This week we have gathered a number of questions from you about the PPP and also gathered the FAQs published by AICPA to help you better understand the PPP and loan forgiveness.
On Monday June 8, SBA and US Treasury issued a joint statement to clarify the removal of 60% cliff for PPP loan forgiveness:
"Lower the requirements that 75 percent of a borrower's loan proceeds must be used for payroll costs and that 75 percent of the loan forgiveness amount must have been spent on payroll costs during the 24-week loan forgiveness covered period to 60 percent for each of these requirements. If a borrower uses less than 60 percent of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs."
The text of the press release is available at:
AREAS WAITING FOR GUIDANCE FROM SBA
Can a borrower whose loan was received prior to June 5, 2020 use the June 30, 2020 FTE Reduction safe harbor instead of December 31, 2020?
- Additional guidance is needed.
For a borrower whose loan was received prior to June 5, 2020, does anything change with the Salary and Hourly Wage Reduction calculation and Safe Harbor?
- Additional guidance is needed.
Does the limit on cash compensation change to $100,000 x 24/52 from $100,000 x 8/52?
- Additional guidance is needed.
FAQs
Questions from you:
The rules were 75% maximum amount expenditure on payroll and retirement combined of the PPP total. Can you now pay employees more than the the 2 1/2 months of equivalent payroll and use all the PPP funds for payroll?
- You now have 24 weeks from the date the loan was funded to use the fund.
- Yes, you can apply all the PPP funds for payroll cost.
If the employee has a SEP IRA, what is the amount that I can fund the pension? Is it based on the aforementioned $15,384.64 times 25% or can I fund the maximum for the year, with the knowledge that over the year, the maximum will/would be earned in salary? It was previously unclear as to whether only 8 weeks of pension could be funded or 52 weeks, if paid during the 8 weeks.
- This is still waiting for guidance from SBA. We believe that the cap is still at $100,000 gross. Pension (or SEP IRA contribution) is not allowed to be included in the forgiveness formula if it was for owner-employee.
It is my understanding that the pension falls under the 60% of the 60/40 limitations, correct?
- Yes, it is correct. And it is only allowed to be counted as payroll cost for employees only.
Is there going to be a DIFFERENT form 941 for the second quarter to account for payrolls made with the PPP funds? If an employee earned more than $15,384.64 (or any new allowed maximum) during the second quarter, do I file a new form 941 for the $15,384.64 and a traditional form 941 for the overage? Is there only one set of EDD payroll tax returns, which would be the summation of the traditional and new forms 941?
- According to the revised 941 (Draft as of 4/29/2020), it includes new line items for:
- Deferred amount of the employer share of social security tax
- Refundable portion of credit for qualified sick and family leave wages
- Refundable portion of employee retention credit
- We believe the employer is still required to report the entire portion of gross wages even it is subject to further limitation for PPP forgiveness purpose.
With the new changes, we will need to use at least 60 percent towards payroll. So we have the flexibility to use it up to 75% if needed?
- Yes, you do. Ideally you can use anywhere between 60% to 100%.
For the non payroll portion, can we utilize it towards cost associated to reopening the office. If so, what is the language around that?
- The PPP loan is meant to mainly support the payroll cost, while 40% can be used for mortgage interest, rent, utilities. Operating cost or working capital can be funded by other SBA loans, ie: EDIL.
Can you explain to me what happens if i received the PPP loan and I had an employee that was out sick with COVID-19 under a covered Paid Sick leave? How does that play into my forgiveness calculation?
- The employee who was out sick with COVID-19 and covered under FFCRA will not be counted towards the forgiveness calculation.
We both received the EIDL in the amount of $1000 to each of our companies. Are there any restrictions on how these monies are used and tracked? And are we liable to have a to pay them back? Under what circumstances?
- $1,000 per employee you received from EIDL is considered as "grant" rather than loan. It will be computed with the total forgiveness with your PPP loan.
I included $100,000 for self employment. If pay myself based on the 100k for the 8 weeks pay, and use 25% for my rent this will leave a balance of $11000 of unused funds after 8.weeks. Will I pay 1% interest on the 11k, or the entire Loan of $35000.
- The forgiveness calculation for self-employed individual is based on the 2019 Schedule C filed. We are still waiting for the final guidance on the new 24-week covered period for SE.
- Yes, any balance that is not forgivable will be subject to 1% interest for 2 years (or 5 years if approved by lender)
If I do not bring my one employee back, as there is no work. Will I be penalised? I have lost substantial amounts of both customers and suppliers due to Covid.
- If you can show good faith in rehiring but not successful, it will not be counted against the forgiveness.
AICPA FAQs
What is the deadline to apply for PPP funds?
June 30, 2020.
When does the covered period (24 weeks or 8 weeks) begin to determine the amount of the forgiveness for the PPP loan?
Borrowers who received loans prior to June 5, 2020 can elect an 8-week covered period or a 24-week covered period. Borrowers who received loans June 5, or later will have a 24-week covered period. The period begins on the date when the fund was disbursed by the lender.
The loan forgiveness application released on May 15, 2020 provides for an alternative payroll covered period. Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the 24-week (or 8-week if elected) period that begins on the first day of their first pay period following their loan disbursement date.
What are the acceptable uses of the PPP funds for businesses other than self-employed individuals?
Payroll costs, health care benefits, mortgage interest payments, rent, utility, interest payments on debt incurred prior to February 15, 2020, and/or refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.
What is included in utilities?
The CARES Act defines utilities in Sec.1106(a)(5) as electricity, gas, water, transportation, telephone or internet access for service which began prior to February 15, 2020. Further guidance released added gas used when driving a business vehicle. Other common utilities such as garbage collection or security monitoring may also be classified as a utility, but a business should confirm with the lending institution.
When determining the potential reduction of loan forgiveness due to workforce reductions, what method is used to determine employees?
The CARES Act uses the standard of “full-time equivalent employees” to determine whether loan forgiveness must be reduced in the measurement period. The loan forgiveness application provides for a calculation of average full-time equivalency which is calculated as the average number of hours paid per week, divided by 40 and rounded to the nearest tenth. The maximum for each employee is capped at 1.0. A simplified method is provided that assigns a 1.0 for employees who work 40 hours or more per week and .5 to employees who work fewer hours.
What are the acceptable uses of the PPP funds for self-employed individuals?
*Owner compensation replacement (calculated based on 8/52 of 2019 net profit from Form 1040 Schedule C)
*Employee payroll costs (as defined by the Interim Final Rule 1 issued on April 2, 2020)
Business mortgage interest payments on real/personal property
Business rent payments
Business utility payments
Interest payments on debt obligations incurred before February 15, 2020
Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020
Note that the individual must have claimed or be entitled to claim a deduction for the included expenses on 2019 Form 1040 Schedule C.
What amounts will be eligible for forgiveness for self-employed individuals?
The amount of the loan forgiveness will depend on the amount spent during the covered period on:
*Payroll costs as defined by the interim rule (does not include benefits for owners)
*Owner compensation replacement: limited to the lesser of:
8/52 of 2019 net profit with a maximum of $15,385 for the covered period and excluding any qualified sick or family leave equivalent amount for which a credit was claimed under FFCRA
2020 compensation paid during the covered period
Interest payments on mortgage obligations for real/personal property incurred before February 15, 2020
Rent payments on lease agreements in force before February 15, 2020
Utility payments under service agreements dated before February 15, 2020
*Note that for interest, rent and utility payments, the amounts must be deductible on Form 1040 Schedule C.
Are employee federal withholdings and employer payroll taxes on wages for the covered period included in payroll costs?
The employee federal withholding is included in allowable payroll costs for the purposes of determining the amount to be forgiven. The employer federal payroll taxes (i.e. FICA and Medicare taxes) imposed on the gross payroll are not eligible payroll costs for the loan forgiveness calculation.
What are the restrictions on determining the amount of loan forgiveness for businesses other than self-employed individuals?
Eligible nonpayroll costs cannot exceed 40% of the total forgiveness amount. If salaries decrease by more than 25% for any non-owner employee who made less than $100,000 annualized in 2019 OR if the number of FTEs decreases, the forgiveness amount will be reduced unless the safe harbor is met.
Do qualified sick and family leave wages which are eligible for a tax credit under the FFCRA count toward payroll costs for the purpose of the forgiveness portion?
For businesses that take this credit, the wages will be excluded from the determination of payroll costs.
What if the business had employees who left for their own reasons? Or need to be fired due to performance issues? Is the loan forgiveness still reduced for those employees?
An FTE reduction exception (meaning that a reduction of FTE in these circumstances does not reduce loan forgiveness) is available for any of the following:
Borrower makes a good-faith, written offer to rehire an employee during the covered period of the alternative payroll covered period and the offer was rejected.
FAQ #40
addresses this issue.
Employee was fired for cause
Employee voluntarily resigned
Employee requested and received a reduction of their hours
Borrower in good faith can document the inability to
- rehire individuals who were employees on February 15, 2020 and
- hire similarly qualified employees for unfilled positions on or before December 31, 2020 or
- return to the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued related to COVID-19
Can you increase pay for employees during the forgiveness period (for example, hazard pay, bonuses or other salary increases)?
*Yes, salary increases in the form of bonuses are eligible for forgiveness to the extent that the total compensation to an employee does not exceed $100,000 on an annualized basis ($15,385 for the 8- week period).
Can I use PPP fund to pay payroll expenses to employees when they are not currently able to work (due to business being closed or for any other reason)?
Based on current guidance, the covered period starts when the loan is funded. For borrowers with a biweekly or more frequent payroll period, an alternative payroll covered period starting on the first day of its first pay period following loan disbursement can be used. If the borrower is not able to operate or is operating at a limited capacity when the PPP loan proceeds are received, the borrower may choose to pay employees who are not able to work. This choice may be made to help the borrower maximize loan forgiveness as current guidance states that not more than 40% of the loan forgiveness amount may be attributable to non-payroll costs.
*Can a PPP loan be forgiven in whole or in part?
The actual amount of loan forgiveness will depend, in part, on the total amount of payroll costs and other eligible costs paid during the covered period. There are reductions in the amount of forgiveness based on the percentage of eligible costs attributable to non-payroll costs, any decrease in FTEs and decreases in salaries/wages per employee. See
PPP Loan Forgiveness Steps
for additional information. Also, the SBA is expected to issue additional guidance related to loan forgiveness.
How are eligible payroll costs determined for forgiveness purposes?
Borrowers are eligible for forgiveness for the payroll costs paid and incurred during the covered period or alternative payroll covered period. Payroll costs are considered paid on the day that paychecks are distributed or when an ACH credit transaction is originated. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the last pay period of the selected period are eligible for forgiveness if paid on or before the next regular payroll date. Payroll costs should be determined based on the Interim Final Rule.
*What are the caps on loan forgiveness for payroll costs available for owner-employees and self-employed individuals?
Owner-employees and self-employed individuals payroll costs for the covered period is capped at $100,000 annualized ($15,385) across all businesses. Schedule C filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit. General partners are capped by their 2019 net earnings from self-employment (reduced by Sec. 179 deduction, unreimbursed partnership expenses and depletion from oil and gas properties) multiplied by .9235. No additional forgiveness is available for retirement or health insurance contributions for self-employed individuals.
How are eligible nonpayroll costs determined for forgiveness purposes?
Any eligible nonpayroll cost must be paid during the covered period or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period.
Can rent or other obligations be prepaid?
To be forgiven, the eligible cost must be incurred during the covered period, so prepaid costs would not qualify. Guidance specifically addresses that prepayments of mortgage payments are not allowed.
Are these expenses tax deductible if the loan is ultimately forgiven?
IRS Notice 2020-32
was issued on April 30, 2020 to state that no deduction is allowed for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan. The AICPA recently submitted a
letter of support
for legislation that would clarify that the receipt and forgiveness of Coronavirus assistance through the PPP does not affect the deductibility of ordinary business expenses.
Is the forgiveness of the loan taxable income?
No, the forgiveness of the loan does not constitute federal taxable income. States are providing guidance on state taxability that will be included in the
AICPA state tax guidance chart
.
Are payments to related parties (such as rent) included as eligible nonpayroll costs?
This has not been specifically addressed in guidance released as of June 8, 2020.
What documentation is required to be submitted to the lender for self-employed individuals to support loan forgiveness?
The following documentation is required:
certification that the documentation provided is true and correct and the amount for which forgiveness is required was used to retain employees, and make interest, rent and utility payments
If the self-employed individual has employees, Form 941 and state quarterly tax reporting forms or equivalent payroll processor records that correspond to the covered period
Evidence of business rent, mortgage interest payments or utility payments for loan proceeds used for these purposes
2019 Form 1040 Schedule C
Can a qualified entity apply for both the PPP and other SBA disaster loans?
Yes, borrowers may apply for the PPP and other SBA financial assistance, including disaster loans and Section 7(a) loans. However, you cannot use the proceeds from the PPP for the same purpose as your other SBA loan(s). Loan proceeds would need to cover payroll for a different period or other qualifying costs. This includes the up to $10,000 grant available with the Section 7(b)(2) loans- Economic Injury Disaster Loans (EIDL).
What happens if a business applies for PPP and also receives the up to $10,000 grant from an EIDL?
The amount of grant received (up to $10,000) will reduce the forgiveness amount of the PPP.
The CARES Act included a deferral of the employer portion of the Social Security (6.2%) tax until 2021/2022. Is this affected by a business’ participation in the PPP?
What are the terms of the loan and the interest rate?
The interest rate will be 1%. The maturity of the loan is 2 years for loans made prior to June 5, 2020 and 5 years for loans made on and after June 5, 2020. Loans with a maturity of 2 years can be extended to 5 years with the agreement of the lender. Payments are deferred until a determination of the amount of forgiveness is made by the SBA. If the borrower does not apply for forgiveness within 10 months after the last day of the covered period, payments will be due that month. Interest will accrue on the loan beginning with disbursement.
What factors should a borrower consider when certifying that current economic uncertainty makes the PPP loan request necessary to support the ongoing operations of the applicant?
Borrowers should assess their economic need for a PPP loan under the standards established by the CARES Act and the PPP regulations in effect at the time of the loan application. Borrowers are considered to make this certification in good faith and by taking into account current business activity and also other sources of liquidity currently available.
Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. Borrowers with loans greater than $2 million will be subject to review by SBA for compliance with the program requirements. These borrowers should continue to assess their economic need as described above.
If a business determines that funds from a PPP loan were received based on a misunderstanding or misapplication of the required certification standard, what steps must be taken by the borrower?
If a borrower applied for a PPP loan prior to the issuance of the Interim Final Rule posted on April 24 and repays the loan in full by May 14, 2020 it will be deemed by SBA to have made the required certification in good faith. See SBA
PPP FAQs
for additional guidance.
Calculation of payroll costs
How should payroll costs for businesses other than self-employed individuals be calculated for the purposes of the loan amount relative to payroll taxes?
Payroll costs are calculated on a gross basis without regard federal taxes imposed or withheld including FICA and Medicare. Payroll costs are not reduced by taxes imposed on an employee and are not increased by the employer's share of payroll taxes.
What other costs should be considered when determining payroll costs for businesses other than self-employed individuals?
Payroll costs consist of compensation to employees including salary, wages, commissions or similar compensation; cash tips or the equivalent; payment for leave; allowance for separation or dismissal; payment for employee benefits including group health care coverage and insurance premiums; retirement contributions, payment of state and local taxes assessed on the compensation of employees.
Are there any other specific exclusions in determining payroll costs?
The compensation of an employee whose principal place of residence is outside of the U.S.
The compensation of an individual employee in excess of an annual salary of $100,000
If the borrower took credits under the Families First Coronavirus Response Act (FFCRA) for sick and family leave wages, those costs are also excluded.
The CARES Act excludes payroll costs for compensation greater than $100,000. Does that exclusion apply to employee benefits?
The $100,000 cap applies only to cash compensation not to non-cash compensation such as retirement plans or group health care.
What period of time should be used to calculate payroll costs for businesses other than self-employed individuals?
Borrowers can calculate payroll costs using data either from the previous 12 months or from the 2019 calendar year.
For seasonal businesses, the applicant may use average monthly payroll for the period between February 15 or March 1, 2019 and June 30, 2019 or any consecutive 12-week period between May 1, 2019 and September 15, 2019.
A business that was not in operation for that period may use the average monthly payroll costs for the period January 1, 2020 to February 29, 2020.
Are payments to independent contractors included in payroll costs?
Payroll costs do not include payments to independent contractors. Independent contractors have the opportunity to apply for PPP funding.
Are part-time employees and/or temporary seasonal employees included in payroll costs?
All employees paid during the period of time selected are included in payroll costs and to determine head count for eligibility purposes.
What if a business contracts with a payroll provider or a Professional Employer Organization (PEO) to process payroll? Are those costs included as payroll costs of the eligible borrower?
In
FAQs released by the SBA
, they recognize that the payroll for employees in this arrangement will not be reported on Form 941s for the borrower. The employees’ gross salary and benefits would be included as part of payroll costs when calculating the loan amount. For documentation, the SBA suggests providing Schedule R from Form 941 (an allocation schedule for aggregate Form 941 filers) or a statement from the payroll provider or PEO.
For churches/religious organizations, should a minister’s housing allowance be included as part of payroll costs?
Per the Interim Final Rule released April 24, 2020, payroll costs consist of compensation to employees including salary, wages, commissions or similar compensation. In additional guidance released on April 24, 2020, housing stipends or allowances are specifically included as payroll costs.
Pass-through entities calculation of payroll costs
How do S Corporations determine payroll costs?
Businesses should accumulate payroll costs based on the general guidelines as noted above. Specifically, compensation of owners who receive reportable wages (i.e. W-2 wages) should be included as payroll costs up to the $100,000 limit. Specifically, 2019 Form 941 taxable Medicare wages & tips should be added for each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from taxable Medicare wages & tips should be used to calculate payroll costs. Employer health insurance contributions (portion of Form 1120-S line 18 attributable to health insurance), retirement contributions (Form 1120-S line 17) and employer state and local taxes assessed on employee compensation (from state quarterly wages reporting forms) should be included as payroll costs.
How do partnerships and LLCs determine payroll costs?
Businesses should accumulate and report payroll costs based on the general guidelines as noted above. Additionally, guidance issued on April 14 states that payroll costs should also include the self-employment income of general active partners (subject to $100,000 compensation cap). This is determined by adding the following:
Schedule K-1, line 14a – Net earnings from self-employment of individual U.S. based general partners, reduced by Sec. 179 deduction, unreimbursed partnership expenses and depletion claimed on oil and gas properties claimed) multiplied by .9235 (adjusting for self-employment tax), up to $100,000 per partner
2019 gross wages and tips paid to the employees whose principal place of residence is in the U.S. (calculated based on guidelines noted above)
2019 employer contributions for employee health insurance (portion of Form 1065 line 19 attributable to health insurance)
2019 employer contributions to employee retirement plans (Form 1065 line 18)
2019 employer state and local taxes assessed on employee compensation (from state quarterly wage reporting forms)
Although partners/members are not treated as employees of the partnership/LLC and may receive guaranteed payments and other self-employment income from the partnership/LLC, the SBA determined that partners/members are not permitted to obtain PPP funds based on their self-employment income from a partnership/LLC.
How do single member LLCs determine payroll costs and do they apply as a business, sole proprietor or self-employed person?
LLCs should follow the instructions that apply to their tax filing situation. For example, an LLC that is considered a disregarded entity should file an application as a self-employed person. If the LLC is electing to be taxed as a partnership, the guidance regarding partnerships/LLCs would apply in the calculation of payroll costs.
Self-employed individuals and independent contractors
How are payroll costs calculated for self-employed individuals and independent contractors
with
no
employees?
The loan amount will be determined based on 2019 Form 1040 Schedule C line 31 net profit amount, up to $100,000. If the Schedule C shows a net loss, the allowed loan amount is zero.
How are payroll costs calculated for self-employed individuals and independent contractors
with
employees?
The loan amount will be determined by the sum of the following:
2019 Form 1040 Schedule C line 31 net profit amount, limited to $100,000. If the Schedule C shows a net loss, then this amount is 0
Payroll costs as calculated above
Are health insurance premium payments and retirement contributions added to payroll costs for self-employed individuals?
Based on guidance provided, health insurance premiums and retirement contributions will be added to payroll costs for individuals with employees. For self-employed individuals with no employees, the loan amount is determined based on net profit from Form 1040 Schedule C.
Do individuals who are self-employed and report income/expenses on forms other than Schedule C (such as Schedule F (farming)) qualify to apply for the PPP?
Yes. Self-employed farmers (those reporting their net farm profit on Schedule F) should use Schedule F line 34 net farm profit to be used to determine their loan amount (rather than Schedule C line 31 net profit). Otherwise, the calculation of the loan amount is the determined in the same manner.
Determining number of employees for less than 500 employee limit/affiliate questions
What time period should be used to determine the number of employees for the loan application?
Businesses may use average employment over the previous 12 months or for the calendar year 2019 for the purposes of applying an employee- based size standard. As an alternative, this formula provided by the SBA can be used: average number of employees per pay period in the 12 completed calendar months prior to the loan application (or the average for the periods the business has been operational if less than 12 months).
Are part-time or seasonal employees included in the employee count?
Yes, all individuals who are considered employees (including those obtained from a temporary employment agency, PEO or leasing concern) are included in the employee count. Per SBA FAQs, you can average employment over the required time period.
How do I determine whether related businesses are considered affiliates for the purpose of applying for the PPP?
The general rules of affiliation rules can be found under 13 C.F.R. 121.301. There are 4 tests:
- based on ownership (control of 50% or more of voting equity)
- based on stock options, convertible securities and agreements to merge (considered to have a present effect on the power to control a concern)
- based on common management (one or more officer/director/managing member or general partner controls the Board of Directors and/or management of another business)
- based on identity of interests, including family members (individuals or firms that have identical business or economic interests)
In determining whether affiliation exists, the SBA may consider other circumstances even if no single factor constitutes affiliation (13 C.F.R. 121.301(f)(5).
Are there any exceptions to the affiliation rules specifically related to the PPP from the CARES Act?
Yes, affiliation is waved for the following:
- Businesses with fewer than 500 employees that is assigned a NACIS Code starting with 72 (hotels, bars, restaurants)
- Businesses operating as a franchise that are assigned a franchise identifier
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We will prepare another update as soon as SBA and The Treasury release more guidance. As always, please don't hesitate to contact one of us or reach out to our COVID-19 team at
covid19@mggcpa.com
. Take care and stay safe.
Disclaimer:
This newsletter is based on interpretation of the CARES Act and guidance released through June 8, 2020. There are areas of the Act where additional clarification from the Treasury and SBA is needed. Your judgement and interpretations of the Act may be necessary. This alert is provided for information purposes only and does not constitute accounting and tax advice. Please contact your MGGGY LLP accountant for additional assistance.
CC mgggy newsletter release 2020-17
