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SBA and Treasury Issue New FAQs on PPP Loan Forgiveness

August 19, 2020

While the economy continues to flounder and we all anxiously await the next stimulus bill, the SBA and Treasury continue to update their PPP FAQs.  The most recent 23 FAQs issued on August 4, 2020 provide additional guidance, clarification and new information regarding PPP loan forgiveness in several areas:

  • Loan forgiveness – In general 
  • Loan forgiveness – Payroll costs
  • Loan forgiveness – Non-payroll costs
  • Loan forgiveness – Reductions 
Highlights from the FAQs:

General Loan Forgiveness  – This section contains three FAQs. 

  • FAQs clarify that sole proprietors, independent contractors, and self-employed individuals who 1) had no employees at the time of the PPP loan application; and 2) did not include any employee salaries in the computation of average monthly payroll for the PPP application, automatically qualify to (and should) use the PPP Loan Forgiveness Application, Form 3508EZ.
  • When a loan is fully forgiven, the borrower is not responsible for any loan interest.
  • The FAQs outline when payments on the PPP loan would commence (if not forgiven), how and when interest would accrue, as well as confirming the time frame for submitting the loan forgiveness application. 

Payroll Costs – This section contains eight FAQs.

  • Owner-Employee: The FAQs provide the definition of “owner-employee” for the purpose of PPP Loan forgiveness computation and the computation to use for purposes of loan forgiveness of owners’ compensation.
    • Compensation limitation: for owners this applies cumulatively across all businesses and is capped at the lesser of $20,833 or 20.833% ( 2½ months) of ’19 compensation.  The limitation presumes a Covered Period of at least 10.6 weeks (i.e. 24-week Covered Period elected).  If the borrower elects an 8-week Covered Period, the cap will be the lesser of $15,385 or 15.385%
    • S Corp owners: health insurance (because those contributions are already included in cash compensation) are included in the compensation cap, but retirement plan expenses are not included in the cap and can be added to the payroll costs eligible for forgiveness.
    • C Corp owners: health insurance and retirement contributions are allowed on top of the cap.
    • Schedule C, F, General Partners, LLC Owners: health insurance and retirement plan contributions do not count toward forgiveness.

Payroll Costs for Employees  – The FAQs address other payroll cost questions that include partial pay periods, commissions/bonuses, group health benefits, retirement expenses, and expenses incurred or paid outside the 8-week or 24-week covered periods. 

  • Only the employer portion of the group health or the retirement plan benefits count towards the loan forgiveness; and these expenses cannot be accelerated into the Covered Period.

Non-Payroll Costs This section includes seven FAQs.

  • The FAQs address the definition of “Covered Utility Payments” and what is meant by the language “payment for a service for the distribution of transportation.” FAQs clarify that a service for the distribution of transportation refers to “transportation utility fees” assessed by state and local governments. More information can be found here.
  • The FAQs also address other non-payroll costs that were incurred or paid outside the Covered Period. Additionally, it was made clear that if a borrower elects the “Alternative Payroll Covered Period” for payroll costs, that Covered Period does not apply to non-payroll costs. 
  • While interest on unsecured debt incurred before February 15, 2020 is an eligible use of PPP funds, only interest paid on secured debt for real or personal property is eligible for PPP loan forgiveness. The FAQs also address loan forgiveness with respect to renewed leases and refinanced mortgage loans. 
  • The FAQs outline when payments on the PPP loan would commence (if not forgiven), how and when interest would accrue, as well as confirming the time frame for submitting the loan forgiveness application.

Forgiveness Reductions  – This section includes five FAQs. 

  • The FAQs address how loan forgiveness reductions should be calculated by borrowers when there has been a more than 25% reduction in employee hourly wage or salary. This is critical because a reduction in compensation exceeding 25% results in a complete loss of forgiveness for the excess.  Three examples of the salary/hourly wage reduction calculation are included. 
    • The FAQs expressly provide that “the borrower should only take into account decreases in salaries or wages,” so it appears that reductions in other forms of compensation (e.g., bonuses, commissions and tips) do not need to be considered when calculating any such forgiveness reduction.

Conclusion

The burning question for many is: With the issuance of the updated FAQs, is it time to apply for PPP loan forgiveness? 

  • For most, the answer is “not just yet.” We believe continued patience is needed. While the FAQs have addressed a number of outstanding questions, gray areas remain, including how the full-time employee (FTE) reductions will be calculated if applying for forgiveness before the end of the covered period. Therefore, our advice is to wait until we have all the guidance to properly apply for loan forgiveness and to be on the lookout for BHCO to bring you more information as it becomes available.
  • Promising discussions continue in Congress for potential automatic forgiveness of PPP loans under $150K.

We know this process has been complex, confusing and very frustrating.  However, much progress has been made and we’re hopeful that streamlined forgiveness for most PPP borrowers is just around the corner – that certainly seems to be the intent of Congress.

As always, if you have any questions or concerns on how to navigate the PPP loan forgiveness application process, please reach out to your trusted tax advisor.

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