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As I previously described, there are 3 stages for the PPP – stage 1 is the securing PPP money. On August 8th, the SBA is no longer processing any new PPP loans unless Congress offers more money to those suffering businesses. Stage 2 is the covered period where businesses need to spend the PPP money. If the business spends the money in accordance with the PPP program, then the SBA will forgive some or all of the PPP money. Originally, the covered period was 8 weeks and most businesses couldn’t spend the money during this 8 week period as the businesses were closed so Congress allowed businesses to use a 24 week period as its covered period. The 8 week period has passed for businesses so if your business hasn’t achieved full forgiveness, then you should be working towards full forgiveness during this 24 week period, if possible. Once the 24 week period expires, then whatever isn’t forgiveness, then that amount will be required to be repaid in accordance with the PPP loan terms. Step 3 is submitting a loan forgiveness application with your bank. I believe that this is a very critical step as the bank will be required to review the application along with all your payroll and non-payroll records to determine if they should forgive your loan. The SBA will be reviewing these loan forgiveness applications and paperwork to ensure banks are doing what they are supposed to do. The SBA has 6 years to review any business’s application and could change the bank’s determination. Therefore, I believe maintaining good solid paperwork to your loan forgiveness application is very important to ensure forgiveness.
Last week, the SBA released more questions and answers regarding forgiveness. While most of this newly released information isn’t new, except they clarifications some questions and also added some new information. These new Q&As are in divided into 4 separate categories:
1. General Forgiveness
2. Loan Forgiveness For Payroll Costs
3. Loan Forgiveness For Non-payroll Costs
4. Loan Forgiveness Reductions
1. General Forgiveness
FAQs in this section provide clarification with respect to the following:
· If your business operates as a sole proprietors, independent contractors, or as a self-employed individuals and you had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form, then you can automatically qualify to use the PPP Loan Forgiveness Application Form 3508EZ and should do so; and
· If you submit their loan forgiveness applications within 10 months after the expiration of your Covered Period, then you are not required to make any payments on the PPP loan until the forgiveness amount is remitted to their lender by the SBA.
· Clearly, if the loan is fully forgiven, your business is not responsible for any payments and if only a portion of the loan is forgiven, or if the forgiveness application is denied, any remaining balance due on the loan must be repaid by your business on or before the maturity date of the loan. Interest accrues during the time between the disbursement of the loan and SBA remittance of the forgiveness amount.
· Your business is responsible for paying the accrued interest on any amount of the loan that is not forgiven. Accrued interest on the forgiven portion of the loan is forgiven.
· The bank is responsible for notifying you as the PPP borrower of remittance by SBA of the loan forgiveness amount (or that SBA determined that no amount of the loan is eligible for forgiveness) and the date on which your first PPP payment is due, if applicable.
2. Loan Forgiveness for Payroll Costs
FAQs in this section reiterate previously issued guidance by the SBA that:
· Payroll costs that were incurred during the covered period and paid on or before the next regular payroll date after the Covered Period or Alternative Payroll Covered Period are eligible for loan forgiveness, and
· Payroll costs that were incurred before the Covered Period but paid during the Covered Period are also eligible for loan forgiveness
o Example: Your business received its PPP loan before June 5, 2020 and elects to use a 24-week Covered Period. Your Covered Period runs from Monday, April 20 through Sunday, October 4. If your business has a biweekly payroll cycle, with a payroll cycle ending on Saturday, April 18. Your business will not make the corresponding payroll payment until Friday, April 24. While these payroll costs were not incurred during the Covered Period, they were paid during the Covered Period and are therefore eligible for loan forgiveness.
· Any PPP loans that are received prior to June 5, 2020 may elect to use the 8-week or the 24-week Covered Period that begins on the first day of their first pay period following their PPP loan disbursement date (i.e., the “Alternative Covered Period”).
· Any businesses with payroll schedules that pay twice a month or less frequently will need to calculate payroll costs for partial pay periods beginning on the date of loan funding, as they are not eligible to use the Alternative Covered Period.
· Forgivable cash compensation per employee is limited to $100,000 on an annualized basis, with the pro-rata maximum paid or incurred in the covered period or alternative covered period being $ 15,385 for an 8-week period and $46,154 for a 24-week period per employee.
In addition, the FAQs provide clarification that:
· Forgiveness is not provided for expenses for group health benefits accelerated from periods outside the Covered Period or Alternative Payroll Covered Period.
· Only the portion of the premiums paid by your business for the employer’s share for coverage during the applicable Covered Period or Alternative Payroll Covered Period is included, not any portion paid by employees or beneficiaries or any portion paid for coverage for periods outside the applicable period.
· Forgiveness is not provided for employer contributions for retirement benefits accelerated from periods outside the Covered Period or Alternative Covered Period.
· Compensation limits for owner-employees, self-employed individuals and general partners are limited to:
-For C-Corporation owner-employees, cash compensation is capped at the lesser of $15,385 (if using the 8-week Covered Period), $20,833 (if using the 24-week Covered Period) or 5/12 of the 2019 cash compensation.
Borrowers are also eligible for loan forgiveness for: (a) payments for employer state and local taxes paid by the borrowers and assessed on their compensation and (b) the amount paid by the borrower for employer contributions for their employee health insurance, and for employer retirement contributions to their employee retirement plans capped at the amount of 2.5/12 of the 2019 employer retirement contribution.
Payments other than for cash compensation should be included on lines 6-8 of PPP Schedule A of the loan forgiveness application (SBA Form 3508 or lender equivalent), and do not count toward the $15,385 or the $20,833 cap per individual for owner-employees.
-For S-Corporation owner-employees, cash compensation is capped at the lesser of $15,385 (if using the 8-week Covered Period), $20,833 (if using the 24-week Covered Period) or5/12 of the 2019 cash compensation.
Businesses are also eligible for loan forgiveness for (a) payments for employer state and local taxes paid by the borrowers and assessed on their compensation, and (b) for employer retirement contributions to their employee retirement plans capped at the amount of 2.5/12 of their 2019 employer retirement contribution.
One key point of clarification is that employer contributions for health insurance paid on behalf of employees with at least a 2% stake in the business, and employees who are family members of an at least 2% owners under the family attribution rules of 26 U.S.C. 318, are not eligible for additional forgiveness for S-Corporation–because those contributions are included in cash compensation.
The eligible non-cash compensation payments should be included on lines 7 and 8 of PPP Schedule A of the Loan Forgiveness Application (SBA Form 3508), and do not count toward the $15,385 or the $20,833 cap per individual for owner-employees.
– For Self-Employed Schedule C filers, the compensation of self-employed Schedule C individuals, including sole proprietors, self-employed individuals, and independent contractors, that is eligible for loan forgiveness is limited to 2.5/12 of 2019 net profit as reported on IRS Form 1040 Schedule C-line 31.
Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness as health insurance and retirement expenses are paid out of their net self-employment income.
It is important to note that if the business did not submit its 2019 IRS Form 1040 Schedule C to the bank when your business initially applied for the PPP loan, it must be included with the borrower’s forgiveness application.
-For General Partners, the compensation that is eligible for loan forgiveness is limited to 2.5/12 of their 2019 net earnings from self-employment that is subject to self-employment tax, which is computed from 2019 IRS Form 1065 Schedule K-1 box 14a (reduced by box 12 section 179 expense deduction, unreimbursed partnership expenses deducted on their IRS Form 1040 Schedule SE, and depletion claimed on oil and gas properties), multiplied by 0.9235.
Compensation is only eligible for loan forgiveness if the payments to partners are made during the Covered Period or Alternative Payroll Covered Period. As such, it is important for your business to pay their general partners during the chosen Covered Period.
Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness.
It is also important to note that if the partnership did not submit its 2019 IRS Form 1065 K-1s when initially applying for the loan, it must be included with the partnership’s forgiveness application.
3. Loan Forgiveness For Non-Payroll Costs
FAQs in this section provide clarification that:
· Interest on unsecured credit is not eligible for loan forgiveness because the loan is not secured by real or personal property. However, interest on unsecured credit incurred before February 15, 2020 is a permissible use of PPP loan proceeds.
· Payments made on recently renewed leases or interest payments on refinanced mortgage loans are eligible for loan forgiveness if the original lease or mortgage existed prior to February 15, 2020.
· Transportation utility payments are fees assessed by state and local governments and are eligible for loan forgiveness. This is a significant clarification by the SBA that makes clear that transportation utilities are not to be confused with auto related expenses and the like.
4. Loan Forgiveness FTE Reductions
FAQs in this section reiterate previously issued guidance by the SBA that:
· In calculating its loan forgiveness amount, your business may exclude any reduction in FTE employees if you are able to document in good faith the following:
o An inability to rehire individuals who were employees of your business on February 15, 2020 and
o An inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020.
Your business is required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer. The documents that you will be required to maintain will be to show compliance with this exemption include the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual.
· The FTE Reduction Exceptions apply to all employees, not just those who would be listed in Table 1 of the Loan Forgiveness Application (SBA Form 3508 or lender equivalent). Your business should therefore include employees who made more than $100,000 in the FTE Reduction Exception line in Table 1 of the PPP Schedule A Worksheet.
· If your business applies for forgiveness before the end of the 24-week Covered Period, it must account for the salary reduction for the full 24-week Covered Period.
It is important to highlight that in situations where an employee’s hours were reduced but not their salary or hourly wage, the salary/hourly wage reduction for those employees will be zero and the employee’s reduction in hours will be taken into account in your business’s calculation of its FTE during the Covered Period, which is calculated separately and may result in a reduction of the loan forgiveness amount.
Therefore, I believe it’s time to project where your business stands in the forgiveness and plan accordingly, Also, it’s time to start putting your records together to ensure that loan forgiveness application agrees with your loan application and its easy for the bank to understand.
If you have any questions then we are here to assist.