The Small Business Administration (SBA) has released new FAQ guidance regarding loan forgiveness for Paycheck Protection Program (PPP) loans. SBA’s interim rules and FAQs, along with forms, are available at: https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses.
The general idea of PPP loans is that they become government grants if the borrower spends the principal amount of a loan on the correct sorts of expenses, mostly payroll, during specific periods. To reach the point where a borrower does not have to pay back the loan, a borrower must deliver to its lender an application for loan forgiveness. The forms are available at the web site shown above.
A borrower must submit its loan forgiveness application within 10 months of the completion of the Covered Period, as discussed below. If the application is submitted on time, the borrower is not required to make any payments until the time the SBA remits the forgiveness amount to the lender. If the loan is fully forgiven, the borrower is not responsible for any payments. If only a portion of the loan is forgiven, or if the forgiveness application is denied, the borrower must repay any remaining balance of principal and accrued interest on or before the loan’s maturity date. Interest accrues during the time between the loan’s disbursement and the SBA’s remittance of the forgiveness amount.
Initially, the lender reviews the forgiveness application and makes a determination as to whether the borrower spent the principal amount in a manner that justifies loan forgiveness. Then, the lender passes the information along to the SBA, which then makes its own determination. If the SBA makes a determination favorable to the borrower, the SBA sends the amount of the loan to the lender along with a notice of the decision. If the determination is less favorable to the borrower – some or none of the loan is to be forgiven – the SBA tells the lender, and the borrower must then start to repay the loan.
The lender is responsible for notifying the borrower of the SBA’s remittance of the loan forgiveness amount (or that the SBA determined that no amount of the loan is eligible for forgiveness) and the date on which the borrower’s first payment is due, if applicable.
In making an application for forgiveness, the borrower is responsible for providing correct information, along with supporting evidence. The new FAQ includes several specific and detailed explanations as to how to make the calculations required as part of the forgiveness application.
For example, in determining how much payroll expense counts toward forgiveness, the SBA advises that, for purposes of calculating cash compensation, borrowers should use the gross amount before deductions for taxes, employee benefits payments and similar payments, rather than the net amount paid to employees. The SBA advises that payroll costs include all forms of cash compensation paid to employees, including tips, commissions, bonuses and hazard pay. However, forgivable cash compensation per employee is limited to $100,000 on an annualized basis.
In addition, expenses for employee group health care benefits that the borrower paid or incurred are also payroll costs eligible for loan forgiveness. Amounts that the employees paid do not count as eligible expenses. There is a special rule for such health-related expenses paid for owners.
Similarly, contributions for employee retirement benefits that the borrower paid or incurred during the Covered Period or Alternative Payroll Covered Period qualify as “payroll costs” eligible for loan forgiveness. An employer’s 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.
Some non-payroll costs also may be credited toward loan forgiveness. Payments of interest on business mortgages on real or personal property (such as an auto loan) are eligible for loan forgiveness. However, interest on unsecured credit is not eligible for loan forgiveness. 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.
Similarly, a borrower may also count toward loan forgiveness payments made on recently renewed leases or interest payments on refinanced mortgage loans if the original lease or mortgage existed prior to February 15, 2020.
Like so many aspects of life, the timing of the payments is critical. Four separate time periods must be taken into account.
- One way to measure the “Covered Period” is the 24-week (168-day) period beginning on the PPP loan disbursement date (the date when the bank credited the loan proceeds to the borrower). For example, if the borrower is using a 24-week Covered Period and received its PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, October 4. In no event may the Covered Period extend beyond December 31, 2020.
- On the other hand, if the borrower received its PPP loan before June 5, 2020, the borrower may elect to use an eight-week (56-day) Covered Period that begins on the disbursement date.
- Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the 24-week (168-day) period (or for loans received before June 5, 2020, at the borrower’s election, the eight-week (56-day) period) that begins on the first day of their first pay period following the PPP loan disbursement date (i.e., the “Alternative Covered Period”). For example, if the borrower is using a 24-week Alternative Payroll Covered Period and 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, October 10.
- For certain kinds of expenses, such as health plan insurance premium payments and utility payments, the period begins on the last day of the applicable 168-day or 56-day period and ends on the next following scheduled payment date.
The first time period is relevant, for example, in a situation where the borrower incurred payroll costs during the Covered Period or the Alternative Payroll Covered Period and paid those costs after the Covered Period or the Alternative Payroll Covered Period. If the borrower paid those payroll costs on or before the next regular payroll date after the Covered Period or Alternative Payroll Covered Period, then those payroll costs may be counted toward the forgiven amount.
The first and second time periods are relevant, for example, in the circumstance where the borrower wants to include non-payroll costs in the loan forgiveness calculation. Eligible business mortgage interest costs, eligible business rent or lease costs, and eligible business utility costs incurred prior to the Covered Period and paid during the Covered Period are also eligible for loan forgiveness. For example, if a borrower has paid an electric bill during the relevant 168-day or 56-day period based on electricity usage prior to the period, that utility payment may be counted toward loan forgiveness.
The fourth time period is relevant, for example, in this circumstance: 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” that may be counted toward the forgiveness amount so long as the borrower paid those premiums during the applicable period or by the next premium due date after the end of the applicable period. Similarly, a borrower uses electricity during the relevant 168-day or 56-day period but pays the electricity bill on time at the next payment date after the end of the period; that utility expense may be counted toward loan forgiveness.
Non-payroll costs, such as electricity, paid or incurred during the relevant 168-day or 56-day period are the costs that matter to loan forgiveness, regardless of whether the borrower uses the Alternative Payroll Covered Period for payroll costs.
The PPP loan program treats owner compensation eligible for loan forgiveness distinctly. The FAQs explain amounts of compensation of owners who work at their businesses that are eligible for forgiveness based on the business type (S corp, C corp, LLC or general partnership) and whether the borrower is using a 168-day or 56-day Covered Period. In addition to specific caps, 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 a 56-day Covered Period, this cap is $15,385. Owners can choose how to allocate the capped amount across different businesses if compensation across businesses that receive PPP loans exceeds the cap.
We will continue to monitor the PPP FAQ’s and provide updates as applicable.
For more information on the PPP program, please see our earlier post “Key Points of the Paycheck Protection Program Flexibility Act.”