UPDATED June 4, 2020 – PPP Loan Recipients Receive Some Guidance on Forgiveness by Andrew Leonard, CPA
On May 15, the Small Business Administration (SBA) released the application form businesses must use to request forgiveness of Paycheck Protection Program (PPP) loans they applied for and received in the wake of COVID-19 crisis. Although the form helps to clarify some issues that businesses were hoping would help them calculate loan forgiveness, its 11 pages leave applicants with several other additional unanswered questions.
The PPP, introduced by the CARES Act, allocates nearly $670 billion to help eligible small businesses maintain their workforce and improve cash flow to cover payroll costs and certain other business expenses through an eight-week COVID-19 crisis period. When loan recipients meet certain requirements, such as using no less than 60 percent of loan proceeds for payroll expenses, they may qualify to have all or a portion of their loans forgiven. Any unforgiven amount must be repaid over five years at an interest rate of 1.0 percent.
Some of the issues clarified by the SBA’s Form 3508, Paycheck Protection Program Loan Forgiveness Application, include the following:
- Borrowers that pay workers biweekly or more frequently may opt to use an alternate 24-week payroll coverage period that begins on the first day of their first pay period following their PPP loan disbursement date rather than standard coverage period, which begins on the day they receive PPP funding.
- Borrowers with loans exceeding $2 million must check a box to re-certify they meet the small business affiliate rules and accepted the loan out of an “economic necessity” to maintain their operations.
- Payroll costs eligible for loan forgiveness must have been paid or incurred during a borrower’s 24-week covered period or alternate covered period. To provide borrowers with flexibility, the SBA defines the “paid date” as the day an employer issues a paycheck or originates an Automated Clearing House (ACH) credit transaction for direct deposit. The date employers “incur” payroll costs is defined as the day an employee works to earn that pay.
- 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 alternate coverage period. Therefore, one can expect that an individual employee’s salary during the 24-week covered period will not be able to exceed approximately $45,000.
- Nonpayroll costs eligible for forgiveness, including rent, mortgage interest and utilities, must have been 1) paid during the covered period or alterative covered period, or 2) incurred during the covered period or alternate coverage period and paid on or before the next regular billing date, even if that date occurs after the covered period. Borrowers’ nonpayroll costs cannot exceed 40 percent of the total forgiveness amount.
- For purposes of calculating a borrower’s loan forgiveness based on any reduction to its full-time equivalent employee (FTEs) during the covered period or alternate coverage period, FTE is calculated by taking each employee’s average number of hours paid per week, dividing that number by 40, and rounding the total to the nearest tenth. The maximum for each employee is capped at 1.0. Alternatively, borrowers may use 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.
A borrower’s loan forgiveness amount will be reduced when the average weekly number of FTE employees during the covered period was less than during the borrower’s chosen reference period. However, the application notes that, for purposes of calculating loan forgiveness, borrowers do not need to consider reductions of FTE in which they 1) made a good-faith, written offer to rehire an employee during the covered period that the employee subsequently rejected; 2) fired any employees for cause; or 3) had any employees who voluntarily resigned or requested and received a reduction of their work hours.
Moreover, an FTE safe harbor provides an exemption for certain borrowers from the loan forgiveness reduction when they meet the following conditions: 1) they reduced FTE employee levels in the period beginning Feb. 15, 2020, and ending April 26, 2020; and 2) they then restored their FTE employee levels by Dec. 31, 2020, to the same employee level during the pay period that included Feb. 15, 2020.
- A borrower’s loan forgiveness may also be reduced when employee salaries and hourly wages during the covered period or alternate coverage period are more than 25 percent less than salaries and wages paid during the period from Jan. 1, 2020, to March 31, 2020. However, borrowers who restore salaries and wages to pre- April 26, 2020, levels by Dec. 31, 2020, may avoid any salary reductions to loan forgiveness.
Some of the information contained in the newly introduced PPP loan forgiveness application and instructions may come as a surprise to borrowers as they attempt to calculate loan forgiveness. These include the following points:
- FTE calculations should be based on a 40-hour workweek, rather than 30 hours;
- Business owners’ compensation replacement may not exceed the amount they earned in 2019, based on their Form 1020 Schedule C; and
- Businesses should track expenses on an accrual basis rather than a cash basis since expenses incurred during the covered period are eligible for forgiveness even when borrowers pay those costs outside of the 24-week covered period, provided payments are made during the next payment period.
There is no doubt that PPP loan recipients will need to jump through a few hoops and maintain meticulous records to qualify for maximum loan forgiveness. It is critical for business owners to work with their business advisors and tax accountants to ensure they meet all the program’s requirements and avoid regulatory scrutiny.
About the Author: Andrew Leonard, CPA, is a director with Berkowitz Pollack Brant’s International Tax Services practice, where he provides tax structuring, pre-immigration planning and a wide array of international tax and consulting services to international companies, entrepreneurs, families and foreign trusts. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or firstname.lastname@example.org.