation owner-employees:  Cash compensation” for C-corporation owner-employees is defined as it is for all other employees. In addition, loan forgiveness is permitted for:

YES:  state and local taxes paid by the employer,

YES:  employer retirement contributions (capped at 2.5/12 or 20.833%) of their 2019 employer retirement contribution),

YES:  employer contributions for their employee health insurance (including vision and dental.)

S-Corporation owner-employees: “Cash compensation” likewise is defined as it is for all employees. And loan forgiveness is permitted for state and local taxes paid by the employer. In addition, loan forgiveness is permitted for:

YES:  employer retirement contributions (capped at 2.5/12 or 20.833%) of their 2019 employer retirement contribution),

NO:  Employer contributions for health insurance (including vision and dental) are not eligible for forgiveness for S-corporation employees who hold at least a 2% stake in the business.

These new rules clarify that health insurance costs will not be added to compensation for S corporation employees that own at least 2% in the business, and that health insurance costs paid for family members of such 2% or more owner/employees will not be counted.

It appears that health insurance costs for owner-employees of S corporations who own less than 2% can be counted in addition to the compensation.

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:

    • 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
    • or for new businesses, the estimated 2020 Schedule C (or Schedule F)

NO: Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness; health insurance and retirement expenses are paid out of net self-employment income.

General Partners: The compensation of general partners that is eligible for loan forgiveness:

YES:  2.5/12 of their 2019 net earnings from self-employment that is subject to self-employment tax (2019 IRS Form 1065 Schedule K-1 box 14a). Reduced by any:

    • Section 179 expense deduction
    • Unreimbursed partnership expenses deducted on their IRS Form 1040 Schedule SE
    • Depletion claimed on oil and gas properties multiplied by 0.9235.

NO: Payments for health insurance (including vision and dental)

NO: Payments for retirement

NO: state or local taxes

LLC Owners: LLC owners must follow the instructions that apply to how their business was organized for tax filing purposes for tax year 2019, or if a new business, the expected tax filing situation for 2020.


As with payroll costs, the FAQ confirms whether certain types of costs are counted as nonpayroll costs and eligible for loan forgiveness. See the full document for examples.

YES: Eligible business mortgage interest costs, eligible business rent or lease costs, and eligible business utility costs incurred prior to and paid during the Covered Period.

YES: 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.

NO:  Interest on unsecured credit. “Payments of interest on business mortgages on real or personal property (such as an auto loan) are eligible for loan forgiveness. Interest on unsecured credit is not eligible for loan forgiveness because the loan is not secured by real or personal property,” SBA says. “Although interest on unsecured credit incurred before Feb. 15, 2020, is a permissible use of PPP loan proceeds, this expense is not eligible for forgiveness.”

YES: Payments made during the Covered Period on recently renewed leases, or interest payments on refinanced mortgage loans on real or personal property, provided the original lease or mortgage existed prior to Feb. 15, 2020.

YES, BUT LIMITED: Transportation costs are defined as utility fees assessed by state and local governments only. Previously the SBA had stated that businesses’ use of gas could be considered transportation costs eligible for forgiveness which created considerable confusion. (For more information on transportation utility fees, see this Department of Transportation page.)

YES: Electricity supply charges that are charged separately from electricity distribution charges are eligible for forgiveness: “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.”

Alternative Payroll Covered Period:

The FAQ confirms that the Alternative Payroll Covered Period applies only to payroll costs, NOT to nonpayroll costs.”


The FAQ clarifies potential reductions to borrowers’ forgiveness amounts:

    1. Reductions in FTE employees

NO:  Do not include employees who declined rehire offers.  “A borrower may exclude any reduction in FTE employees if the borrower is able to document in good faith the following:

1) an inability to rehire individuals who were employees of the borrower on Feb. 15, 2020, and

2) an inability to hire similarly qualified individuals for unfilled positions on or before Dec. 31, 2020.

Borrowers must inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the rejection. Borrowers should maintain documentation including “the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual.”

YES: Employees who made more than $100,000 in 2019 ARE included in FTE reduction calculation.

The SBA confirms that the FTE Reduction Exception applies to all employees.  Those earning more than $100,000 in compensation in 2019 should be included.

YES:  Seasonal Employers who used 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 calculation of any reduction in the amount of loan forgiveness.

    1. Forgiveness reductions for reductions in employee salary or hourly wage:

SBA previously established that unless certain safe harbors were met, “if the salary or hourly wage of a covered employee 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.”

The FAQ provides three thorough examples for determining these reductions, and also notes that for purposes of this calculation, the borrower should take into account decreases only in salaries or wages, not all forms of compensation. 


Eligibility for the EZ application form:

YES: 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 simplified Loan Forgiveness Application Form 3508EZ (or lender’s equivalent).

Loan payments prior to SBA remitting the forgiveness amount:

No: As long as a borrower submits its loan forgiveness application within ten 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 SBA.  If the loan is fully forgiven, the borrower is not responsible for any payments.  If only a portion is forgiven, or if the forgiveness application is denied, any remaining balance due must be repaid on or before the maturity date of the loan.

During the time between loan disbursement and SBA remittance of the forgiveness amount, interest will accrue, and the borrower is responsible for paying that interest on any unforgiven amount of the loan.

Note:  While the SBA began accepting PPP loan forgiveness applications submitted by lenders on its portal beginning on or about August 10, 2020, most lenders are not yet accepting applications.

Next Round of Stimulus and Pending PPP Changes

There is pending legislation currently under consideration by Congress for automatic forgiveness of PPP loans of $150K or less (of which approximately 87% of PPP loans fall into this threshold – around 4 million loans).

While the HEALs Act, introduced August 3rd in the Senate, includes automatic forgiveness for loans below $150,000 as part of their stimulus proposal, it also provides for a middle tier of forgiveness requirements for loans falling in the $150,000 to $2 million range. For these loans, the proposed Act merely requires businesses to complete a certification and retain relevant records with supporting worksheets for up to three (3) years. Banks, however, would still need to submit a loan forgiveness application to the SBA.

In addition, there is movement in Congress to allow businesses to deduct expenses paid for with PPP loans that have been forgiven.

In spite of the Congressional August recess, stimulus package negotiations continue. Since there is a high likelihood of additional PPP announcements occurring, many banks are not requesting or accepting PPP Forgiveness applications at this time.

For more information, access the FAQ document, or contact W&D’s PPP Loan Forgiveness Assistance team for guidance specific to your business and needs.  We may be reached at 847-267-9600 or info@waradydavis.com. You can also visit the Warady & Davis LLP COVID-19 Resource Center for a wealth of information on stimulus assistance, new legislation and much more.  This information is updated regularly.  This is a rapidly evolving situation so please do not hesitate to reach out to us; we are here to help.

SOURCE: www.sba.gov


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