The SBA Releases the Paycheck Protection Program Loan Forgiveness Application
By Michael Maksymiw, Partner, Tax & Business Services (SBA Task Force)
On May 15, 2020, the Small Business Administration (SBA) released the Paycheck Protection Program (PPP) Loan Forgiveness Application.
The PPP Loan Forgiveness Application and its related instructions provide answers to several outstanding questions to assist borrowers when planning the spending related to their PPP loan proceeds during the 56-day (8-week) Covered Period. It is expected that more nuanced questions may be addressed in additional releases by the SBA.
The following summary outlines what are considered eligible payroll costs, non-payroll costs, loan forgiveness reductions, and the necessary required consistency in maintaining and submitting tax documents as described within the PPP Loan Forgiveness Application.
Payroll Costs: wages, health insurance, retirement, and employer-level state taxes
Eligible payroll costs include payroll costs paid and incurred during the Covered Period, which is the 8-week period commencing on the date the business owner receives the PPP funds from a financial institution. Payroll costs are considered incurred on the day the employee’s pay is earned. In addition, payroll costs incurred during the 8-week period and paid on or before the next regular payroll date are eligible for forgiveness. This means that each payroll paid during the 8-week period counts toward forgiveness, as do the payroll costs incurred during the last pay period of the 8-week period that are paid in the first regular payroll period after the 8-week period.
Borrowers who pay their employees bi-weekly or more frequently also have the option to elect an Alternative Payroll Covered Period. This period begins with the first day of the employee’s pay period, following the date the loan proceeds are received. In other words, if a borrower receives its loan proceeds on April 20 and the first day of the next payroll period begins on April 26, the borrower may begin the calculation of eligible wages as of April 26. For wage purposes only, the 56-day Covered Period starts then. This alternative calculation does not apply to eligible non-payroll costs (which are discussed below).
Wages are considered paid on the day paychecks are distributed or the day the borrower originates an ACH transaction. The maximum payroll for any one individual during the 8-week period is $15,385.
Owner-employees, self-employed individuals, and self-employed partners’ maximum compensation is 8/52 of 2019 compensation, capped at $15,385 per individual. This means that owners cannot increase their pay during the 8-week period above their 8-week average pay for 2019 and have that increase count toward forgiveness.
There is presently no guidance related to wages for relatives, spouses, or children of owners. It appears that these wage costs will count toward forgiveness. (There may be additional guidance issued in the future that could clarify this further).
The application and guidance do not include any limit on increasing employees’ wages; therefore, it appears that employee wage increases are allowed.
Eligible costs include costs that are paid or incurred during the 8- week Covered Period. These costs include self-insurance programs and employer-sponsored group health plans, reduced by employee contributions. It appears that accrued costs paid during the 8-week period will count toward forgiveness. (There may be additional guidance that may clarify this).
Eligible costs include costs paid or incurred during the 8-week Covered Period. There does not appear to be any limitation on retirement contributions, including accrued costs, paid during the 8-week period. This may be an opportunity for companies to pay 2019 accrued retirement contributions during the 8-week period and have those retirement costs count toward the 75% payroll cost threshold. (There may be additional guidance that could further clarify this interpretation).
Employer-level State Taxes
Eligible costs include amounts paid by the borrower assessed on employee compensation. This appears to include state-level employer taxes paid by the borrower through a payroll company, rather than only taxes paid to the state agency. State withholding taxes are not included. (Additional guidance could clarify this).
Non-Payroll Costs: Rent, Mortgage Interest and Utilities
Non-payroll costs must be paid or incurred during the 8-week covered period and paid on or before the next regular billing date, even if that falls outside of the 8-week period. Non-payroll costs may not be pre-paid, but it does appear that accrued costs may be allowed.
For practical purposes, it appears that non-payroll costs paid during the 8-week Covered Period may be included as part of the loan forgiveness application, in addition to any portion incurred during the 8-week period that is paid with the first bill following the 8-week period.
Borrowers can elect to exclude any amount of non-payroll costs as part of their loan forgiveness application.
Eligible costs include rent or lease payments pursuant to an obligation in force prior to February 15, 2020, for real or personal property. It appears that vehicle and equipment leases will be considered eligible rental costs.
Eligible costs include interest on any business mortgage obligation in place before February 15, 2020, for real or personal property. It appears that interest on loans for vehicles and equipment will be considered eligible interest expenses.
Eligible costs include electricity, gas, water, telephone, internet, and transportation costs where service began before February 15, 2020. There is still no guidance regarding what costs are included as “transportation,” other than gas for business vehicles, which was indicated in previous guidance.
Loan Forgiveness Reductions
Full Time Equivalents (FTE)
The FTE calculation uses a 40-hour workweek as a base. Any employee working more than 40 hours counts as one employee. Any employee working less is a fractional employee, calculated using a 40-hour denominator, rounded to the nearest tenth. Borrowers can also elect to count all part-time employees as 1/2-FTE.
For employers who have not reduced the number of employees or average paid hours of employees between January 1, 2020, and the end of the Covered Period, there is no FTE reduction, and the look-back period does not apply.
To calculate if FTE during the 8-week Covered Period was reduced, the borrower will need to compare FTE to the look-back period chosen by the borrower (either January 1 – February 29, 2020, or February 15 – June 30, 2019). Any reduction in FTE during the 8-week period will decrease the loan forgiveness proportionately, with a few exceptions.
FTE is not reduced for any employee who:
- Receives a good-faith written offer of employment that is rejected.
- Was terminated for cause.
- Voluntarily resigned.
- Voluntarily requested a reduction of hours.
FTE Safe Harbor – If the average FTE from February 15 – April 26, 2020, is less than the FTE on February 15, 2020 (because FTE was reduced during this period), and the June 30, 2020, FTE is greater than or equal to the February 15, 2020, FTE, loan forgiveness does not need to be reduced for this calculation. If the average FTE from February 15 – April 26, 2020, is more than the FTE on February 15, 2020, this safe harbor cannot be used.
The wage reduction calculation is computed on an employee-by-employee basis. Employees who earned more than $100,000 annualized during any pay period in 2019 are excluded from this calculation. This means that if a weekly employee earned more than $1,923.08 in any 2019 pay period, s/he is excluded from the wage reduction calculation.
For all other employees, individual wages earned from January 1 – March 31, 2020, should be annualized. Multiply this number by 75% for each employee. Next, annualize the individual employee’s wages for the 8-week Covered Period. If the 8-week annualization is more than 75% of the first calculation, there is no wage reduction. If the 8-week annualization is less, use 8/52 of the annualized dollars that are below 75% of the first calculation to reduce the loan forgiveness.
Wage Reduction Safe Harbor – If the employee’s annualized wages from February 15 – April 26, 2020, are less than the annualized wages on February 15, 2020 (because wages were reduced during this period), and the employee’s June 30, 2020, annualized wages are greater than or equal to the employee’s February 15, 2020, annualized wages, loan forgiveness does not need to be reduced for this calculation. If the employee’s annualized wages from February 15 – April 26, 2020, are more than the employee’s annualized wages on February 15, 2020, this safe harbor cannot be used.
Consistency with Tax Documents
Borrowers certify on the PPP loan application that their tax documents are consistent with their tax filings with the IRS and state agencies. For example, a Schedule C that excludes bonus / Section 179 depreciation for loan forgiveness purposes, but includes bonus / Section 179 depreciation for tax filing purposes, cannot be submitted.
The PPP Loan Forgiveness Application provides borrowers with a foundation for planning and compliance in the use of their loan proceeds. Borrowers will undeniably have their own specific situations that will still need to be addressed with their banks and advisors. Applying the above interpretation of the PPP Loan Forgiveness Application will be the best path forward as we wait for any additional information from the SBA.
If you have any questions concerning the application or this update, please contact your Marcum Tax Professional or a member of the Marcum SBA Task Force at firstname.lastname@example.org.
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