Aug 05 SMALL BUSINESS ADMINISTRATION ISSUES FREQUENTLY ASKED QUESTIONS ON PPP LOAN FORGIVENESS
In a much-anticipated move, the Small Business Administration (SBA), in conjunction with the U.S. Department of Treasury, issued the latest round of frequently asked questions (FAQs) on August 4, 2020. These FAQs, which can be found here, focus on the questions and concerns that borrowers and lenders had as part of the Paycheck Protection Program (PPP) loan forgiveness process.
The FAQs are broken out into the following sections:
- General Loan Forgiveness FAQs (3)
- Loan Forgiveness Payroll Costs FAQs (8)
- Loan Forgiveness Non-Payroll Costs FAQs (7)
- Loan Forgiveness Reductions FAQs (5)
The release of these 23 FAQs brings clarity and guidance to a number of areas. We have highlighted some of the more pressing borrower and lender concerns below, as well as how they were addressed in the FAQs:
Employee Retirement Benefits
- Issue: How does the paid and/or incurred standard impact employee retirement benefits?
- Response: Loan Forgiveness Payroll Cost FAQ #7 stipulates that employer contributions for employee retirement benefits that are paid or incurred during the Covered Period or the Alternative Covered Period qualify for forgiveness. Furthermore, forgiveness is not provided for accelerated retirement benefits from periods outside the Covered Period or the Alternative Covered Period.
S-Corporation Shareholders Health Insurance
- Issue: Are employer health insurance contributions for S-Corporation shareholders valid Payroll Costs?
- Response: As clarified by Loan Forgiveness Payroll Cost FAQ #8, employer health insurance contributions for shareholders owning less than 2% of the corporate stock are eligible Payroll Costs. Borrower health insurance contributions for shareholders owning at least 2% of the stock are ineligible for Payroll Cost inclusion.
Interest on Unsecured Debt Obligations
- Issue: Is interest on unsecured credit eligible for loan forgiveness?
- Response: As the debt is not secured, Loan Forgiveness Non-Payroll Cost FAQ #4 verifies that the interest is not forgiveness eligible. However, interest on unsecured debt is an allowable use of PPP funds.
- Issue: What is included in transportation-related Non-Payroll Costs?
- Response: Loan Forgiveness Non-Payroll Cost FAQ #6 confirms that expenses in this category refer to transportation utility fees assessed by state and local governments. Schedule C filers should note that Interim Final Rule 85 FR 21747 (effective April 20, 2020) indicates gas used for driving business vehicles also qualifies as a PPP-eligible use of proceeds. Broad-ranging applicability in terms of gas-expenditure qualification for non-Schedule C filers has not been clarified.
- Issue: Will seasonal employers undertake different procedures as part of the loan forgiveness process?
- Response: While it does not appear that a separate loan forgiveness application specific to seasonal employers is on the horizon, Loan Forgiveness Reduction FAQ #2 indicates that a seasonal employer that elects to use a 12-week period between May 1, 2019 – September 15, 2019 to calculate its PPP loan amount must use the same 12-week period as the reference period for any potential reductions due to headcount and/or salary/wage decreases.
In addition to the pressing borrower and lender concerns detailed above, the FAQs reiterated and/or recapped certain items as well, including:
25% Salary/Wage Reduction
As long as the hourly wage of the employee is not impacted, Loan Forgiveness Reduction FAQ #4 confirms that a mere reduction in hours would not also result in a reduction in salary and/or hourly wage. Borrowers still need to keep all rehire and salary reduction exceptions front of mind, as if headcount and/or payroll are not restored by December 31, 2020, loan forgiveness could be negatively impacted unless one of the other exceptions apply.
Owner Retirement Benefits
The inclusion of retirement benefits as Payroll Costs for owners, as compared to employees, is different. Loan Forgiveness Payroll Cost FAQ #8 recaps the treatment and limits as follows:
- C-Corporations:5/12 of the 2019 employer retirement contributions
- S-Corporations:5/12 of the 2019 employer retirement contributions
- Self-Employed Schedule C (or Schedule F) Filers: Retirement payments are ineligible for forgiveness.
- General Partners: Retirement payments are ineligible for forgiveness.
Loan Payment Timing
Provided the borrowers submit loan forgiveness applications within 10 months of the close of the Covered Period, General Loan Forgiveness FAQ #3 confirms that loan payments are not required until the lender submits the forgiveness amount to the SBA. As a reminder, interest accrues (to the extent of non-forgiveness) during the time between the disbursement of the loan and the SBA remittance of the forgiveness amounts.
As many borrowers have completed or are nearing completion of the Covered Period and/or have expended all PPP funds, focus has now shifted to loan forgiveness as we await the next round of COVID-19 stimulus. These FAQs, as discussed above, provide clarity in some areas, but still leave us with many unanswered questions, including but not limited to:
- Full-time equivalent (FTE) reductions (including written documentation requirements);
- Tax deductibility of PPP expenses; and/or
- Expansion of eligible PPP proceeds.
While we do anticipate additional FAQs and/or governmental guidance to cover some of these open items, be sure to tune into our Special Webinar on August 10, 2020 at 10 AM (Click here to register) for additional information on these FAQs.
Sax will continue to update you as further details are made available. Reach out to your Sax advisor or email [email protected] with questions. For more and on-going information relative to your state and business, visit Sax’s COVID-19 Resource Center.