How the Most Recent FAQs on PPP Loan Forgiveness May Impact You

On August 4, 2020, the Small Business Administration (the “SBA”), in consultation with the U.S. Department of the Treasury (the “Treasury”), issued guidance in the form of Frequently Asked Questions (“FAQs”) on PPP Loan Forgiveness. Some longstanding questions were answered (e.g., what is transportation under utilities? See below for the answer), other questions were not, and some FAQ answers raise new questions. The FAQs are structured in four categories: (i) General Loan Forgiveness FAQs (3 in this section), (ii) Loan Forgiveness Payroll Cost FAQs (8 in this section), (iii) Loan Forgiveness Nonpayroll Costs FAQs (7 in this section), and (iv) Loan Forgiveness Reductions FAQs (5 in this section). In the following outline, we will revisit how we got here and address some of the key FAQs that resolve questions related to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

See link here for the SBA’s FAQs on PPP Loan Forgiveness effective August 4, 2020: https://www.sba.gov/document/support-frequently-asked-questions-ppp-loan-forgiveness

How Did We Get Here?

The CARES Act was signed into law on March 27, 2020, and small businesses (as defined by the SBA) started applying for Paycheck Protection Program (“PPP”) loans on April 3, 2020. By April 16, 2020, the first tranche of PPP loan funding of $349 billion ran out and Congress passed another law expanding the funding by an additional $310 billion. As of August 6, 2020, $523.4 billion in loans have been approved, which means $135.6 billion of funding is still available. The last day to apply for a PPP loan was August 8, 2020.

There have been numerous guidelines and rules issued by the U.S. Treasury and SBA as follow up to the CARES Act and the Paycheck Protection Program Flexibility Act (the “PPPFA”) in the form of Interim Final Rules (“IFRs”), FAQs, and other guidance. To date, the most common questions remain on how to handle certain aspects of the PPP Loan Forgiveness Application. The recently-issued FAQs address some of these issues as described below.

Selected Questions Answered by the FAQs

General Loan Forgiveness FAQS (Questions 1 to 3)

Anchin Commentary: These three FAQs generally repeat some of the basic rules for filing the Application for PPP Loan Forgiveness – Forms 3508 and 3508-EZ.

Payroll Costs FAQs (Questions 1 to 8)

Question #2: Are payroll costs that were incurred before the Covered Period but paid during the Covered Period eligible for loan forgiveness?

Answer: Yes.

Anchin Commentary FAQ #2: The SBA finally resolves that Borrowers can include payroll costs as eligible for loan forgiveness that were incurred prior to the Covered Period and paid during the Covered Period. Keep in mind, if choosing between the Covered Period and the Alternative Payroll Covered Period that the Covered Period likely will allow you to include more costs than the Alternative Payroll Covered Period.

Question #7: What contributions for retirement benefits will be considered payroll costs that are eligible for loan forgiveness?

Answer: Generally, employer contributions for employee retirement benefits that are paid or incurred by the borrower during the Covered Period or Alternative Payroll Covered Period qualify as “payroll costs” eligible for loan forgiveness. The employer contributions for retirement benefits included in the loan forgiveness amount as payroll costs cannot include any retirement contributions deducted from employees’ pay or otherwise paid by employees. Forgiveness is not provided for employer contributions for retirement benefits accelerated from periods outside the Covered Period or Alternative Covered Period. Loan Forgiveness Payroll Costs FAQ 8 outlines the treatment of retirement benefits for owners, which are different from this general approach.

Anchin Commentary FAQ #7: The key takeaway here is that forgiveness is not provided for retirement contributions that are accelerated from periods outside the Covered Period.

Question #8: How is the amount of owner compensation that is eligible for loan forgiveness determined?

Answer: The amount of compensation of owners who work at their business that is eligible for forgiveness depends on the business type and whether the borrower is using an eight-week or 24-week Covered Period. In addition to the specific caps described below, 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. For borrowers that received a PPP loan before June 5, 2020 and elect to use an eight-week Covered Period, this cap is $15,385. If their total compensation across businesses that receive a PPP loan exceeds the cap, owners can choose how to allocate the capped amount across different businesses. The examples below are for a borrower using a 24-week Covered Period.

C Corporations: 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. 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), for borrowers using that form, and do not count toward the $20,833 cap per individual.

Anchin Commentary – C-Corp Owner-Employee: The above section clarifies that Borrowers can include as eligible payroll costs, employer contributions made on behalf of C-corporation owner-employees for health insurance and retirement contributions. This FAQ does not however address the level of ownership required to be considered an owner employee. Some are speculating that 2% is the threshold based on the S Corporations rule below while others feel that any percentage of ownership by an employee would be considered an owner, unless the SBA issues further guidance.

The SBA provided clarification that an owner-employee’s employer funded retirement contributions are capped at 2.5/12 of the 2019 employer retirement contribution. Also, keep in mind that the above specific guidance of a compensation cap of $20,833 is for 24-week filers. The cap for an 8-week filer is still $15,385.

S Corporations: 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 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), for borrowers using that form, and do not count toward the $20,833 cap per individual.

Anchin Commentary – S-Corp Owner Employees: The SBA makes a distinction between S-corporation owner employees who own at least a 2% stake in the business and does not permit employer contributions for health insurance for these individuals, which means these costs are eligible for S-corporation shareholders who own less than 2%.

Self-employed Schedule C or F filers: There is nothing new in the Schedule C/F portion of this FAQ other than the borrower must include their 2019 Schedule C or F when applying for loan forgiveness.

General Partners and LLC Owners: There is no additional guidance in the partnership section of this FAQ.

Loan Forgiveness Nonpayroll Costs FAQs (Questions 1 to 7)

Question #4: Is interest on unsecured credit eligible for loan forgiveness?

Answer: No. Payments of interest on business mortgages on real or personal property (such as an auto loan) are eligible for loan forgiveness. Interest on unsecured credit is not eligible for loan forgiveness because the loan is not secured by real or personal property. Although interest on unsecured credit incurred before February 15, 2020 is a permissible use of PPP loan proceeds, this expense is not eligible for forgiveness.

Anchin Commentary FAQ #4: Although this question and answer are straight forward, the SBA does provide “auto loan” as an example of a mortgage on personal property.

Question #5: Are payments made on recently renewed leases or interest payments on refinanced mortgage loans eligible for loan forgiveness if the original lease or mortgage existed prior to February 15, 2020?

Answer: Yes. 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.

Anchin Commentary FAQ #5: This response should resolve any concern Borrowers had regarding leases or mortgages that were in place prior to February 15, 2020, but had some form of change whether through renewal or refinance.

Question #6: Covered utility payments, which are eligible for forgiveness, include a “payment for a service for the distribution of . . . transportation” under the CARES Act. What expenses does this category include?

Answer: 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. This FAQ includes footnote5, which refers the reader to a url for more information on transportation utility fees – https://www.fhwa.dot.gov/ipd/value_capture/defined/transportation_utility_fees.aspx.

Anchin Commentary FAQ #6: It is not clear if anyone knew what the CARES Act was referring to when “transportation” was listed alongside electricity, gas, water, telephone, and internet access. Well, now we do. Transportation utility fees are charged to businesses primarily by certain local governments to fund roadway maintenance.  However, the SBA still has not addressed why heating oil is not included as a utility, while gas and electricity are included.

Loan Forgiveness Reductions FAQs (Questions 1 to 5)

Question #5: For purposes of calculating the loan forgiveness reduction required for salary/hourly wage reductions in excess of 25% for certain employees, are all forms of compensation included or only salaries and wages?

Answer: For purposes of calculating reductions in the loan forgiveness amount, the borrower should only take into account decreases in salaries or wages.

Anchin Commentary FAQ #5: This seems to clarify that the 25% test on wage reduction includes only the base rate of pay and excludes other compensation including bonuses.

Next Steps

We continue to monitor ongoing updates to the PPP Program. To better understand how the changes impact your unique situation, please contact your Anchin Relationship Partner or our Anchin COVID-19 Resource Team at [email protected].

Disclaimer: Please note this is based on the information that is currently available and is subject to change.