PPP Loan Forgiveness As of April 17, 2020
Congratulations! You are one of the lucky businesses who received (or is about to receive) a loan under the Paycheck Protection Program (PPP). Now that you have gotten your loan, our attention needs to focus on the forgiveness portion of the program. If you thought there was a lot of confusion and uncertainty involved in getting the loan, that pales in comparison to the forgiveness provisions. At the time of this writing, we know very little about how the forgiveness provisions will work. We are waiting on additional guidance from the SBA and Treasury to provide us with a better understanding of how this portion of the program will work. We have more questions than answers currently, but here is what we know (or think we know):
1. Eight Week Coverage
This one is pretty clear, so let’s start there. Eligible “costs incurred, and payments made” over the eight weeks after you receive the funds from the PPP lender will be eligible for forgiveness under the program. This 8-week period is the “covered period”.
2. Eligible costs.
The following are the costs that are eligible for forgiveness:
- Payroll costs;
- Any payment of interest on any mortgage obligation (not including any prepayment of or payment of principal on a mortgage obligation) that was incurred before February 15, 2020,
- Any payment of rent under a leasing agreement in force before February 15, 2020,
- Any utility payment, including payment for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
For a business with employees, payroll costs are equal to the sum of:
- Salary, wage, commission, or similar compensation; for a partnership, recent guidance from the SBA explains that payroll costs include not only guaranteed payments to a partner, but also any partner’s share of income of the partnership subject to self-employment income. These limited to $100,000 per-employee or per-partner.
- Payment of cash tip or equivalent;
- Payment for vacation, parental, family, medical, or sick leave;
- Allowance for dismissal or separation;
- Payment required for the provisions of group health care benefits, including insurance premiums;
- Payment of any retirement benefit; or
- Payment of State or local tax assessed on the compensation of employees.
Payroll costs do NOT include:
- The compensation of an individual employee — or the self-employment income of a partner in a partnership – in excess of $100,000, as prorated for the covered period;
- Taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code during the covered period;
- Any compensation of an employee whose principal place of residence is outside of the United States;
- Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act;
- Qualified family leave wages for which a credit is allowed under section 7003 of that same Act; or
- Independent contractors not treated as employees for payroll tax purposes.
For a self-employed taxpayer, recent guidance defines payroll costs in a purely mechanical fashion as the net self-employment income reported on a 2019 Form 1040 Schedule C, Line 31.
3. Requirements for full forgiveness
In order to get the full amount you borrowed forgiven, you need to meet a few requirements.
- 75% of the funds must be spent on payroll costs;
- No reduction in Full Time Equivalent Employees (“FTEs”)—meaning you must keep your staffing at the same levels from the beginning to the end of the loan period; and
- No reduction on a salary more than 25% per employee for those under making under $100K
On the surface, that seems simple enough. Unfortunately, as we start digging into the specifics of how exactly we apply this, many unanswered questions arise. The potential saving grace is that the lender who you received your PPP loan from will ultimately be the one who decides what amount is forgiven and what documentation is needed. We anticipate a significant amount of guidance and clarification on how the forgiveness piece will work. Here are the major open items we see currently:
- What does “costs incurred and payment made” mean?
In its literal meaning it would lead us to interpret this to mean cost I actually incurred and paid during the eight-week period. But what about costs incurred before or after this period but paid during this period (i.e. April rent)? What if I pay my utilities by credit card? Do I have to pay off the credit card during the 8-week period?
- How does the reduction of FTEs and employee pay work?
Without additional guidance, here is how we think the forgiveness works:
For the reduction in FTEs. FTEs are measured and averaged using each pay period during the 8-week period. The average number of FTEs is then compared to a base period.
The employer gets to choose the base period that is most beneficial, either:
> February 15, 2019 – June 30, 2019, or
> January 1, 2020 – February 29, 2020.
Example: A business receives a $100,000 PPP loan.
- Average FTEs during the 8-week period was 21.
- Average FTEs between February 15 – June 30, 2019 was 35.
- Average FTEs between January 1 – February 29, 2020 was 30.
This business would choose the 2020 period as the base period because the average is lower. The calculation for maximum loan forgiveness would be: 21/30 * $100,000 = $70,000. This means that $30,000 of the loan will have to be repaid.
In addition to the FTE rules above, employee salaries/wages cannot be cut more than 25% during this eight-week period. This step is very math-intensive because you must look at every employee (who made less than $100,000 in 2019) individually. The CARES Act includes an “apples to oranges” comparison by utilizing a base period of 12-weeks and comparing those wages to our 8-week period. We don’t believe that was their intent. We anticipate guidance on this disparity since if we apply the law as written it would reduce the forgiveness amount for every loan regardless of the facts. Based on our interpretation of the intent of the law, here is how we believe it would work:
Assume Employee A makes $1,000 per week for 40 hours, but you cut his salary to $650 per week during the eight-week period. If A was receiving the reduced salary for all eight weeks, you would reduce the maximum loan forgiveness by $800 ($1,000 * 25% = $250 is the allowed reduction; A’s reduction is $1,000 – $650 = $350. Penalty is computed as: ($350 – $250) * 8 weeks = $800).
There are many open questions regarding how we would apply these provisions, such as what if an employee leaves?
- What is rent, and does related party rent count?
The CARES Act does not specify rent for real or personal property, so we assume it means both. However, you can only include rent paid under a leasing agreement in force (signed) before February 15, 2020. There is no reference to related parties in CARES, so we assume that rent paid to related parties is included. Capital leases are excluded because they are a financing agreement and not a leasing agreement.
- What utilities are included?
Payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020. A “transportation utility” has been interpreted to mean fuel costs for business vehicles.
- What interest expense is included?
Interest on loans secured by real or personal property that were in effect before February 15, 2020. If your line of credit is secured by real or personal property, then the interest paid on the line would be included.
- Is the forgiven amount considered taxable income?
No. It is unclear at this point if we will still be able to deduct the expenses that we incurred and paid with the proceeds of the loan
- How will the forgiveness process work?
As indicated earlier, you will be required to request forgiveness for your lender. The forgiveness provisions are not automatic nor are they guaranteed. Your lender will outline the documentation requirements. The Act provides that a borrower must submit to the lender an application, which must include a host of certifications and documentation verifying payments made. The lender then has 60 days to decide on forgiveness. And while the CARES Act states that if the lender receives the required documentation and certifications from the borrower, the lender will not be subject to SBA enforcement action or penalties if it chooses to forgive the loan. It appears at this point that the forgiveness will be based on your representation and documentation.
We will continue to closely monitor this matter and communicate important information to you timely and accurately. We are always available by phone or email to address your questions and concerns.
We strongly encourage you to leverage our expertise during these trying times. We have a deep understanding and broad view of the economic climate, which can add significant value during times of uncertainty. We are committed to assisting you in successfully managing through the rapidly changing economic environment.
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