By Gina Brymer, CPA – Senior Manager and Laurie Kaplan, CPA – Partner
August 12, 2020
On August 4, 2020, the Small Business Administration (SBA) in consultation with the Treasury Department released a ten-page Frequently Asked Questions (FAQ) document on guidance to calculate loan forgiveness under the Payroll Protection Program (PPP). This guidance is to supplement the previously released PPP Interim Final Rules. The FAQs are divided into four areas: (1) General Loan Forgiveness; (2) Loan Forgiveness Payroll Costs; (3) Loan Forgiveness Non-payroll Costs; and (4) Loan Forgiveness Reductions. Below are the highlights of each section.
1. GENERAL LOAN FORGIVENESS
- Sole proprietors, independent contractors, and self-employed individuals without employees qualify to use the Loan Forgiveness Application Form 3508EZ.
- PPP lenders may accept scanned copies of signed loan forgiveness applications and documents, E- signatures, and E-consents.
- A borrower is not required to make any payments on its loan until the SBA determines the amount of loan forgiveness if the loan forgiveness application is submitted within ten months of the completion of the Covered Period. If only a portion is forgiven, the borrower must repay the balance due on or before the maturity date of the loan.
2. LOAN FORGIVENESS PAYROLL COSTS
- Payroll costs incurred during the Covered Period/Alternative Payroll Covered Period, but paid after the Covered Period/Alternative Payroll Covered Period are eligible for loan forgiveness.
- Similarly, payroll costs incurred before the Covered Period, but paid during the Covered Period are also eligible.
- Gross amounts before deductions such as taxes and employee benefits are used to calculate cash compensation for payroll costs. Cash compensation includes tips, commissions, bonuses, and other incentive pay. Note that the forgivable cash compensation per employee is limited to $100,000, annualized.
- Payroll costs also include employer expenses for employee group health care benefits and employer contributions for employee retirement plans. These benefits cannot be accelerated outside the Covered Period/Alternative Payroll Covered Period. Furthermore, these benefits paid by the employee are not considered payroll costs eligible for loan forgiveness.
- Owner compensation eligible for loan forgiveness depends on the business type and whether the borrower is using an 8-week or 24-week Covered Period. The examples below are for borrowers using a 24-week Covered Period.
- C Corporation – The amount eligible for forgiveness for an owner who is also the only employee is up to 2.5/12 of his or her 2019 employee cash compensation, which is capped at $20,833. Amounts paid for state unemployment taxes, employer paid group health insurance, and employer paid retirement contributions are also eligible for loan forgiveness. Employer retirement contributions are capped at 2.5/12 of the 2019 employer retirement contribution. Payments other than cash compensation do not count toward the $20,833 cap per individual.
- S Corporation – The amount eligible for forgiveness is similar to the eligibility of a C Corporation as described above with the exception that the employer contributions for health insurance are not eligible for additional forgiveness for 2% or greater shareholders. Noncash compensation payments do not count toward the $20,833 cap per individual.
- Self-employed Schedule C Filers – The amount eligible for forgiveness of self-employed individuals, including sole proprietors and independent contractors, is limited to 2.5/12 of 2019 net profit capped at $20,833 per individual. Separate payments for health insurance, retirement, and state and local taxes are not eligible for loan forgiveness.
- General Partners – The amount eligible for forgiveness is limited to 2.5/12 of their 2019 net earnings from self-employment capped at $20,833 per individual. Compensation is only eligible for loan forgiveness if the payments to partners are made during the Covered Period/Alternative Payroll Covered Period. Similar to self-employed Schedule C filers, separate payments for health insurance, retirement, and state and local taxes are not eligible for loan forgiveness.
3. LOAN FORGIVENESS NON-PAYROLL COSTS (MORTGAGE INTEREST, RENT, AND UTILITIES
- Non-payroll costs incurred prior to the Covered Period, but paid during the Covered Period are eligible for loan forgiveness.
- Likewise, non-payroll costs incurred during the Covered Period, but paid after the Covered Periods are eligible for loan forgiveness. Note that the Alternative Payroll Covered Period only applies to payroll costs and not to non-payroll costs.
- Interest on unsecured credit is not eligible for loan forgiveness.
4. LOAN FORGIVENESS REDUCTIONS
- A borrower will not be subject to a reduction in its forgiveness amount if the borrower offers to rehire one or more laid off employees and the employee declines. The borrower is required to contact the state unemployment insurance office within 30 days of the rejected offer. To document this, the borrower should keep a copy of the written offer to the employee and the employee’s rejection in its files.
- If the salary or hourly wage of a covered employee is reduced by more than 25% during the Covered Period/Alternative Payroll Covered Period, the portion in excess of the 25% reduces the eligible forgiveness amount. Examples are provided in the FAQ document.
- A reduction in hours worked with no change in salary or hourly wages is a separate calculation and may also reduce the borrower’s loan forgiveness amount.
- Only salary and wages and not other forms of compensation are included in the loan forgiveness reduction calculation.
We will continue to closely monitor any new developments and keep you informed. If you have any questions, please contact your MichaelSilver tax professionals at 847.982.0333.