Paycheck Protection Program and Forgivable Loans Summary

New Developments – 10/13/20

FAQs on PPP Loan Forgiveness Updated October 13, 2020: The PPP loan forgiveness application forms (3508, 3508EZ, and 3508S) display an expiration date of 10/31/2020 in the upper-right corner, but this does not mean October 31, 2020 is the deadline for borrowers to apply for forgiveness. Borrowers may submit a loan forgiveness application any time before the maturity date of the loan, which is either two or five years from loan origination. However, if a borrower does not apply for loan forgiveness within 10 months after the last day of the borrower’s loan forgiveness covered period, loan payments are no longer deferred and the borrower must begin making payments on the loan. Note—these loan terms apply even if the original note signed by the borrower contain different terms that were applicable when the note was signed.


New Developments – 10/9/20

The SBA issued a new PPP Forgiveness Application Form 3508S and 3508S Instructions for those small businesses that secured a PPP loan of $50,000 or less. The most significant benefit of the new form is that employee reductions and salary reductions are no longer penalized. Additionally, the new form does not require submitting mathematical calculations on how the funds were spent, but it still requires the borrower to submit to the lender evidence (bank statements, invoices, etc) that the funds were properly spent. Interestingly, the SBA also reduced the lender’s responsibility to “verify” the evidence submitted.

  • Because the maximum PPP loan amount is $50,000, this new loan forgiveness application will be most beneficial to self-employed,  gig workers and businesses with just a few employees. There are approximately 3.57 million outstanding PPP loans of $50,000 or less, totaling approximately $62 billion of the $525 billion in PPP loans.
  • There is still a possibility that the SBA/Congress may authorize a streamline forgiveness process for loans over $50K and under $150K.
  • SBA just recently began approving PPP forgiveness applications and remitting forgiveness amounts to lenders last week on October 2, 2020.
  • New PPP Loan Forgiveness Application Form 3508S
  • New PPP Loan Forgiveness INSTRUCTIONS for Form 3508S​​​​​
  • New IFR for Loan Forgiveness of Small Loans

New Developments – 8/31/20

Lenders should account for the forgivable portion of a Paycheck Protection Program (PPP) loan as an interest-bearing loan until the receipt of payment for that loan from the SBA, according to a Technical Question and Answer posted by the AICPA.


New Developments – 8/25/20

PPP Loans: Treasury Department released new IFR on Aug. 24 addressing related party issues:

  • Owner-employees with less than a 5 percent ownership stake in a C- or S-Corporation are not subject to the owner-employee compensation rule
  • The amount of loan forgiveness requested for non-payroll costs may not include any amount attributable to the business operation of a tenant or sub-tenant of the PPP borrower or, for home-based businesses, household expenses
    • Example: A borrower rents an office building for $10,000 per month and subleases out a portion of the space to other businesses for $2,500 per month. Only $7,500 per month is eligible for loan forgiveness.
    • Example: A borrower works out of their home. When determining the amount of nonpayroll costs that are eligible for loan forgiveness, the borrower may include only the share of covered expenses that were deductible on the borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings
  • Rent payments to a related party are eligible for loan forgiveness as long as:
    • the amount of loan forgiveness requested for rent /lease payments to a related party is no more than the amount of mortgage interest owed on the property during the Covered Period that is attributable to the space being rented by the business, and 
    • the lease/mortgage were entered into prior to February 15, 2020
  • Mortgage interest payments to a related party are not eligible for forgiveness
  • IFR – Business Loan Program Temporary Changes; Paycheck Protection Program – Treatment of Owners and Forgiveness of Certain Nonpayroll Cost
  • Journal of Accountancy – New PPP forgiveness guidance addresses owner-employee compensation, rent-related costs

New Developments – 8/10/20

The SBA PPP Forgiveness Platform went live on August 10 to begin accepting Lender submissions. Major banks are delaying accepting applications from their borrowers.


New Developments – 8/4/20

Treasury Department released new FAQ’s for PPP Loan Forgiveness (Updated Aug. 4) confirming existing guidance and addressing a few open issues, including the meaning of “transportation utility expenses.”


New Developments – 7/6/20

The Paycheck Protection Program has reopened after President Trump signed legislation extending the program. The new deadline to apply for a loan is August 8, 2020. There is approximately $129 billion in funding remaining.


New Developments – 6/26/20

Treasury and SBA guidance on How to Calculate Maximum Loan Amounts by Business Type was updated on June 26:

  • FAQ No. 10 applies to self-employed individuals whose businesses were in operation on Feb. 15, 2020, but were not in operation from Feb. 15, 2019, to June 30, 2019, and will file a Form 1040 Schedule C or Schedule F for 2020.
  • The maximum PPP loan amount in this case would generally be equal to 2.5 times the business’s average monthly payroll costs incurred in January and February 2020, plus the outstanding amount of any Economic Injury Disaster Loan (EIDL) received between Jan. 31, 2020, and April 3, 2020 that will be refinanced by the PPP loan, less any EIDL Advance received.
  • Questions 1, 2, 4, 5, 6, and 7 were updated to reflect the 24-week covered period that was established with the PPP Flexibility Act
  • How to Calculate Maximum Loan Amounts by Business Type FAQ

New Developments – 6/23/20

New PPP guidance released June 22, 2020 declares that PPP recipients can apply for loan forgiveness early but that doing so could cost them money. The new IFR says that if a borrower applies for loan forgiveness before the end of the covered period and has reduced any employees’ salaries or wages by more than the 25% allowed for full forgiveness, the borrower must account for the excess salary reduction for the full eight-week or 24-week covered period, whichever one applies to its loan.


New Developments – 6/22/20

Treasury Dept changes position and will release PPP borrower loan information to the public. SBA will disclose the business names, addresses, NAICS codes, zip codes, business type, demographic data, non-profit information, jobs supported, and loan amount ranges, for loans equal to and above $150,000:

SBA launches ‘lender match” program to help underserved borrowers locate a lender before the program closes on June 30:


New Developments – 6/17/20

The SBA and the Treasury Department unveiled a simpler loan forgiveness application for the Paycheck Protection Program to reflect changes in the PPP Forgiveness Act. The new EZ application requires fewer calculations to be done and less documentation is needed for eligible borrowers. The application is for borrowers who:

Revised PPP Loan Forgiveness Application and Instructions as of June 16. Highlights of the changes:

  • Health insurance costs for S corporation owners cannot be included when calculating payroll costs; however, retirement costs for S corporation owners are eligible costs.
  • Safe harbors for excluding salary and hourly wage reductions and reductions in the number of employees (full-time equivalents) from loan forgiveness reductions can be applied as of the date the loan forgiveness application is submitted. Borrowers don’t have to wait until Dec. 31 to apply for forgiveness to use the safe harbors. (Future guidance may clarify this new safe harbor)
  • Borrowers that received loans before June 5 can choose between using the original eight-week covered period or the new 24-week covered period.
  • PPP Loan Forgiveness Application Revised June 16, 2020
  • PPP Loan Forgiveness Application Instructions for Borrowers Revised June 16, 2020

The SBA filed its 19th IFR, scheduled to be published on Friday, June 19, focusing on revisions made from PPP Flexibility Act, ensuring full forgiveness for self-employed, freelancers and independent contractors who took the maximum loan amount based on 2.5 times their 2019 monthly income.

  • The IFR shows us how to calculate owner compensation under the new rules. The cap applies to self-employed and general partners and appears to apply to C and S Corp owners as well. It’s either:
    • Eight weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an eight-week covered period
      or
    • 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period
  • The 24-week extension also increased the amount eligible for forgiveness for (non-owner) employee compensation. The payroll costs including salary, wages, and tips are still capped at $100,000 of annualized pay. But now, instead of $100,000/52 * 8 (a max of $15,385 per individual), you get up to $100,000/52 *24, making the new maximum forgiveness cap $46,154 per individual for 24 weeks.
  • Journal of Accountancy – New PPP Loan Forgiveness Applications Released

New Developments – 6/5/20

The President signed into law the Paycheck Protection Program Flexibility Act (H.R. 7010) on June 5, 2020.


The Paycheck Protection Program is designed to provide a direct incentive for small businesses to keep their workers on payroll by providing each small business a loan up to $10 million for payroll and certain other overhead expenses. If all employees are kept on payroll for 24-weeks (if loan was funded prior to June 5, 2020, borrowers may elect an 8-week period), SBA will forgive the portion of the loan used for payroll costs, rent, mortgage interest, or utilities. Up to 100% of the loan is forgivable. For maximum forgiveness, at least 60% (previously 75%) of the loan amount must be used for payroll costs, employees must be retained/rehired (with some exceptions), and wages not reduced significantly.

Details

  • Apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating.
    • Search for a local lender, however, we recommend utilizing your existing financial institution.
    • Participating Lenders
    • Many FinTech companies have been approved to offer PPP loans including, Square, QuickBooks, Paypal, and Kabbage.
  • The first application period opened April 3, 2020, and continued until funding ran out.  The SBA began taking applications for the second round of funding on April 27, 2020. And most recently, the PPP reopened on July 6, 2020, after President Trump signed legislation extending the program. The new deadline to apply for a loan is August 8, 2020.
    • Download an Application Form (updated as of June 12, 2020, to include changes made by the PPP Flexibility Act)
  • New loans (on or after June 5, 2020), have a maturity of 5 years and an interest rate of 1%. This rate is expected to change when additional guidance is issued. Payments are deferred until SBA determines the amount to be forgiven. PPP loans issued prior to June 5, 2020, can be extended from the original maturity of 2 years to 5 years if the lender and borrower agree, however, the interest rate may change.
  • Guaranteed by Small Business Association so no personal guarantees or collateral are required.
  • In compliance with existing SBA policy, the names and amounts borrowed of all borrowers will be public information, however, Treasury Secretary Mnuchin recently indicated that names will not be released.

Eligibility

  • Businesses with fewer than 500 employees (including eligible nonprofits):
    • Borrowers must count all its employees and the employees of its U.S. and foreign affiliates, absent a waiver of or an exception to the SBA’s affiliation rules
    • Each full or part-time employee is counted as “one employee”
    • Borrowers in certain industries are not eligible (What businesses are ineligible for SBA business loans?)
  • Partnerships and Limited Liability Companies taxed as partnerships are eligible borrowers. Individual partners and LLC Members cannot apply.
  • Sole proprietorships & self-employed individuals (for additional details see our blog post: Paycheck Protection Program Loans for Taxpayers with Self-Employment Income)
  • Independent contractors and gig workers
  • All borrowers need to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant,” but the Treasury Department has issued a “safe harbor” for small loans, FAQ #46: Paycheck Protection Program Loans FAQ
  • Treasury Department indicated that public and private companies with “adequate sources of liquidity to support the business’s ongoing operations will likely NOT qualify for a PPP loan”.  Further details follow later in this blog.
  • VC backed entities will apply the regular affiliation rules (no special exceptions) so it may be difficult to qualify.
  • The SBA has announced that all loans of $2 million or larger will be “reviewed” for loan eligibility and compliance with program rules upon submission of a borrower’s application for loan forgiveness.

Determining Loan Amount

Maximum loan amount permitted for an eligible business is the lesser of:

  1. $10 million
  2. 2.50 x average monthly “payroll costs” incurred in the “twelve-month period” before the loan is made:
    • “Payroll costs” include employees’ gross wages (capped at $100,000 annually), health insurance premiums, retirement plan contributions, state and local tax assessed on employee compensation
      • The per-employee compensation cap of $100,000 does not include benefits
      • Employer’s share of Social Security and Medicare tax is not included in “payroll costs”
      • “Payroll costs” should be calculated based on gross payroll, not net (after employee deductions) payroll
    • The twelve-month period to determine “payroll costs” can be either calendar year 2019 or the twelve months prior to obtaining the loan
      • For new businesses, the measurement period would be Jan. 1 – Feb. 29, 2020
    • Payments made to independent contractors do not qualify as “payroll costs”

The SBA released an FAQ detailing how various entity types (Nonprofits, C and S-Corps, Partnerships, LLC’s, Sole Proprietorships) can calculate loan amounts for the PPP program:

Since the time applications were first accepted, guidance has been continually evolving so the SBA issued an Interim Final Rule (IFR) allowing partnerships and seasonal employers to increase their existing loans if the loan amounts were determined under prior guidance and current guidance will allow a higher loan amount. Current guidance allows partnerships to include a portion of 2019 SE income of partners as a “payroll cost” and established an alternate method to determine PPP loan amounts for seasonal employers. These changes may result in larger loan amounts for applicable borrowers.

Requests from borrowers under this IFR are subject to strict time limits so should be made immediately.

How Can the Proceeds Be Used, in Order to be Forgiven?

The amount eligible to be forgiven is the amount paid or incurred by the borrower during the 24-week (optional 8-week period available if loan funded prior to June 5, 2020) “Covered Period” (beginning upon receipt of loan proceeds) for:

  • Payroll Costs consisting of:
    • Employee compensation (limited to $15,385 per employee during the 8-week period, and $46,154 per employee during the 24-week period)
    • Employee-owners of C and S Corps are limited to 8/52 of 2019 compensation, for an 8-week covered period (up to $15,385); or 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period. Applies to all owners as no minimum ownership is required
    • Weekly or bi-weekly employers can choose an alternate 24 (or 8) week period for payroll costs that will align with their regular payroll cycle
    • Group health insurance premiums. Capped by 2019 amounts for employee-owners.
    • Employee retirement plan contributions. Capped by 2019 amounts for employee-owners.
    • State and local taxes assessed on employee compensation
  • Mortgage interest for real or personal property (excluding amounts pre-paid) for mortgages in effect on or before Feb. 15, 2020.
  • Rents or leases for real or personal property pursuant to a lease in force on or before Feb 15, 2020.
  • Utility expenses (gas, electric, water, phone, internet and transportation) for services which began on or before Feb 15, 2020.

SBA has clarified that both expenses paid during the “Covered Period” and expenses incurred but paid in the next payment cycle after the “Covered Period” has ended are eligible for forgiveness.

Borrowers have 10 months after the end of the “Covered Period” to submit their applications for forgiveness.

Additional Requirements for Full Forgiveness

  • Forgiveness will be reduced if less than 60% of the loan proceeds are spent on payroll costs.
  • Originally, businesses could avoid reductions in forgiveness by rehiring/restoring wage levels by June 30, 2020, businesses (that use the 24-week “Covered Period”) now have until Dec. 31, 2020, to restore staffing levels/wages that were reduced during the “Covered Period”
  • Employment levels decrease–Business must maintain the same number of full-time equivalent employees (FTE) during the 24-week (or optional 8-week) “Covered Period” as they had during the period from either February 15, 2019 through June 30, 2019, or January 1 to February 29, 2020.  If FTE was reduced from Feb. 15, 2020 to April 26, 2020 and restored on Dec. 31, 2020 (or June 30, 2020 for borrowers using 8-week “Covered Period”), the other FTE reductions will be ignored.
    • New exceptions allow borrowers to achieve full forgiveness even if they don’t fully restore their workforce:
      • Borrower could not find qualified employees and was unable to rehire individuals who were employees on Feb. 15, 2020 or
      • Borrower was unable to restore business operations to Feb. 15, 2020 levels due to COVID-19 related operating restrictions (i.e. sanitation, social distancing, or worker/customer safety).
    • Note:
      • It’s unclear how businesses will be expected to document their good faith certification that they could not fully restore their workforce.
      • New guidance may change the testing dates and restoration dates
  • Compensation decreases – if during the “Covered Period,” annualized compensation of employees have been reduced by over 25% as compared to annualized compensation received for the quarter ended before the start of the “Covered Period” (2020-Quarter 1 for loans funded April 1 to June 30), forgiveness will be reduced.
    • Employees who earned over $100,000, on an annualized basis for any pay period in 2019, can be excluded from this test.
  • Businesses can exclude laid-off employees from loan forgiveness reduction calculations if the employees turn down a written offer to be rehired:
  • Employees that resigned, were terminated for cause, or requested a reduction in work hours can be excluded as well.

Forgiveness Process

The requirements for debt forgiveness and the process to request forgiveness were unclear until May 15, 2020, when the Treasury Department released its 11 page PPP Loan Forgiveness Application and Related Guidance (revised June 16, 2020). Although the guidance answered many questions and provided several safe harbors for borrowers, many important issues have not been addressed. SBA indicated they would be providing additional guidance shortly.  This guidance has been delayed due to the enactment of the Payroll Protection Program Flexibility Act on June 5, 2020.

Borrowers must submit their Forgiveness Applications within 10 months after the conclusion of their “Covered Period.” Lenders have 60 days to review the applications and SBA has 90 days to notify the lender of their forgiveness determination.

SBA has 6 years from date of forgiveness or loan repayment to review the Borrower’s loan application, loan certifications, determination of loan eligibility and loan amount, use of proceeds, and forgiveness amount.

Interaction with Other Tax Provisions

Income from Debt Forgiveness and Deduction of Expenses Paid

The CARES Act designates any loan forgiveness as non-taxable income.

In IRS Notice 2020-32 it was announced that expenses paid with PPP loan proceeds that are forgiven cannot be deduced.

Legislation is currently pending (as of June 10, 2020) in Congress that will reverse the IRS’ position and allow a deduction for expenses paid with PPP funds. Unfortunately, the Payroll Protection Program Flexibility Act did not address this issue.

Employee Retention Credit

The CARES Act created a refundable credit of up to $5,000 per employee for eligible employers that are impacted by the pandemic and are currently paying their employees.

Taxpayers receiving a PPP Loan cannot qualify for this credit. However if a borrower returned their PPP loan proceeds under the “safe harbor” discussed below they could qualify for a PPP loan.

In lieu of a PPP Loan, this credit can be very beneficial for businesses that have been shut down and are now beginning to reopen.

Deferral of Employer Payroll Taxes

All employers can defer the employer portion of social security tax (6.20%) on deposits due between March 27th and Dec 31st 2020 until Dec 2021 and 2022. Due to the recent passing of the PPP Flexibility Act, borrowers of a PPP loan may now continue to defer Social Security tax even after their loans are forgiven.

Mandatory Sick Leave and Family Leave 

The Families First Coronavirus Response Act enacted on March 18, 2020 requires employers with under 500 employees to provide sick leave and family leave to employees. The employer can be reimbursed for these payments with a refundable payroll tax credit.  Compensation paid and reimbursed by the tax credit is not includable as a payroll cost eligible for loan forgiveness.

Unintended Consequences

As the PPP loan program was hastily created and implemented it is not surprising that is has experienced some unintended results.

Numerous articles were published in late April 2020 disclosing that many publically held companies received loans. As a direct response, the SBA issued new guidance on April 23rd requiring borrowers to “take into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business” when certifying that a loan is/was needed. This new requirement applied to all PPP borrowers regardless of when their loan had been or was yet to be funded. The SBA shortly thereafter clarified this new requirement stating that it applies to privately help businesses as well. SBA offered borrowers a “safe harbor” period, until May 18th, to reconsider their need for the loan and return loan funds, if appropriate.

Due to a lack of clear guidance and potential penalties, many borrowers were uncertain what to do. Fortunately, on May 13, 2020, the SBA released FAQ #46 granting a safe harbor for many borrowers. Under the “safe harbor,” all loans with an original amount of under $2 million would be deemed to have met the certification requirements in good faith.

For borrowers receiving loans in excess of $2 million, the SBA will “review” their loans. If based on the review, it is determined that the borrower lacked an adequate basis for the required certification, the SBA will seek repayment of the loan and notify the lender that no forgiveness shall be granted. If the borrower then repays the loan the SBA will not pursue any enforcement actions.

Nonprofits

It is currently uncertain if PPP funds used to pay the expenses of programs operated and funded with government grants are eligible for forgiveness. There is a possibility, government agencies will consider this duplicate funding.

The SBA has concluded that PPP Loans issued to nonprofits do not represent federal financial assistance. Therefore, these loans will not be subject to Single Audit requirements. However, loans issued under the EIDL program will be considered as federal financial assistance and are required on the SEFA.


If you have any questions about the Paycheck Protection Program, please contact us.

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