Treasury Issues New FAQs on PPP Loan Forgiveness
As the Small Business Administration (SBA) prepares to accept forgiveness documentation from lenders via its Paycheck Protection Program (PPP) Forgiveness Platform beginning on August 10, 2020, the SBA has issued a new round of Frequently Asked Questions (FAQs) relating to PPP loan forgiveness. These forgiveness FAQs reinforce previously issued guidance and provide new information to assist borrowers in preparing their loan forgiveness applications.
Here are some of the most helpful takeaways from the 10 pages of FAQs on PPP Loan Forgiveness:
- Payments of PPP loan principal and interest
The FAQs address a common W&D client question as to whether borrowers need to make payments while they await a forgiveness decision and will they be responsible for interest accrued during this period. The guidance makes clear the answer is, “no.” As long as you submit a loan forgiveness application within ten months of the selected covered period’s end and the loan is fully forgiven, you will not be responsible for any payments.
If, however, all or part of the loan is not forgiven, you will be responsible for repayment of that portion over the term of loan, which is 2 or 5 years. The interest accrued from the time of the disbursement of the loan on the amount not forgiven will also need to be repaid in this scenario. Your lender will notify you if a portion of your loan and interest needs repayment and when the first payment is due.
- Determining Which Payroll Periods to Include in Loan Forgiveness
Many clients continue to ask questions about when payroll costs need to occur to count towards loan forgiveness.
The FAQS confirm that payroll costs and nonpayroll costs incurred before but paid during the Covered Period are eligible for loan forgiveness. In addition, if payroll is incurred towards the end of the covered period, but your usual payroll run occurs after the end of the covered period, it will still count towards forgiveness.
- Employee Compensation Clarification
Payroll costs include all forms of cash compensation paid to employees, including tips, commissions, bonuses and hazard pay. The maximum forgivable compensation is $100,000. For purposes of calculating cash compensation, borrowers should use the gross amount before deductions for taxes, employee benefit payments, and similar payments.
- Expenses for accelerated group health and retirement benefits are not eligible costs
Employer expenses for employee group health care and retirement benefits that are paid or incurred by the borrower during the Covered Period or the Alternative Payroll Covered Period are eligible payroll costs. However, the SBA clarified that these eligible costs do not include expenses for group health care and retirement benefits accelerated from periods outside the Covered Period or Alternative Payroll Covered Period. In addition, group health care benefits paid by employees are not forgivable payroll costs.
Additional detailed guidance on the forgiveness of health care and retirement benefits for owner-employees are addressed in FAQs #8.
- Caps on Forgiveness of Owner Compensation.
The amount of compensation of owners who work at their business that is eligible for forgiveness depends on the business type and whether the borrower is using an eight-week or 24-week Covered Period. In addition to the specific caps described in the FAQs on PPP Loan Forgiveness (Question #8), 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.
If an owner’s total compensation across businesses that receive a PPP loan exceeds the cap, the owner can choose how to allocate the capped amount across different businesses.
We will cover in greater detail how to determine the amount of owner-employee compensation eligible for PPP loan forgiveness in a separate e-alert.
- Timing of non-payroll costs for PPP forgiveness
The PPP FAQs further explain how to calculate non-payroll costs for forgiveness. Like payroll, covered expenses for rent, mortgages, utilities, and interest on loans incurred prior to the covered period, yet paid during it, are forgivable. Likewise, if these expenses are incurred during the covered period, but the next payment cycle occurs after the covered period, those too will be forgivable.
- Interest Payments on Unsecured Loans are Not Forgivable
Although borrowers are permitted to use PPP loan proceeds to pay interest on unsecured credit, these interest payments are ineligible for loan forgiveness.
- Modifications to Leases and Mortgages.
Payments made on recently renewed leases or interest payments on refinanced mortgage loans are eligible for loan forgiveness so long as the original lease or mortgage existed prior to February 15, 2020.
- Transportation costs
Until now, there was speculation that “transportation” costs included, for example, mileage reimbursement and/or fuel charges. The SBA clarified that eligible “transportation” costs are limited to transportation utility fees assessed by state and local governments.
- FTE Reduction for Seasonal Employers
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 calculation of any reduction in the amount of loan forgiveness.
- Salary/Hourly Wage Reduction.
The CARES Act requires that a borrower’s forgiveness be reduced for certain employees whose salary/hourly wage was reduced in excess of 25 percent. The FAQs on PPP Loan Forgiveness provides several examples of the calculation of the Salary/Hourly Wage Reduction, and clarifies that, in calculating such reductions in the loan forgiveness amount, borrowers should only take into account decreases in salaries or wages, and not other forms of compensation, such as health care or retirement contributions.
The new FAQs address a number of the outstanding questions, but some gray areas remain. In addition, there are still open items such as how will FTE reductions work if applying for forgiveness before the end of the covered period.
Stay tuned as we will update you both by e-alerts and webinars as information on the next round of Stimulus and PPP changes become available. Our next webinar on PPP Loan Forgiveness will be held Wednesday, August 19, 2020 from, 3:00-4:15 p.m. An invitation will follow separately next week. In the meantime, please contact us with your questions and concerns at 847-267-9600 or firstname.lastname@example.org.
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: US Small Business Administration
* SBA advises that borrowers and lenders may rely on the FAQs on PPP Loan Forgiveness as SBA’s interpretation, in consultation with Treasury, of the CARES Act, the Paycheck Protection Program Flexibility Act, and the interim final rules relating to the PPP (the “PPP Interim Final Rules”).