Expertise Beyond the Numbers

SBA Issues Long-Awaited FAQs on PPP Loan Forgiveness

Updated 8/12/2020 at 8:44pm ET

On August 4th, SBA released guidance that has been expected since the end of June on Paycheck Protection Program (PPP) loan forgiveness. The release includes Frequently Asked Questions (FAQs) and provides some definitional guidance around expenses eligible for forgiveness, timing issues, and more. In addition, in late July, the SBA issued a procedural notice to lenders participating in the PPP, which will be of interest to borrowers.

SC&H’s Key Takeaways

  • No payments on PPP loans are required until the forgiveness amount is known and submitted to the lender by the SBA. Interest accrues at 1% from the date of loan disbursement on any unforgiven loan amounts.
  • Payroll costs paid or incurred during the covered period are eligible for forgiveness. This means that many borrowers will have more than either 8-or-24-weeks of payroll included in their forgiveness calculations, confirming what we have previously communicated.
  • Prepaid health care and retirement benefits will not be eligible for forgiveness.
  • More than 8-or-24-weeks of nonpayroll costs may be eligible for forgiveness – just as payroll costs are eligible if paid or incurred during the covered period.
  • Interest expense is forgivable only on debts secured by business assets.
  • Forgivable transportation expenses seem to be only for utility transportation distribution fees assessed by state and local governments (as well as business vehicle fuel as outlined in previous guidance).
  • The SBA’s platform for accepting loan forgiveness applications is scheduled to be available to lenders on August 10th.

In issuing this long-awaited guidance, the SBA answers a few key questions, though as we have come to expect, the FAQs create additional questions and do not answer all the key open issues.

Let’s break down what the FAQs tell us and what issues remain open.  But first, we refer you to previous articles on PPP forgiveness here and here for background as we take a deeper dive into the guidance itself.

Mechanical Issues

The FAQs confirm that sole proprietors, self-employed, and independent contractor borrowers without any employees may file the EZ loan forgiveness application.  In addition, the lender guidance issued in July informed us that the SBA has partnered with a fintech provider to create a secure SaaS platform for the SBA to accept loan forgiveness applications, related documentation, issue loan forgiveness decisions and requests for payments.  The SBA will be accepting scanned copies of applications and related documents and certifications.  This portal should be available beginning August 10th.  It remains to be seen when banks will be ready to accept loan forgiveness applications, as they likely need to digest and program their processes based upon this August 4th guidance.

No payments on PPP loans will be required until the forgiveness amount is remitted to the lender by the SBA, assuming the application is timely filed – within 10 months of the completion of the borrower’s covered period.  Interest will accrue at 1% from the loan date until any unforgiven amount is paid. This means that while the bank is reviewing your forgiveness application and awaiting SBA payment to pay off or pay down the loan, borrowers will not need to make any payments. Given that there are millions of PPP loans in place, the process could take some time, so this guidance affirms that no cash outlay is required until the loan forgiveness process is complete.

Payroll Costs

In providing two examples directly on point, the SBA confirmed that payroll incurred before the 8- or 24-week covered period and paid during the covered period will be eligible for forgiveness.  In addition, payroll incurred during the covered period but not paid until the pay date immediately following the covered period will also be allowed.  This means many borrowers will have more than either 8 or 24 weeks included in their forgiveness calculations – as a result, when combined with the option of extending the covered period to 24-weeks and dropping the payroll ratio amount to 60%, most borrowers should achieve 100% forgiveness (unless, of course, reductions apply due to staffing or pay cuts).

In addition, the SBA confirms previous guidance which specifically limits the use of the Alternative Payroll Covered Period to borrowers who have a biweekly or more frequent payroll cycle. The Alternative Payroll Covered Period allows eligible borrowers to synchronize their covered period for payroll cost purposes to their biweekly payroll period, which may allow some borrowers to maximize the amount of payroll includable in forgiveness calculations. This option is not available to borrowers who pay twice a month or less frequently.

The SBA also confirmed that when calculating cash compensation, the gross amount is utilized, not the net, and compensation such as bonuses, hazard pay, tips, and commissions are within the definition of cash compensation, all subject to the limit of $100,000 per employee on an annualized basis.

Business Owner Compensation and Benefits 

Depending on the type of entity in which the business operates, the definition of eligible owner compensation will vary.  Borrowers with multiple businesses that have PPP loans only receive one overall cap on their compensation, and the SBA is allowing borrowers to allocate said compensation as they deem reasonable.  The chart below updates our previous guidance and assumes the borrower has a 24-week covered period.

*For S corporation shareholder-employees who own 2% or more of the borrowing business, health care costs are not includible in eligible non-cash compensation, and the same holds true for employees who are related to the owner.

Nonpayroll Costs

The FAQs confirm that nonpayroll costs that were incurred prior to the covered period but paid in the 8 or 24 weeks covered period will be eligible for forgiveness.  You will not need to pro-rate amounts for portions incurred before the covered period.  Similarly, if a nonpayroll expense is incurred during the covered period but paid in the next billing cycle outside the covered period, it is includable.  This may allow more than 8 or 24 weeks of expenses to be factored into your forgiveness calculation.

  • Interest on unsecured debt is not eligible for loan forgiveness; only interest paid on debt that is secured by real or personal property of the business is eligible. Interest paid on loans in existence before February 15, 2020, that was refinanced after February 15, 2020, is eligible.  An open question here is whether interest on a loan balance has increased since February 15, 2020, such as a line of credit, will count?  To be conservative, we would think only the interest on the balance in place at February 15, 2020, would be eligible, but perhaps clarification may be provided in the future.  Similarly, leases in place at February 15, 2020, that renew after that date are deemed to be extensions of the previous lease, and thus, rental payments under that lease would be forgivable expenses.  Again, an open question here would be whether, if the lease renewal included adding more space, the entire lease payment would qualify?  Also, are CAM charges includable as rent?
  • Transportation – previously, we have waited for definitional guidance on utility costs, which included transportation costs. Prior SBA guidance indicated fuel used by business vehicles would be an eligible expense.  The newly issued FAQs clarify that the term “transportation” in the definition of utility costs is a specific reference to fees of state and local governments for the distribution of transportation of utilities, and are includible.
  • Charges for both electricity usage and supply will be eligible utility costs
  • Health care costs eligible for forgiveness include expenses related to dental and vision benefits

The SBA also specifically confirms that the use of the Alternative Payroll Covered Period by eligible borrowers (as mentioned above) does not change the covered period for purposes of computing eligible nonpayroll costs.

Loan Forgiveness Reductions

As outlined in previous SBA guidance, if an employer attempts to rehire an employee who refuses that job offer or if they cannot locate a qualified employee to fill an open position, this will not negatively impact their forgiveness calculation.  The employer must document these issues and notify the state unemployment office of a furloughed employee’s refusal of an offer to return to work.

The FTE reduction calculation does include employees who earned more than $100,000 in 2019, and their compensation should be included in Table 1 of the PPP Schedule A.  Pay reductions to these same employees do not negatively impact forgiveness calculations.

For purposes of calculating salary and wage reductions of more than 25%, borrowers should only include those forms of compensation and not bonuses, commissions, etc.  This is helpful guidance as many employers will have reduced employee bonuses and commissions in 2020 due to the business environment, but as long as base salary and wage rates have remained at 75% or more of the previous levels, there should be no wage reduction impact.

Open Issues

As we have become accustomed to, we receive guidance that answers ten questions and creates five new ones.  Here are the key areas of guidance we believe remain outstanding as borrowers begin to turn toward putting together their forgiveness applications and analysis:

  1. Tax treatment of forgiven expenses – Congress is debating additional COVID-19 relief for the nation, and included in their thinking is a provision that would make loan forgiveness tax free and the expenses deductible. Stay tuned – and for Maryland employers – expect a decoupling modification to make these expenses nondeductible in Maryland if Congress does allow the deductions.  The timing of when loan forgiveness creates the loss of the deductions is another key issue here as it relates to 2020/2021 tax planning.
  2. There was talk that borrowers of a certain loan size, perhaps $150,000 or less, would not even have to apply for forgiveness. About 3 million of the 4.5 million loans were for less than $50,000. Secretary Mnuchin seemed to be in favor of this, but Congressional action would be required.
  3. Utility costs – it would be helpful to have more detailed information on what is and is not included here. For now, telephone, internet, electricity, water, gas, and business vehicle fuel are eligible.

Please let your SC&H team know if you have questions, and keep our Coronavirus Resource Center bookmarked for updates on PPP loan guidance and legislative relief we expect Congress to provide in the near future.

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