The original CARES Act, which was signed into law on March 27, 2020, created the Paycheck Protection Program (PPP). The PPP provided forgivable SBA loans designed to provide a direct incentive for small businesses to keep their workers on the payroll.
Since its inception the SBA has been updating its FAQs and providing updates on the program. Here, we endeavor to answer the most frequently asked questions about the “loan forgiveness” aspect of PPP
1) How can I use the money so that the loan will be forgiven?
The amount of principal that may be forgiven is equal to the sum of expenses-paid and incurred during the 8-week period starting from the date the loan was funded-for payroll costs, and existing (as of Feb. 15, 2020) interest payments on mortgages, rent payments, leases, and utility service agreements. Non-payroll expenses eligible for forgiveness have to be under contracts, mortgages, and leases in effect as of February 15, 2020. Payroll costs include employee gross salaries, hourly wages and cash tips, paid sick or medical leave (up to an annual aggregate amount of $100,000 per employee), plus employer retirement contributions, group health insurance premiums, and state and local payroll taxes imposed on compensation. See Appendix A for the allowable and forgivable guidelines for payroll and non-payroll costs.
2) When is the loan forgiven?
The loan is eligible for forgiveness after the end of the 8-week period from loan funding. Borrowers should work with lenders to verify covered expenses and the proper amount of forgiveness. The lender must make a decision on the forgiveness of the loan within 60 days. It is anticipated that the SBA will be issuing its version of a “Loan Forgiveness Application” that will be submitted to the lending institutions, along with substantiation documentation as required by the lender.
3) How much of my loan will be forgiven?
The purpose of the Paycheck Protection Program is to help you retain your employees, at their current base pay. If you keep all your employees, the entirety of the loan may be forgiven. If you lay off, or have laid off and don’t re-hire employees, the forgiveness will be reduced by the percent decrease in the number of employees. If your total payroll expenses on workers making less than $100,000 annually decreases by more than 25 percent, loan forgiveness will be reduced by the same amount.
4) What amounts are eligible forgiveness for self-employed individuals:
The following amounts are eligible for forgiveness for self-employed individuals:
Payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual), as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums),
Owner compensation replacement calculated based on 2019 net profit from Form 1040 Schedule C line 31,
Payments of interest on mortgage obligations,
Rent payments on lease agreements, and
Utility payments
5) What is the difference between an “allowable use” and “forgivable amount” of payroll and non-payroll costs?
Per SBA guidance, at least 75% of PPP Loan proceeds must be used towards qualifying payroll costs and up to 25% of PPP Loan proceeds can be used towards qualifying non-payroll costs. Loan forgiveness, which is similar yet separate, follows similar guidelines in that the maximum amount available for loan forgiveness is reached when, during the 8-week post loan funding period, at least 75% of loan proceeds are spent on payroll costs and up to 25% of loan proceeds are spent on non-payroll costs. SBA guidance does allow for partial forgiveness, if payroll costs incurred during the 8-week covered period are less than 75% of total PPP Loan proceeds, but no more than 25% of the forgivable amount can be allocated to the non-payroll costs. See Appendix A for the allowable and forgivable guidelines for payroll and non-payroll costs.
6) Can I pay back-pay to my employees with the PPP Loan proceeds if I cut their pay before I received my PPP Loan?
Forgivable payroll costs must be incurred during the 8-week covered period. You can use the PPP loan funds to pay back-pay since they are an allowable use of PPP loan proceeds – but they may not be forgiven.
7) Can I pay bonuses or raises during the 8-week covered period to maximize my payroll costs?
We are still waiting on additional SBA guidance to clarify this area. However, it is our understanding right now that bonuses and raises may qualify as wages and/or similar compensation capped at $15,385 per employee during the 8-week covered period. Bonuses may have to be pro-rated over the 8-week period since they may be based on annual performance.
8) Can I prepay my payroll and/or non-payroll costs during the 8-week covered period?
No, you cannot prepay eligible costs if they will not be incurred during the 8-week covered period. To be eligible for forgiveness, all eligible costs must be incurred during the 8-week covered period.
9) What qualifies as payment of employer’s portion of retirement benefits?
Based on our interpretation, payments made to an employer sponsored retirement plan are eligible for forgiveness, limited to the amounts that are incurred during the 8-week covered period. This also applies to profit-sharing plans that are normally paid in a year after the amounts have been incurred. Until further guidance is provided, we recommend that the cash funding to those plans be made before a loan forgiveness application is submitted to your lender.
10) What if my pay period for the time incurred within the 8-week covered period falls outside of the 8-week covered period?
We are still waiting on further guidance on this point, but if your pay cycle is after the 8-week period it is our understanding that the amounts paid for the payroll costs incurred during the 8-week covered period will be eligible for loan forgiveness.
11) Can you hire additional employees during the 8-week covered period?
Yes, you can hire additional employees during the 8-week covered period and any eligible payroll costs associated with them are eligible for forgiveness.
12) Must PPP loan proceeds be spent within the 8 weeks after receiving the funds?
No, PPP loan proceeds can be spent outside of the 8-week covered period, but only on the eligible uses. But, to be eligible for forgiveness, the proceeds must be spent on forgivable expenses within the first 8 weeks immediately after receiving the PPP loan funding.
13) Are you allowed to pay an employee more than a $100,000 annual salary, prorated over the covered period?
Yes, you can pay an individual more than an annual salary of $100,000 but, only $15,385 incurred during the covered period will be eligible for forgiveness.
14) Can you pay independent contractors with PPP loan proceeds and qualify for forgiveness?
No, independent contractors are not employees and therefore do not qualify under the eligible uses or for forgiveness. Independent contractors should apply for their own PPP loan based on their net earnings from self-employment.
15) What items can be included in the 25% of non-payroll forgivable cost category?
Eligible Forgivable Non-Payroll Costs include the following: 1) Mortgage Interest, 2) Rent on Lease, and 3) Utilities.
16) What is included in “utility payments”?
Utility Payments include the following: 1) water & sewer, 2) electricity, 3) telephone (including cell phone), 4) internet, 5) gas, and 6) transportation.
17) Does vehicle gasoline qualify as transportation under “utility payments”?
The CARES Act allows for transportation costs. The only SBA guidance we have as of now on this point is for self-employed individuals. This guidance states that gas used for driving a business vehicle is a forgivable use of PPP loan proceeds. This suggests gas expenses and expenses from the standard mileage allowance may be permitted, but we need more definitive guidance.
18) Are car or equipment lease amounts eligible for forgiveness?
According to the CARES Act, only rent under a “covered rent obligation” is eligible for forgiveness. A covered rent obligation means rent obligated under a leasing agreement in force before Feb 15, 2020. This suggests that payments on a car or equipment lease may be permitted, but we need more definitive guidance. Clearly, without a pre-02/15/2020 “lease” in effect, the rent attributable to any lease will not qualify for forgiveness.
19) Do rent payments made to an affiliated/related party pursuant to a lease in place at 2/15/2020 qualify for forgiveness?
Yes. Current guidance does not exclude such rent payments from being eligible for forgiveness, subject to the 25% forgiveness limitation for non-payroll costs.
20) Will a borrower’s PPP loan forgiveness amount be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?
No, if the borrower offered to rehire a previously laid off employee and the employee declined, then that employee does not have to be included in the loan forgiveness reduction calculation. To qualify for this exception, the borrower must have made a good faith written offer of rehire and the rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
21) What happens if I have PPP loan proceeds left over after the 8 weeks?
Only the amount spent on allowed payroll and non-payroll costs in the 8 week covered period is forgivable. Based on SBA guidance, it is our understanding that any amount not spent in the 8 weeks will turn into an 18-month term loan carrying a 1% interest rate, and may be spent on any of the eligible uses.
22) Are permissible expenses paid from PPP loan proceeds that are forgiven deductible on my tax return?
No, IRS Notice 2020-32 issued on April 30, 2020, precludes the tax deductibility of expenses funded by PPP loan proceeds that were forgiven. However, certain members of Congress have expressed opposing views on this matter.
23) Am I responsible for interest on the forgiven loan amount?
No, if any part of the PPP loan principal is forgiven, the borrower will not be responsible for the pro-rata interest on the forgiven amount.
24) What are the interest rate and terms for the PPP loan amount that is not forgiven?
PPP Loans carry a 2 year term with a 1.0% interest rate. Loan payments will be deferred for the first six months from loan origination; however interest will accrue during those first six months. In addition, you will not have to pay any fees on the loan, and collateral requirements and personal guarantees are waived. The unforgiven accrued interest and loan amount, along with current interest, will be payable in 18 monthly payments.
25) What documents do borrowers need to submit for loan forgiveness?
You will need to verify the number of full-time equivalent employees on payroll, as well as pay rates prior to, and after, the PPP loan period. We anticipate the following documentation will need to be provided to your lender:
Payroll tax filings reported to the IRS, state payroll tax filings, and payroll processing records,
Invoices and payment records verifying mortgage interest, lease, and utility payments,
Certification that documentation is true and correct, and that the amount considered for forgiveness was used appropriately under Paycheck Protection Program guidelines, and
Other documentation as deemed necessary by the SBA and/or lender
26) What happens if PPP loan funds are misused?
If you use PPP loan funds for unauthorized purposes, SBA will direct you to repay those amounts immediately. If you knowingly use the funds for unauthorized purposes, you may be subject to additional liability such as charges for fraud. If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.
(NOTE: We expect the SBA to issue additional guidance related to the PPP Loan forgiveness process and the amounts eligible for forgiveness. MBAF will issue another updated FAQ when that or other information becomes available. The answers above are based on the current guidance available and MBAF’s interpretations thereof, and are subject to change upon any new guidance issued.)
How MBAF Can Help
We continue to assist clients with understanding the PPP Loan forgiveness rules when applying for PPP Loans. We have developed a methodology to assist our clients in estimating their loan forgiveness amount. In addition, we will be paying very close attention to developments surrounding the impact of the coronavirus, and we will keep you aware of any other taxation or financial relief that will be offered by the government that could help you or your business with the current crisis.
Understanding all of the financial and tax impacts of the coronavirus outbreak can be complex. If you would like to benefit from our expertise in these areas, or if you have further questions on this Advisory, do not hesitate to contact our Tax and Accounting Specialists, or call us at 1-866-367-5007
Appendix A: Payroll & Non-Payroll Costs – Allowable vs Forgivable
PPP loan proceeds can be used to cover the following “Allowable” expenses and the corresponding “Forgivable” expenses during the 8-week period starting from the date the loan was funded. Non-payroll expenses eligible for forgiveness have to be under contracts, mortgages, and leases in effect as of February 15, 2020.
Expense Category – Payroll Costs
Allowable
Forgivable
Salary, wages, tips, paid leave, and commissions less than $100k annually
YES
YES
Salary, wages, tips, paid leave, and commissions more than $100k annually
NO
NO
Bonuses*
YES
YES
Payments made to independent contractors
NO
NO
Compensation paid to non-US employees
NO
NO
Vacation, parental, family, medical, and sick leave not credited under Families First Coronavirus Response Act (“FFCRA”)
YES
YES
Group health care benefits paid by employer
YES
YES
Group health care benefits paid by self-employed or partnership
NO
NO
Workers compensation premiums
NO
NO
Retirement 401(k) employer match
YES
YES
Defined-benefit plan employer contribution
YES
YES
Defined-contribution plan employer contribution
YES
YES
Contribution to a SEP/KEOGH paid by self-employed or partnership
NO
NO
Federal unemployment tax
NO
NO
Employer-paid federal employment taxes (i.e., SS and Medicare)
NO
NO
Employer-paid state disability insurance (in applicable states)
YES
YES
State unemployment insurance
YES
YES
Expense Category – Non Payroll Costs
Allowable
Forgivable
Mortgage interest payments
YES
YES
Rent payments
YES
YES
Utility payments
YES
YES
Interest payments other debt obligations
YES
NO
Electricity
YES
YES
Gas
YES
YES
Water
YES
YES
Internet
YES
YES
Telephone
YES
YES
Transportation*
YES
YES
Equipment lease*
YES
YES
Cell phone
YES
YES
Cloud Computing
NO
NO
IT Expenses
NO
NO
*Needs further guidance from the SBA.
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Paycheck Protection Program (PPP) Extension Signed Into Law, and Borrower Information Released by SBA
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