FAQs | Payroll Protection Program – Forgiveness Phase
The Small Business Administration (SBA) released the long-awaited Paycheck Protection Program Loan Forgiveness Application. The release on May 15, 2020, brought significant changes to the interpretation of some components of PPP forgiveness that were not previously known. As a result of these changes Squire has updated its FAQ Document on Payroll Protection Program Forgiveness.
The CARES Act lists four categories of expenses that are forgivable. This means that your PPP loan is forgivable to the extent you spend the proceeds of your loan on these four categories, provided you maintain the headcount and compensation of employees at the same pre-Covid-19 level, the loan will be forgiven. Another important requirement is that you actually either accrue or pay for these expenses during the “covered period” which is defined as the 8-week (56-day) period immediately after your receipt of the loan proceeds (the “Covered Period”).
Amounts accrued or spent outside the 8-week period (or “Alternative Payroll Covered Period” as explained below), or outside one of the four permitted categories of expense, are not forgivable and will need to be repaid within two years. As of the date of the production of this FAQ the Paycheck Protection Program Loan Forgiveness Application (the “Forgiveness Application”) had been received, but final regulations on PPP Forgiveness had not been issued by the Small Business Administration (SBA). The answers below, in many cases, are based on Squire’s interpretation of existing guidance. As PPP Forgiveness regulations are issued by the SBA Squire will provide appropriate updates
1. When will the forgiveness amount be calculated?
Answer – The forgiveness calculation is based on expenses incurred and payments made by the business beginning the eight-week (56 day) period following the date you receive funding (the “Covered Period”). However, for administrative convenience, borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week period that begins on the first day of their first pay period following their PPP Loan Disbursement Date (the “Alternative Payroll Covered Period”). For example, if the borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20. Borrowers who elect to use the Alternative Payroll Covered Period must apply the Alternative Payroll Covered Period wherever there is a reference in the Paycheck Protection Program Loan Forgiveness Application (the “Forgiveness Application”) to the Covered Period or the Alternative Payroll Covered Period.” However, Borrowers must apply the Covered Period (not the Alternative Payroll Covered Period) wherever there is a reference in the Forgiveness Application to the Covered Period only.
2. When will the PPP funds received that are NOT eligible for forgiveness need to be repaid?
Answer – Loan payments are not required to be made for at least 6 months after funding. The repayment of the loan will be due within 2 years of the loan date at a 1% interest rate that is accruing during the non-payment window.
3. Should we wait to apply for PPP until we anticipate additional hiring and/or ability to re-open our place of business? Or can we apply now, get approved, and not take the funds until we are ready?
Answer – Our recommendation is you immediately apply for the funds as the dollar amount infused by the government are capped. The lender is required to fund within 10 days of loan application being approved by the SBA. You will need to be prepared to repay any loan proceeds that are not spent on allowable payroll costs and related expenses, should you delay hiring employees back.
Eligible Costs for Loan Forgiveness
4. What cost are eligible for loan forgiveness?
The forgiveness calculation includes the sum of all expenses incurred and payments made, as outlined below, during the eight-week period following the of receipt of funding.
Cash Compensation (subject to FICA and Medicare tax) – Gross salary, gross wages, gross tips, gross commissions, paid leave (vacation, family, medical or sick leave, not including leave covered by the Families First Coronavirus Response Act), and allowances for dismissal or separation paid or incurred during the Covered Period or the Alternative Payroll Covered Period. For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the Covered Period or Alternative Payroll Covered Period; therefore, do not enter more than $15,385
Payroll Benefits — employer-paid health insurance, employer-paid 401k matching contributions, and employer-paid state and local taxes on payroll (e.g., unemployment insurance), among other things. Payroll costs do not include the employers portion of payroll tax expenses such as Social Security and Medicare.
Rent Obligations – This includes payments under a lease agreement for real or personal property in force before February 15, 2020. It is not certain if self-employed/independent contractors can consider a home office deduction.
Utilities – This includes electricity, gas, water, transportation, telephone, or internet service for which service began before February 15, 2020. This most likely refers to utilities on office and business space. It is unknown whether self-employed/independent contractors can consider a home office portion of utilities.
Interest – The CARES Act uses a term “covered mortgage obligation,” to describe which interest payments could be subject to forgiveness. Interest payments can be for real or personal property debt obligation that is a liability of the borrower incurred before February 15, 2020. It does not include payments or prepayments of principal. The Act does stipulate that unsecured debt meets the definition.
5. During the Covered Period or Alternative Payroll Covered period do expenses eligible to be applied toward forgiveness need to be both incurred and paid during the eight-week period?
Answer – Payroll costs incurred but not paid during the borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period).
An 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.
6. Can I prepay on rent during the 8-week period and have that included in the forgivable portion?
Answer – No. The loan forgiveness application requires documentation of the current lease agreement and verification of payment of during the Covered Period. Payments outside of the lease agreement will not be eligible for forgiveness.
7. How do companies with Partner Payroll costs (1065) calculate eligible payroll costs?
Answer – Partner Payroll costs (1065) are eligible for automatic PPP forgiveness based on 8 out of 52 weeks of the same [2019 Form 1065, Schedule K-1, box 14a (net earnings from self-employment) x .9235, limited to $100K] amount used to calculate their loan. Thus, the maximum loan amount attributable to partner payroll costs is calculated using a monthly basis up to $20,833 ($100,000 / 12 x 2.5). The maximum forgiveness amount for partner payroll costs is calculated using a weekly basis up to $15,385 ($100,000 x 8 / 52). This leaves $5,448 ($20,833 – $15,385) available to spend on eligible non-payroll costs or it will be required to be repaid.
8. How do independent contractors (ICs) and sole proprietors (SPs) “pay” themselves and determine costs eligible for loan forgiveness?
Answer — ICs and SPs are eligible for automatic PPP forgiveness based on 8 out of 52 weeks of the same [2019 Form 1040, Schedule C, line 31 (net profit), limited to $100K] amount used to calculate their loan. Thus, the maximum loan amount attributable to owner payroll costs is calculated using a monthly basis up to $20,833 ($100,000 / 12 x 2.5). The maximum forgiveness amount for owner payroll costs is calculated using a weekly basis up to $15,385 ($100,000 x 8 / 52). This leaves $5,208 ($20,833 x 25%) eligible for the non-payroll costs forgiveness portion (see Rent, Utilities, Interest above), but $5,448 available to spend ($20,833 – $15,385). Under the present calculation, every IC and SP without employees will have to repay some amount of their loan.
9. If we pay contractors, is that an eligible cost for forgiveness of the PPP loan?
Answer – The forgiveness is tied to payroll for employees, not contractors. Funds used to pay contractors would not be forgiven and would need to be repaid as part of the loan.
10. For the non-payroll costs that can be included in the forgiveness calculation, what are the consequences of using those funds beyond what qualifies? What if our costs for the qualified spending are higher than the limitation for forgiveness?
Answer – Your mortgage interest, office lease, and utilities can offset up to 25% of the loan. Any funds used to pay other costs (for instance the principal portion of the mortgage) will not qualify for forgiveness. The Forgiveness Application allows the smallest of the following three amounts as the forgiveness amount: 1) PPP Loan amount, 2) payroll costs divided by 0.75 or 3) total payroll and non-payroll costs during the Covered Period or Alternative Payroll Covered Period reduced for wage reduction and headcount reductions.
Note that option #2 is taking your payroll costs and increasing it when you divide by .75. With all of the percentages and other 75% analyses, this seems confusing, but this is not to limit your payroll costs, it is instead how the application is limiting your non-payroll costs to be only 25%.
11. Can the amounts paid by the employer under the Family Medical Leave Act (FMLA) that are reimbursed under the Families First Coronavirus Response Act: Employee Paid Leave (FFCRA) be included in PPP Forgiveness?
Answer – If FFCRA credits will allow the recoupment of amounts paid by the employer then such amounts will not be included in PPP Forgiveness.
Headcount During Eight-Week Period and Effect on Loan Forgiveness
12. How is an average full-time equivalent (“FTE”) defined and calculated?
Answer — The headcount reduction rule is based on an average FTE concept. This calculates the average full-time equivalency (FTE) during the Covered Period or the Alternative Payroll Covered Period. For each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. A simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the Borrower
13. How is forgiveness affected by a reduction in FTE employee count?
Answer – The amount of forgiveness available will be reduced according to the formula A = B(X/Y). where:
“A” is the amount of PPP Loan forgiveness reduction
“B” is the maximum loan forgiveness otherwise available
“X” is the average monthly number of FTE employees from Feb. 15, 2020 – June 30, 2020
“Y” is the average monthly number of FTE employees during the period (at the borrower’s election) of (i) the period from Feb. 15, 2019 through June 30, 2019 or (ii) Jan. 1, 2020 through Feb. 29, 2020 (subject to different rules if business not in operation at that time or if employs seasonal employees).
14. Can you clarify the FTE Reduction Safe Harbor exemption for re-hires clause on loan forgiveness? If we re-hire to 100% by June 30th, will we be subject to forgiveness reduction due based on FTE employee levels?
Answer – A safe harbor under applicable law and regulation exempts certain borrowers from the loan forgiveness reduction based on FTE employee levels. Specifically, the Borrower is exempt from the reduction in loan forgiveness based on FTE employees if both of the following conditions are met: (1) the Borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the Borrower then restored its FTE employee levels by not later than June 30, 2020 to its FTE employee levels in the borrower’s pay period that included February 15, 2020.
For example, if a reduction of FTE employees occurred during the period beginning on February 15, 2020 and ending on April 26, 2020 (the “Testing Period”) results in a lower FTE employee count during the Testing Period than that of February 15, 2020, a borrower can rehire employees (or potentially hire new employees) on or before June 30, 2020, sufficient to take the June 30, 2020, FTE employee count up to the FTE employee count on February. 15, 2020 and thereby eliminate the forgiveness reduction that would otherwise have applied relating to the reduction of FTE employees during the Testing Period.
Keep in mind the above FTE Reduction Safe Harbor only relates to loan forgiveness based on reduction based on FTE but does not determine if the Salary/Hourly Wage Reduction Safe Harbor is met.
15. What about employees that have quit and are not willing to be rehired or have been terminated for cause or have requested a reduction in hours worked?
Answer – No loan forgiveness reduction based on FTE employee levels will apply if (1) any positions for which the borrower made a good-faith, written offer to rehire an employee that was terminated during the Covered Period or the Alternative Payroll Covered Period which was rejected by the employee; and (2) any employees who during the Covered Period or the Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours. Any FTE reductions in these cases do not reduce the Borrower’s loan forgiveness.
Although no forgiveness reduction based on FTE employee levels will apply if the above requirements are met, the employer will still need to hire a replacement employee as the original employee’s pay was included in the loan amount and that portion of the loan will remain outstanding if a replacement employee is not paid during the eight week period.
Salary/Hourly Wage Reduction and Forgiveness Calculation Adjustments
16. How is forgiveness affected by a reduction in compensation paid?
Answer — The amount of forgiveness available will be reduced by the amount of any reduction in total wages and salary of any employee earning an annualized salary of less than $100,000 during the Covered Period in excess of 25% as compared to the total wages and salary of that employee during the period January 1, 2020 through March 31, 2020.
17. Can you clarify how the Salary/Hourly Wage Reduction Safe Harbor Safe is met?
Answer — A safe harbor under applicable law and regulation exempts certain borrowers from the loan forgiveness reduction based on salary/hourly wage reductions. Specifically, the borrower is exempt from the reduction in loan forgiveness based on salary/hourly wage reduction for an employee if an employee’s salary/hourly wage is reduced for the period February 15, 2020 through April 26, 2020, but then restored to the February 15, 2020, level by June 30, 2020.
18. Can employers exclude from the wage reduction calculation some employees who make $100,000/year or more?
Answer — Employees making more than $100,000/year are to be excluded from the wage reduction calculation because of the provision that includes only employees “who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.”
19. How do you define the “most recent full quarter” before the covered period for purposes of the wage reduction calculation?
Answer – The period January 1, 2020 through March 31, 2020.
20. How does a replaced worker factor into the wage reduction calculation?
Answer — If an employee is included in the calculation of the loan amount and included in the base period (i.e. the period from January 1, 2020 through March 31, 2020), but is not included in the eight-week covered period, then there would be a 100% reduction in that employee’s wages. However, if that employee is replaced and the new employee was paid the same amount the wage reduction rule would not apply because the purpose of the statute has been met (i.e., keeping workers employed).
21. What is the final basis for calculating the reduction to loan forgiveness reduction?
Answer – The Forgiveness Application allows the smallest of the following three amounts as the forgiveness amount: 1) PPP Loan amount, 2) payroll costs divided by 0.75 or 3) total payroll and non-payroll costs during the Covered Period or Alternative Payroll Covered Period reduced first for first wage reduction and second for headcount reductions.
22. Is our loan forgivable if our sales remain about the same?
Answer – Sales are not part of the forgiveness calculation. You will not be penalized for maintaining sales.
Forgiveness Tax Implications
23. The debt forgiveness is tax-free to borrowers, but can they deduct the forgiven expenses even though the government effectively paid them?
Answer – PPP loan forgiveness is tax-free for federal income tax purposes. Expenses paid from forgiven loan amounts are nondeductible under IRS Notice 2020-32. Legislation to clarify the intent of the CARES Act regarding this is currently being considered. Also, the states will need to provide guidance with regard to the taxability of the forgiveness and deductibility of related expenses.
24. If I receive PPP am I eligible for the retention credit and payroll tax deferral incentives?
Answer — PPP recipients are not eligible for the retention credit. Employer payroll tax deferral incentive is only lost if a PPP loan is forgi
24. If I receive PPP am I eligible for the retention credit and payroll tax deferral incentives?
Answer – PPP recipients are not eligible for the retention credit. Employer payroll tax deferral incentive is only lost if a PPP loan is forgiven.