Updated on August 11, 2020
On August 4, 2020, the U.S. Small Business Administration (“SBA”), in consultation with the Department of the Treasury (“Treasury”), released new guidance in the form of Frequently Asked Questions (“FAQ”s) to address borrower and lender questions concerning forgiveness of Paycheck Protection Program (“PPP”) loans, as provided for under Section 1106 of the CARES Act, as amended by the Paycheck Protection Program Flexibility Act. Borrowers and lenders may rely on the Frequently Asked Questions (FAQs on PPP Loan Forgiveness as SBA’s interpretation, in consultation with Treasury, of the CARES Act, the Flexibility Act, and the Interim Final Rules.
Even though SBA released 23 new FAQs concerning PPP loan forgiveness, a number of the questions/answers are essentially just restating prior guidance on loan forgiveness rather than providing any new or supplemental guidance on general questions or specific questions related to payroll costs, non-payroll costs or loan forgiveness reductions. As such, we are going to focus our analysis on new or supplemental guidance provided in the FAQs:
General Loan Forgiveness
FAQ #2 indicates that PPP lenders may accept scanned copies of signed loan forgiveness applications and documents containing the information and certifications required by SBA Form 3508, 3508EZ, or the lender equivalent. Lenders may also accept any form of E-consent or E-signature that complies with the requirements of the Electronic Signatures in Global and National Commerce Act (P.L. 106-229).
FAQ #3 clarifies that even though interest accrues from the date that the PPP loan is received, the borrower will only be responsible for paying accrued interest on loan amounts that are not eventually forgiven.
Loan Forgiveness Payroll Costs
FAQ #6 indicates that employer expenses for employee group health care benefits that are paid or incurred by the borrower during the Covered Period (or Alternative Payroll Covered Period) are payroll costs eligible for loan forgiveness. Forgiveness is not provided for expenses for group health benefits accelerated from periods outside the Covered Period (or Alternative Payroll Covered Period). If a borrower has an insured group health plan, insurance premiums paid or incurred during the Covered Period (or Alternative Payroll Covered Period) qualify as “payroll costs,” as long as the premiums are paid during the applicable period or by the next premium due date after the end of the applicable period.
FAQ #7 indicates that forgiveness is not provided for employer contributions for retirement benefits accelerated from periods outside the covered period. It is not clear what is meant by “accelerated from;” and this may mean that retirement plan contributions made during the covered period that are attributable to retirement plan obligations accrued between January 1, 2019 and the last day over the covered period can be forgiven if paid during the covered period, but that prepayments of retirement plan contributions outside of the covered period will not count.
FAQ #8 indicates that the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at $20,833 per individual in total across all businesses in which he or she has an ownership stake (or $15,385 if electing the 8-week covered period). The FAQ also provides the following specific guidance on payroll cost limitations for owner-employees and self-employed individuals based on the type of business entity:
- The employee cash compensation of a C-corporation owner-employee, defined as an owner who is also an employee (including where the owner is the only employee), is eligible for loan forgiveness up to the amount of 2.5/12 of his or her 2019 employee cash compensation, with cash compensation defined as it is for all other employees. Borrowers are also eligible for loan forgiveness for payments for employer state and local taxes paid by the borrowers and assessed on their compensation, for 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.
- The employee cash compensation of an S-corporation owner-employee, defined as an owner who is also an employee, is eligible for loan forgiveness up to the amount of 2.5/12 of their 2019 employee cash compensation, with cash compensation defined as it is for all other employees. Borrowers are also eligible for loan forgiveness for payments for employer state and local taxes paid by the borrowers and assessed on their compensation and for employer retirement contributions to their employee retirement plans capped at the amount of 2.5/12 of their 2019 employer retirement contribution. Employer contributions for health insurance are not eligible for additional forgiveness for S-corporation employees with at least a 2% stake in the business, including for employees who are family members of an at-least 2% owner under the family attribution rules of 26 U.S.C. 318, because those contributions are included in cash compensation.
- The compensation of self-employed Schedule C (or Schedule F) 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 (or 2.5/12 of 2019 net farm profit, as reported on IRS Form 1040 Schedule F line 34). Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness; health insurance and retirement expenses are paid out of their net self-employment income.
- The compensation of general partners 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 (reduced by Sec. 179 expense deduction, unreimbursed partnership expenses 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). Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness.
- LLC owners must follow the instructions that apply to how their business was organized for tax filing purposes for tax year 2019, or if a new business, the expected tax filing situation for 2020.
Loan Forgiveness Non-payroll Costs
FAQ #4 indicates that payments of interest on business mortgages on real or personal property (such as an auto loan) are eligible for loan forgiveness; however, payments of interest on unsecured credit are not eligible for loan forgiveness because the loan is not secured by real or personal property. While interest on unsecured credit incurred before February 15, 2020, is a permissible use of PPP loan proceeds, this expense is not eligible for forgiveness.
FAQ #5 indicates that if a lease that existed prior to February 15, 2020 expires on or after February 15, 2020, and is renewed, the lease payments made pursuant to the renewed lease during the Covered Period are eligible for loan forgiveness. Similarly, if a mortgage loan on real or personal property that existed prior to February 15, 2020, is refinanced on or after February 15, 2020, the interest payments on the refinanced mortgage loan during the Covered Period are eligible for loan forgiveness.
FAQ #6 clarifies that a “service for the distribution of transportation” refers to transportation utility fees assessed by state and local governments. Payment of these fees by the borrower is eligible for loan forgiveness. Transportation utility fees are a financing mechanism that treats the transportation system like a utility in which residents and businesses pay fees based on their use of the transportation system rather than taxes based on the value of property they occupy. They have been used in smaller cities in a number of states (Washington, Idaho, Utah, Colorado, Texas, Missouri, and Florida) to primarily fund roadway maintenance. They are also known as street maintenance fees, road use fees, street utility fees, and pavement maintenance utility fees (U.S. Department of Transportation).
FAQ #7 clarifies that the entire electricity bill payment is eligible for loan forgiveness (even if charges are invoiced separately), including supply charges, distribution charges, and other charges such as gross receipts taxes.
Loan Forgiveness Reductions
FAQ #3 indicates that 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). Borrowers 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.
All of the FAQs included in the August 4, 2020 document released by SBA can be found by clicking the link in the first paragraph of this post, which will connect you to the U.S. Department of Treasury website where you can find additional information on the Paycheck Protection Program. Even though these FAQs have answered some questions that borrowers and lenders have been waiting for guidance on, there are still a number of questions and issues that SBA and Treasury need to resolve before borrowers should consider applying for loan forgiveness.
On August 11, 2020, SBA added three new FAQs related to Economic Injury Disaster Loan (EIDL) advances and their impact on PPP loan forgiveness.
Economic Injury Disaster Loan (EIDL)
FAQ #1 indicates that a lender will be able to confirm the amount of an EIDL advance that must be automatically deducted by SBA from the loan forgiveness payment by reviewing the borrower’s EIDL advance information in the PPP Forgiveness Platform.
FAQ #3 indicates that a borrower that received an EIDL advance in excess of the amount of its PPP loan will not receive any forgiveness on the PPP loan, because the amount of an EIDL advance is deducted from the PPP loan forgiveness amount.
In general, the lender is responsible for notifying the borrower of the date on which the borrower’s first loan payment is due. The lender must continue to service the loan. The borrower must repay the remaining loan balance by the maturity date of the PPP loan (either two or five years). If a borrower is determined to have been ineligible for a PPP loan for any reason, SBA may seek repayment of the outstanding PPP loan balance or pursue other available remedies.
SBA has partnered with a financial services technology provider to develop a secure platform to accept loan forgiveness decisions, supporting documentation, and requests for forgiveness payments. The Paycheck Protection Forgiveness Platform launched on August 10, 2020, allowing lenders to begin submitting their PPP forgiveness decisions to SBA.
For additional information on the Paycheck Protection Program or other Federal, state and local relief measures, please visit our COVID-19 Resource Center on our website. If you have any questions, please contact your Tronconi Segarra & Associates advisor or a member of our response team at firstname.lastname@example.org
This website has been prepared for general guidance on matters of interest only; it does not constitute professional advice. You should not act upon the information contained in this website without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy of completeness of the information contained in this publication; and, to the extent permitted by law, Tronconi Segarra & Associates LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this website or for any decision based on it.
Copyright 2020 Tronconi Segarra & Associates. All rights reserved.