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SBA Still Silent on Important Details of PPP Loan Forgiveness

The SBA was expected to issue additional guidance on PPP Loan Forgiveness rules on or before April 26, 2020. However, as of today, April 30, 2020, 11:00 am EST there has been no official guidance posted by the Treasury or SBA relating to the specific details of PPP loan forgiveness. In this blog spot, we will share the facts that are known based on the initial guidance provided and certain questions we want further clarification on. We intend to cover this in more detail during our upcoming webinar this coming Tuesday, May 5th, at 11:00am est- please click here to register for the webinar.

What We Know

What is certain is that that amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest. That is, the borrower will not be responsible for any loan payment if the borrower uses all of the loan proceeds for forgivable purposes and employee and compensation levels are maintained (as further detailed throughout this blog post).

The actual amount of loan forgiveness will depend, in part, on the total amount of payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020, over the eight-week period following the date of the loan. However, not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs. Meaning, at least 75 percent of the expected forgiveness amount shall be for payroll costs.

What happens if PPP loan funds are misused? If you use PPP funds for unauthorized purposes, SBA will direct you to repay those amounts (perhaps immediately).  If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud. If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.

 What we want further clarity on:

There are plenty of valid, detailed questions borrowers have asked. Below are the summary of questions borrowers and their advisors would like the Treasury and SBA to answer specifically and clarify:

Questions regarding the actual forgivable costs incurred and payments made during the Covered Period:

  • Does a particular cost need to be both “incurred” and “paid” during the Covered Period or can such costs be incurred during the period and paid after the period, or vice versa?
  • Can a cost incurred prior to the Covered Period (such as payroll costs for part of a payroll period that began before the start of the Covered Period) which is paid during the period qualify for forgiveness?
  • Can a cost incurred during the Covered Period but not paid until after the Covered Period (such as payroll costs for a payroll period ending after or lease payments not due and payable during the Covered Period) qualify for forgiveness?
  • Whether rent paid to a related party of the borrower is forgivable is an open issue, although the CARES Act and current guidance do not expressly differentiate between third party and affiliated payments.

Questions regarding the reduction of loan forgiveness due to reduction of headcount or compensation:

  • How do we calculate the number of FTEs? Is it based on hours? How do we aggregate part-time employees? The SBA appears to treat a full-time employee as any employee who is employed on average at least 30 hours/week, and that an FTE is a combination of employees, each of whom is not full-time because they do not work at least 30 hours/week, but who, in combination, are counted as the equivalent of a full-time employee.
  • Its been said that Reductions in the number of FTE employees, or reductions in salary or wages, that occurred between Feb. 15, 2020, and April 26, 2020, will not reduce the loan forgiveness amount if, by June 30, 2020, the borrower eliminates the reductions. What are the details and specifics of this rehire solution? Is it as simple as rehiring the day before, June 29th? How long does that employee have to remain on payroll after June 30th for it to count towards loan forgiveness?
  • Do borrowers have to factor in headcount reductions if the employee quits or the reasons for the reduction are unrelated to COVID-19?

Other general questions about loan forgiveness:

  • The debt forgiveness is tax-free to borrowers, but can they deduct the forgiven expenses even though the government effectively paid them?
  • What happens to the portion of the PPP loan that were not used during the 8-week period? Must they be immediately returned upon 8 weeks? Or does that portion convert to the 2-year loan? Meaning, if the PPP loan was $100,000, and we only ended up using $80,000 during the covered period, will that remaining $20,000 be part of the 2 year loan or must those funds be repaid immediately.

More details on what we know:

Q: What costs paid with PPP Loan proceeds may be eligible for loan forgiveness?

Answer: A borrower of a PPP Loan will be eligible for forgiveness of that portion of the PPP Loan equal to the sum of “costs incurred and payments made” during the eight-week period following the first date the PPP Loan was disbursed (the “Covered Period”) for:

  • Payroll costs that are eligible for loan forgiveness include:
    • Salary, wages, commission or similar compensation (recent SBA guidance states that payroll costs include all cash compensation, including a housing stipend or allowance)
    • Payments for vacation, parental, family, medical or sick leave
    • Allowance for dismissal or separation
    • Payments for the provision of group health care benefits, including insurance premiums
    • Payments for retirement benefits
    • State or local payroll taxes
  • Payroll costs that are not eligible for loan forgiveness:
    • Payments to an independent contractor
    • Cash compensation in excess of $100,000
    • The employer’s share of federal payroll taxes
    • Qualified sick leave and qualified parental leave wages for which credit is allowed under the Families First Coronavirus Response Act (FFCRA)
    • Interest (but not principal) payments on a mortgage that was in existence on Feb. 15, 2020, on real or personal property
    • Rent payments on leases in existence on Feb. 15, 2020
    • Utility payments for electricity, gas, water, transportation, telephone or internet service for which service began before Feb. 15, 2020

Formula for reduction in FTE employees:

The loan forgiveness amount is subject to reduction by multiplying it by the following fraction:

  • The numerator of which is the average number of FTE employees per month employed by the borrower during the covered period
  • The denominator of which is, at the election of the borrower, either:
    • The average number of FTE employees per month employed by the borrower during the period beginning Feb. 15, 2019, and ending June 30, 2019 OR
    • The average number of FTE employees per month employed by the borrower during the period beginning Jan. 1, 2020, and ending Feb. 29, 2020

For seasonal employers, as determined by SBA, the denominator is the period beginning Feb. 15, 2019, and ending June 30, 2020.

Formula for reduction in wages:

The loan forgiveness amount is subject to reduction by an amount determined as follows:

  1. Identify all employees, who did not receive during any single pay period in 2019, wages or salary at an annualized rate of pay of more than $100,000 (each, a covered employee)
  2. Compare each covered employee’s wages or salary during the covered period to his or her wages or salary during the first quarter of 2020
  3. For any covered employee whose wages or salary during the covered period decreased by more than 25 percent
    1. Multiply the first quarter wages or salary by .75
    2. Subtract the product from the covered period wages or salary
  4. Add all amounts computed under number three above

The aggregate dollar amount calculated as set forth above will reduce the loan forgiveness amount.

Reductions in the number of FTE employees, or reductions in salary or wages, that occurred between Feb. 15, 2020, and April 26, 2020, will not reduce the loan forgiveness amount if, by June 30, 2020, the borrower eliminates the reductions.

Q: What documentation must be submitted with an application for loan forgiveness?

To receive loan forgiveness, the CARES Act requires that the borrower submit an application to the lender. The application must include the following:

  • Documentation verifying the number of FTE employees on the payroll and pay rates for the covered period and the prior periods included in the formulas for determining any reduction in loan forgiveness, including payroll tax filings reported to the Internal Revenue Service and state income, payroll and unemployment insurance filings
  • Documentation, including cancelled checks, payment receipts, transcripts of accounts or other documents verifying payments on mortgage obligations, rent payments and utility payments
  • A certification from a representative of the business authorized to make such certifications that:
  1. The documentation presented is true and correct
  2. The amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation or make utility payments 
Any other documentation SBA determines necessary

It will be important for businesses to keep detailed records regarding the use of the PPP loan during the covered period. Businesses should start keeping detailed records beginning on day one of the covered period, insist on receipts and keep an organized system for document storage. While not required under the CARES Act or SBA guidance, PPP loan proceeds may be deposited into a separate bank account, with only costs eligible for loan forgiveness paid out of that account. Good record keeping will be critical in maximizing the amount of loan forgiveness. Again, we look forward to discussing these items in more detail during our webinar on Tuesday, May 5th-- please click here to register for the webinar.