SBA Issues Additional PPP Loan Forgiveness Guidance

The SBA has published additional guidance regarding the forgiveness of Paycheck Protection Program (PPP) loans. The new FAQs clarify previous SBA guidance, provisions of the CARES Act and the PPP loan forgiveness application.

Loan Forgiveness Generally

No payments are due until the forgiveness amount is remitted by the SBA to the lender. The lender must notify a borrower of the remittance date and, with respect to an amount that is not forgiven, the date on which the first payment is due. Interest accrues during the period from the loan disbursement date to the date the SBA remits the forgiveness amount to the lender. Interest is paid only with respect to the portion of the loan that is not forgiven.

Payroll Costs

• Timing of Payment of Payroll Costs. Payroll costs incurred during, but paid after, the Covered Period or Alternative Covered Period (each, an “Applicable Covered Period”) are eligible for forgiveness if such costs are paid on or before the next regular payroll date after the Applicable Covered Period. Payroll costs incurred before the Covered Period and paid during the Covered Period also are eligible for forgiveness.^[1] The Covered Period is the 8-week or 24-week period following the loan disbursement date.^[2] The Alternative Covered Period is the 8-week or 24-week period following the first day of the first pay period following the loan disbursement date.^[3]
• Partial Pay Periods. If a borrower’s payroll cycle is twice per month, or less frequent, the Borrower is not eligible to use the Alternative Covered Period and will need to calculate payroll costs for partial pay periods.
• Calculation of Cash Compensation. Borrowers should use the gross amount paid to employees before deductions for taxes and employee benefits payments when calculating cash compensation for purposes of completing the forgiveness application. Eligible payroll costs include (in addition to salary or wages) lost tips, lost commissions, bonuses and hazard pay, up to $100,000 per employee on an annualized basis.
• Group Healthcare Costs. Employer expenses for employee group healthcare plans that are paid or incurred during the Applicable Covered Period are eligible for forgiveness. Group healthcare expenses paid by employees (e.g., the employee’s portion of their healthcare premium) are not forgivable payroll costs. Group healthcare premiums paid or incurred during the Applicable Covered Period are eligible for forgiveness only if such premiums are paid during the Applicable Covered Period or on or before the next premium due date. This means that any prepaid premiums are not eligible for forgiveness.
• Retirement Contributions. Employer contributions for employee retirement benefits paid or incurred during the Applicable Covered Period are eligible for forgiveness, but contributions deducted from employee pay or otherwise paid by employees are not.
• Owner Compensation. The amount of compensation paid to the owner-employee of a borrower that is eligible for forgiveness depends upon the type of entity and whether the borrower elects to use an 8-week or 24-week Applicable Covered Period.
  • C-Corporations: 2.15/12 of the owner-employee’s 2019 cash compensation (up to $20,833 for a 24-week Applicable Covered Period, or $15,0385 for an 8-week Applicable Covered Period) plus 2019 employer paid state and local taxes, employer paid healthcare contributions and 2.5/12 of employer paid retirement contributions.
  • S-Corporations: 2.15/12 of the owner-employee’s 2019 cash compensation (up to $20,833 for a 24-week Applicable Covered Period, or $15,0385 for an 8-week Applicable Covered Period) plus 2019 employer paid state and local taxes and 2.5/12 of employer paid retirement contributions. For borrowers that are S-corporations, employer paid healthcare contributions are eligible for forgiveness only if the owner-employee has less than a 2% stake in the borrower.
  • General Partners: 2.5/12 of the owner-employee’s 2019 net earnings from self-employment (reduced by Section 179 deductions, unreimbursed partnership expenses and depletion) if payments to partners were made during the Applicable Covered Period. State and local tax, health insurance and retirement contributions are not eligible for forgiveness.

Nonpayroll Costs

• Timing of Payment of Nonpayroll Costs. Eligible nonpayroll costs (mortgage interest, rent and utility payments) incurred before, but paid during the Covered Period, are eligible for forgiveness. Eligible nonpayroll costs incurred during, but paid after the Covered Period, are eligible for forgiveness if paid on or before the next regular billing date. Note that the Alternative Covered Period cannot be used for purposes of calculating nonpayroll costs, even if the borrower elects to use the Alternative Covered Period for purposes of calculating payroll costs.
• Interest on Unsecured Debt. Borrowers can use PPP loan proceeds to pay interest on unsecured credit incurred before February 15, 2020, but such expenditures are not eligible for forgiveness.
• Renewed Leases or Refinanced Debt. Lease payments made under a renewed lease and interest payments made on refinanced mortgage loans are eligible for forgiveness if the original lease or mortgage existed prior to February 15, 2020.
• Clarification of Transportation Costs. The definition of utility payments in the CARES Act includes “transportation costs,” and the SBA has now clarified that “transportation costs” are transportation utility fees assessed by state or local governments.^[4]
• Electricity Costs. Electricity costs eligible for forgiveness include supply charges, distribution charges and other charges such as gross receipts taxes, even if those amounts are charged on separate bills.

Loan Forgiveness Reductions

• Rejected Employment Offers. For purposes of determining a reduction in full-time employees, borrowers should not include employees who were laid off and rejected the borrower’s rehire offer. Borrowers must notify the state unemployment insurance office of such a rejection within 30 days of the rejection. Borrowers should maintain written documentation of the offer, the employee’s rejection and efforts to hire a similarly qualified individual, which will be used to supplement the forgiveness application.
• Seasonal Employers. Seasonal employers must use the same 12-week reference period in 2019 and 2020 for purposes of calculating any reductions to the forgiveness amount.
• 2019 Compensation in Excess of $100k. For purposes of calculating the full-time employee reduction, borrowers should include employees who earned in excess of $100,000 in 2019.
• Compensation Reductions and Forgiveness Reductions. If a Borrower reduced the salary or wages of a covered employee^[5] more than 25% during the Applicable Covered Period, the forgiveness amount is reduced by the compensation reduction in excess of 25%, unless the reduction is corrected prior to the earlier of the last day of the Applicable Covered Period or December 31, 2020. A reduction that is 25% or less than the employee’s salary or wages will not reduce the eligible forgiveness amount.
• Calculating Salary/Wage Reduction. When calculating reductions to the forgiveness amount based upon reductions in compensation, only reductions in salaries or wages should be used.

____________________

[1] This scenario is not applicable to Borrowers who elect to use the Alternative Covered Period because the Alternative Covered Period begins on the first day of the first pay period and, as a result, no payroll costs would be incurred prior to the Alternative Covered Period.

[2] Borrowers who received loan proceeds prior to June 5, 2020, can elect to use the original Covered Period, which is the 8-week period following the loan disbursement date.

[3] The Alternative Covered Period is an option for Borrowers with biweekly, or more frequent, payroll schedules. Borrowers who received loan proceeds prior to June 5, 2020, can elect to use the original Alternative Covered Period, which is the 8-week period following the first day of the first pay period following the loan disbursement date.

[4] See Transportation Utility Fees

[5] “Covered employee” means an employee employed by the Borrower during the Applicable Covered Period, with a principal place of residence in the U.S. and annualized compensation less than or equal to $100,000 for all pay periods in 2019.