On May 22nd, the SBA released further clarification regarding PPP loan forgiveness concepts and calculations, as a follow-up to its recently released SBA Form 3508, which is the current 11 page document PPP loan recipients are required to use when calculating and applying for PPP loan forgiveness amounts. HOWEVER, and this is potentially BIG NEWS, the US House passed H.R 7010, called the Paycheck Protection Program Flexibility Act, which would increase the current 8 week “forgiveness period” to 24 weeks. H.R 7010 passed by a 417 to 1 vote, indicating almost unanimous support for an increased period of time in which PPP loan recipients would have to spend PPP loan proceeds on payroll/other expenses in order to obtain “forgiveness” from repayment of the PPP loan. This bill will now be sent to the Senate this week, which has been drafting it’s own proposed legislation intended to adjust/increase the 8 week period in which employers have to spend PPP funds to maximize loan forgiveness. The Senate version, which did not pass, proposed a 16 week period. It is expected that the Senate will either vote on the existing House bill OR will talk with the House and create a new bill which will be sent to President Trump for signature. These bills are “stand-alone” bills pertaining to PPP loan improvements, which increases the likelihood of enacting PPP legislation in the very near future.
HOUSE BILL 7010——THE HIGHLIGHTS—-WOULD BE A GAME CHANGER!
H.R 7010 includes the following changes to the current PPP law enacted by the CARES Act:
The current 8 week period in which PPP loan recipients are required to spend money on payroll and other eligible costs is increased to 24 weeks;
The amount of the PPP loan required to be spent on “payroll costs” is reduced from 75% to 60%; and
The date on which employers must hire/rehire employees (FTE’s) to avoid a reduction in loan forgiveness based on employee “headcount” is December 31, not June 30th.
Since the PPP loan amount was originally calculated based on 2 1/2 months of “payroll costs” (10.83 weeks), it would seem that increasing the time period to spend the loan proceeds from 8 to 24 weeks would provide total loan forgiveness for most employers. A longer time period than the current 8 weeks, whether it turns out to be 24 or 16 weeks, would permit employers to gradually hire employees as they reopen and as their customer base returns, instead of attempting to “cram” payroll costs into an 8 week period to optimize forgiveness. This is “great news” for PPP loan recipients, although somewhat bittersweet for those employers who worked hard to apply for PPP loans when the portals first opened on April 3rd, were rewarded with PPP loan deposits early in the cycle, and spent PPP loan proceeds based on the original rules of the 8 week “forgiveness period.”
ACTION STEP—–Talk to your accountant as to your current status as to PPP loan proceeds already spent on payroll costs, rent, utilities and interest expense, and calculate how much of your PPP loan proceeds remain. Discuss whether “slowing down” the use of your PPP loan would be prudent based on the pending legislation to increase the 8 week period to 16 or 24 weeks.
CLARIFICATION OF PPP LOAN CONCEPTS AND CALCULATIONS—MAY 22ND INTERIM FINAL RULE/SBA FORM 3508 APPLICATION FOR FORGIVENESS:
PAYROLL COSTS PAID OR INCURRED IN THE 8 WEEK PERIOD
The May 22nd clarification indicated that an employer can “count” payroll costs “paid OR incurred” during the 8 week period. This means that more than 8 weeks worth of payroll costs could be counted during the 8 week period since payroll PAID starting with the day an employer got the PPP loan would “count” (even though it was “incurred” prior to the PPP loan deposit date) PLUS payroll costs “incurred” during the 8 week/56 day forgiveness period also count for forgiveness IF they are paid no later than the next paydate after the end of the 56 day period of time. This was a liberal interpretation of the “payroll costs paid and/or incurred”, since it would enable greater than 8 weeks worth of payroll to count towards forgiveness. This clarification also eliminates the need for employers to run an extra “special payroll” at the end of the 56 day period to qualify those payroll costs for forgiveness.
Special note-—you cannot “count” FFCRA wages paid during your 8 week period as forgivable payroll costs since an employer all ready receives a 100% tax credit from the IRS for those FFCRA wages (sick and family leave pay subject to tax credits). So eliminate those wages from your calculation/projection of forgivable “payroll costs”.
PAID OR INCURRED ALSO APPLIES TO RENT, UTILITIES AND INTEREST EXPENSE
The SBA clarified that rent/utilities and interest expense PAID during the 8 week/56 day period of time all qualify for loan forgiveness, as do costs which are “incurred” during the 56 day period and paid no later than the next regular billing date for those expenses. Like payroll costs, this enables employers to potentially include greater than 8 weeks of those eligible costs into their 56 day forgiveness period. Back rent paid on or after the day an employer received their PPP loan would qualify for forgiveness even though it was “incurred” prior to the 8 week period.
MORE THAN JUST REAL ESTATE FOR RENT AND OTHER COSTS
The SBA has clarified that rental expense and mortgage interest includes rent and interest expenses for both real estate and personal property. As such, equipment lease expense, business vehicle leases, and interest on loans secured by personal property qualify for loan forgiveness. Utility costs have not been clarified beyond the original “gas, electricity, telephones, internet and transportation” costs contained in the original CARES Act. No examples have been provided as to what constitutes a “transportation utility.”
BONUSES, HAZARD PAY, EXTRA EFFORT PAY, PAY INCREASES
Great news here—–total clarification that bonuses or extra compensation paid to non-owner employees during the 8 week period qualifies for forgiveness as payroll costs. Many suspected that extra compensation/bonuses paid to employees would not count for PPP loan forgiveness, but the May 22nd clarification specified that bonuses, hazard pay, extra effort pay, etc. all qualify as “payroll costs” for loan forgiveness purposes. This does NOT apply to “owner-employees” of the employer. ALSO, no more than $15,385 of total cash compensation paid to an employee during the 8 week period can be “counted” towards loan forgiveness ($15,385 is the 8 week equivalent of the $100K “cap” on annual compensation which is eligible for loan forgiveness.)
OWNER-EMPLOYEES, PARTNERS, SOLE PROPRIETORS COMPENSATION/BONUSES
Treasury was concerned that owners would bonus extra compensation to themselves/family members in order to attain loan forgiveness. As such, the amount of an owner’s compensation which can be “counted” towards PPP loan forgiveness is limited to 8/52 of the 2019 W-2 of a corporation “owner-employee”, and a similar “8 weeks worth of 2019 compensation/net income” for general partners of partnerships and sole proprietors’ Schedule C net income amounts. It appears that the employer share of retirement plan funding and health insurance will “count” for forgiveness for corporation owner-employees BUT will not “count” for partners or sole proprietors. This could be “cleaned up” in any new PPP loan legislation, since it clearly discriminates in favor of small business owners operating as S or C corporations. However, for those S corporations which have been paying the owner-employees “on the low side” for social security reduction purposes, the “lower W-2” amount paid during 2019 could negatively impact the owner-employee’s forgivable compensation during the 2020 8 week period.
75% FOR PAYROLL COSTS IS NOT ALL OR NOTHING
Some employers were concerned that they would not receive any loan forgiveness if they did not spend at least 75% of the PPP loan on “payroll costs.” The SBA clarified that spending less than 75% on payroll costs does not eliminate all forgiveness—the total amount of the PPP loan forgiven can not include more than 25% for eligible rent, etc. costs other than payroll—If your PPP loan is $100K and you spend $70K on payroll costs and $30K on rent, utilities, interest, the PPP loan forgiveness amount would be $93,333 of the 100K spent—-which translates into $23,333 of your rent, etc. costs being forgiven, or 25% of the $93,333 loan forgiveness amount.
LIBERAL INTERPRETATIONS PLUS SAFE HARBOR EXEMPTIONS FOR REDUCTIONS BASED ON PAYRATES AND HEADCOUNTS/FTE’S
Most employers know that their PPP loan forgiveness amount can be reduced IF they cut payrates/salary amounts of their employees and/or reduce their “headcount”/FTE’s. The calculations and “math” can be rather daunting for these loan forgiveness reductions, but here are the basic concepts:
IF an employer reduces the payrate or salary amounts of specific employees during their 8 week period as compared to payrates/salaries during the first calendar quarter of 2020, the excess of the pay reductions over 25% of the first quarter 2020 payrates would generally result in a reduction of the loan forgiveness amount. However, these “payrate reductions” can be eliminated IF the employer “restores” the payrates/salary levels of those specific employees to their levels which existed during the first quarter of 2020, no later than June 30, 2020. These pay reductions only apply to specific employees who were on your payroll BOTH during the first quarter of 2020 and during your 8 week forgiveness period—–and, if you restore those pay rates to their levels which existed during the first quarter of 2020, no reductions in forgiveness will occur. H.R 7010 would change the June 30,2020 “restoration date” to December 31, 2020.
A reduction in an employer’s “full-time equivalent employees” (FTE’s) during the 8 week forgiveness period (a “headcount reduction”) as compared to either Feb 15-June 30, 2019 OR Jan 1-Feb 29, 2020, would produce a “percentage reduction” in otherwise forgivable loan costs IF not “cured” by June 30, 2020. IF an employer’s FTE’s as of June 30, 2020 are at least as many as calculated as of February 15, 2020, no “headcount reduction” of loan forgiveness would occur.
It would seem that a reduction in loan forgiveness based on reduced FTE’s would generally be more severe than reductions based on reduced payrates, since the FTE/headcount reduction is calculated as a percentage reduction of all eligible loan forgiveness costs. As such, all employers should check their potential FTE/headcount figures in advance of the expiration of their 56-day period to determine if additional employees should be hired before June 30, 2020 to qualify for the safe harbor based on June 30 FTE’s as compared to February 15, 2020 FTE’s.
LENDER REVIEW PROCEDURES
SBA lenders/banks must confirm that they have received all documentation to support eligible loan costs for the 8 week forgiveness period—–it is the employer’s responsibility to accurately complete the SBA loan forgiveness application Form 3508, and the employer must certify that their application is correct. Every SBA lender will approach their reviews of loan forgiveness differently, but we suspect that not much attention will be paid to the complex FTE/payrate calculations, and the SBA lenders will primarily make sure the “basic math” is accurate on the application, and is supported by payroll documents/reports from payroll service providers, payroll tax returns for the second quarter of 2020, and billing statements, invoices, lease agreements, checks, etc. to document expenses for rent, utilities and business loan interest. As the law currently stands, the SBA lenders have 60 days to review loan forgiveness applications and the SBA has an additional 90 days to approve or challenge the bank’s findings as to loan forgiveness.
PROFESSIONAL ADVICE—-WORTH THE MONEY FOR PPP PLANNING
Due to the complexity of the PPP loan rules, to include the actual Form 3508 loan forgiveness application (looks like a “tax return”), we suggest that recipients of PPP loans engage their accountants or other business consultants to help them with planning for efficient use of the PPP loan proceeds as well as assisting with completion of the Form 3508 to submit to your SBA lender. As a former practicing CPA myself, I view hiring your accountant/tax advisor for PPP consulting as similar to “year-end tax planning and tax preparation”—–the tax-deductible fees you pay to your accountant should yield savings in PPP loan forgiveness, and will also provide credibility to your SBA lender when they receive your organized, accurate application for their review.
We encourage you to talk with your accountant/banker/business consultant now to discuss final planning for use of your PPP loan proceeds and for optimization of the loan forgiveness amount—-make sure you discuss the potential impact of the recently passed House bill on your PPP loan forgiveness planning.
The American Institute of CPA’s has an excellent “loan forgiveness calculator” available to the public—-they continually update it for changes in the PPP rules. You can access the calculator here. Also, here is a link to a previous AccuPay PayDays we have authored on PPP loans, pertaining to applying for PPP loans to the forgiveness provisions.
OPEN TO YOUR QUESTIONS
If you have questions about any aspect of PPP loans, email firstname.lastname@example.org. When you email your questions, we would love to know who your SBA lender and accountant/consultants are who are helping you with PPP loan details and planning.