A major benefit of the Paycheck Protection Program (PPP) was the possibility of converting the loan to a tax free grant. The requirements for this 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. 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. Several members of Congress are calling for changes to the PPP program, which creates uncertainty as to whether these proposed changes will be adopted now or implemented in a future round of PPP funding.
The significant items contained in the new guidance include:
- No change in eligible expenses so “payroll costs”, mortgage interest, rent, and utilities remain the only eligible costs that can be “paid or incurred” during the eight week Covered Period.
- A broad interpretation of “costs incurred and payments made” was adopted so eligible costs can be either paid during the eight week Covered Period or incurred and paid shortly after the Covered Period.
- No more than 25% of the loan forgiveness amount can be from non-payroll costs so the amount forgiven for non-payroll expenses is limited to 33% of payroll costs.
- The eight week Covered Period begins on the day the loan proceeds are received. The new guidance allows an alternative 56 day (8 week) period that may be used by borrowers with weekly or bi-weekly payroll cycles to calculate their eligible payroll costs. The Alternative Payroll Covered Period begins on the first day of the first payroll period beginning after loan proceeds are received so payroll periods will better align with an eight-week cycle.
- Borrowers using the Alternative Payroll Covered Period use this period only for payroll costs. All other eligible costs must be paid or incurred during the regular Covered Period beginning on the day loan proceeds were received.
- Payroll costs incurred during the Covered Period or Alternative Payroll Covered Period but not paid may be included if paid on or before the next regular payroll date after the applicable Covered Period ends.
- Previous guidance indicated that “payroll costs” for partners, LLC members, and self- employed taxpayers would be limited to 8/52 of their 2019 self-employment income or $15,385. This rule now applies to owner-employees of C and S corporations so salary will be capped at 8/52 of their compensation.
- Rents paid or incurred during the covered period are eligible for forgiveness. Rents include both real and personal property so vehicle and equipment leases would be eligible. Rents incurred must be paid on the next regular payment date even if such date is after the Covered Period.
- Utilities paid or incurred during the Covered Period are eligible for forgiveness. Utilities include electricity, gas, water, transportation, phone and interest access. Garbage remains off the list. Utilities incurred must be paid on the next regular payment date even if paid after the Covered Period.
- Mortgage interest would include interest on loans secured by real or personal property.
- Full-Time Equivalent (FTE) employee count will be based on 40 hours per week but borrowers can use a simplified method to count all employees working fewer than 40 hours as .50 FTE.
- Forgiveness is reduced if FTE declines between the base period and the Covered Period.
- Forgiveness will not be reduced for FTE reductions due to employees that resigned, are terminated for cause, requested a reduction in hours, or refused an offer to be rehired.
- Forgiveness is reduced if an employee’s average salary or wages declined more than 25% between first quarter of 2020 and the Covered Period. Employees not working during the Covered Period are excluded from this calculation. Employees that earned over $100,000, as annualized, during any pay period in 2019 are also excluded so employees receiving bonuses last year may meet this exclusion test.
- If FTE or wages/salaries have been reduced from Feb 15, 2020, to April 26, 2020 and restored to the Feb 15th levels on June 30th the otherwise required reductions in forgiveness will be eliminated.
- The guidance includes a new safe harbor to eliminate the FTE reduction calculations. If the number of employees or average paid hours between Jan 1, 2020 and the end of the Covered Period have not changed, the numerous required FTE calculations can be omitted.
- Possible flexibility to defer the start of the eight week Covered Period to a later date for businesses not fully operational during their existing Covered Period.
- Eligibility to use costs incurred prior to the Covered Period but paid during the Covered Period such as payroll or rents.
- Possible limitations on rents paid to related parties.
- There is now a limitation on wages paid to owner-employees but the ownership interest required to be an “owner” is not defined. No limitations are currently imposed on related parties of the owner. Health insurance and retirement benefits of partners and LLC members are not eligible costs. It is not clear if they are eligible costs for “owners” since they are now being treated similarly for eligible compensation.
- Treatment of funding the 2019 retirement plan contribution during the eight week Covered Period.
- Definition of “transportation utility costs”.
- How the June 30th “safe harbor” rehire date will apply to borrowers whose Covered Period ends after June 30th.
- How long must employees be retained after the June 30th “safe harbor” rehire date.
- Treatment of home office expenses of self-employed taxpayers.
SBA provided a detailed list of documents borrowers will need to submit to their lender to support the eligible costs and expenses incurred during the Covered Period and the calculation of FTEs: Documents that Each Borrower Must Submit with its PPP Loan Forgiveness Application
Interestingly, the instructions require borrowers to retain documents supporting their “certification of need” for the loan and forgiveness calculations for six years after the loan is forgiven or repaid. It appears the SBA may be “reviewing” these loans long after they are repaid or forgiven.
The application does not specify a due date, so contact your lender to determine when your application must be submitted.
The new guidance offers many opportunities for borrowers to maximize their loan forgiveness but come with some compliance complexity. Please contact us to further discuss how your business can benefit from these new rules.