Yesterday, the Small Business Administration (SBA) released a new round of answers to frequently asked PPP loan forgiveness questions (FAQs). While many questions remain unanswered, the new FAQs do address some of the questions we routinely field from borrowers.
Payroll Costs
Prior SBA guidance included provisions permitting borrowers with biweekly or more frequent payroll cycles the option of electing an “Alternative Payroll Covered Period,” which is a period commencing on the first date of the first payroll period during the Covered Period. This option simplifies the determination of forgivable costs by aligning the period for measuring forgivable costs with the borrower’s normal payroll cycle. The new FAQs clarify that borrowers who do not elect the Alternative Payroll Covered Period can include payroll costs paid during the Covered Period, even if they were incurred prior to the Covered Period. Additionally, both borrowers who elect the Covered Period and those who elect the Alternative Payroll Covered Period can include payroll costs incurred during the Covered Period or the Alternative Covered Period as long as the costs are paid on or before the next regular payroll date after the end of the relevant period.
For purposes of determining forgivable cash compensation, payroll costs include all forms of cash compensation paid to employees, including tips, commissions, bonuses, and hazard pay, subject to a per employee cap of $100,000 in annualized compensation. Additionally, cash compensation should be the gross amount paid to employees before deductions for taxes, employee benefits payments, or similar payments.
With regard to benefits, the FAQs indicate that employer expenses for employee group healthcare benefits paid or incurred during the Covered Period or Alternative Payroll Covered Period are eligible for forgiveness. In the case of insured group health plans, if the borrower does not pay premiums before the end of the Covered Period or Alternative Payroll Covered Period, it must pay them by the premium due date in order to be included in forgivable payroll costs. Importantly, amounts paid by employees (or plan beneficiaries) and amounts accelerated from periods outside of the Covered Period or Alternative Payroll Covered Period are not eligible for forgiveness.
Similarly, employer contributions for retirement benefits paid or incurred by the borrower during the Covered Period or Alternative Payroll Covered Period are eligible for loan forgiveness, but again, amounts paid by employees or amounts accelerated from periods outside of the Covered Period or Alternative Payroll Covered Period are not eligible for forgiveness.
Nonpayroll Costs
For nonpayroll costs (eligible business mortgage interest costs, eligible business rent or lease costs, and eligible business utility costs) the FAQs clarify that both costs incurred before the Covered Period but paid during the Covered Period AND amounts incurred during the Covered Period but paid on or before the next regular billing date are eligible for forgiveness.
The FAQs also eliminate confusion about the definition of “transportation” utility payments included in the original PPP guidance by stating that transportation refers to transportation utility fees assessed by state and local governments (not fuel for company equipment).
Finally, the SBA clarified that eligible utility costs include the entire electricity bill paid by the borrower, inclusive of supply charges, distribution charges, and other charges such as gross receipts taxes, even if such charges are invoiced separately.
FTE and Salary/Wage Reduction Tests
Prior to the release of the new FAQs, some borrowers had questions about whether they should consider changes in hours as part of the salary/wage reduction test. The SBA made clear in the FAQs that when determining the amount of reduction in forgiveness under the salary/wage reduction test, only reductions in salary or hourly wages are considered. The impact of a reduction in hours is separately considered under the FTE reduction test.
Finally, the FAQs make clear that the FTE reduction test (but not the salary/wage reduction test) includes all employees, including those who made more than $100,000.
Owner Compensation
In general, the FAQs define limitations on payroll compensation and make clear that these caps apply to each individual in total across all businesses in which he or she has an ownership stake. The cap is $15,385 for borrowers electing an 8-week covered period and $20,833 for borrowers electing a 24-week covered period.
The FAQs provide the following additional limitations based on the type of business:
- C Corporations: Cash compensation for C-Corporation owner-employees (those who are owners and also employees) is eligible for loan forgiveness up to the amount of 2.5/12 of his or her 2019 employee cash compensation, with cash compensation defined as it is for all other employees. 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 the amount of 2.5/12 of the 2019 employer retirement contribution. Payments other than for cash compensation should be included on lines 6-8 of PPP Schedule A of the loan forgiveness application (SBA Form 3508 or lender equivalent), for borrowers using that form, and do not count toward the $20,833 cap per individual.
- S Corporations: The employee cash compensation of an S-corporation owner-employee (those who are owners and also employees) is eligible for loan forgiveness up to the amount of 2.5/12 of their 2019 employee cash compensation, with cash compensation defined as it is for all other employees. 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 the amount of 2.5/12 of their 2019 employer retirement contribution. Employer contributions for health insurance are not eligible for additional forgiveness for S-corporation employees with at least a 2 percent stake in the business, including for employees who are family members of an at least 2 percent owner under the family attribution rules of 26 U.S.C. 318, because those contributions are included in cash compensation. The eligible non-cash compensation payments should be included on lines 7 and 8 of PPP Schedule A of the Loan Forgiveness Application (SBA Form 3508), for borrowers using that form, and do not count toward the $20,833 cap per individual.
- 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 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) referenced in question 10 of “Paycheck Protection Program: How to Calculate Maximum Loan Amounts – By Business Type”). 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 their net self-employment income.
- General Partners: The compensation of general partners that is eligible for loan forgiveness is limited to 2.5/12 of their 2019 net earnings from self-employment that is subject to self-employment tax, which is computed from 2019 IRS Form 1065 Schedule K-1 box 14a (reduced by box 12 section 179 expense deduction, unreimbursed partnership expenses deducted on their IRS Form 1040 Schedule SE, and depletion claimed on oil and gas properties) multiplied by 0.9235. Compensation is only eligible for loan forgiveness if the 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.
- 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.
Other Noteworthy Items
- Forgivable nonpayroll costs including lease payments on recently renewed leases and interest payments on refinanced mortgage loans are eligible for forgiveness if the original agreements existed prior to February 15, 2020 and were renewed/refinanced on or after February 15, 2020.
- The FAQs indicate that a borrower does not have to make principal or interest payments on its PPP loan during the period between the date of a timely submitted forgiveness application and the date that the SBA remits the forgiveness amount to the lender. However, if the loan is not fully forgiven, the unforgiven portion is due on or before the maturity date, along with interest on the unforgiven amount from the date of the lender’s disbursement of loan.
- 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 the Loan Forgiveness Application Form 3508EZ or lender equivalent and should complete that application.
- Seasonal borrowers who elect to use a 12-week period between May 1, 2019 and September 15, 2019 to determine their maximum loan amount must use the same 12-week period as the reference period for calculation of any reduction in the amount of loan forgiveness.
As always, we are here to help and are happy to assist you with the PPP loan process. If you have any questions about these or any other matters, please contact your Kreischer Miller relationship professional or any member of our team. We also continue to update our COVID-19 Resource Center, which you can access here.
Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.