SBA Releases New FAQs on PPP Loan Forgiveness – Key Takeaways for BorrowersAugust 6, 2020
On August 4, the Small Business Administration (“SBA”) released a new set of Paycheck Protection Program (“PPP”) FAQs focused exclusively on loan forgiveness. This new set of FAQs follows the updated PPP loan forgiveness applications and instructions that the SBA released on June 16 and the June 22 Interim Rule related thereto (as summarized in Client Alert found here). Many of these FAQs confirm what the SBA set forth in those updated forgiveness applications and instructions and the related Interim Rule.
This new set of FAQs is divided into four sections: (1) General Loan Forgiveness FAQs, (2) Loan Forgiveness Payroll Costs FAQs, (3) Loan Forgiveness Nonpayroll Cost FAQs, and (4) Loan Forgiveness Reductions FAQs. Key points from each section are highlighted below.
General Loan Forgiveness FAQs
- Sole proprietors, independent contractors, or self-employed individuals without employees at the time of the PPP loan application, and who did not use employee salaries to calculate their PPP loan amounts, automatically qualify to use the Loan Forgiveness Application Form 3508EZ and should use that form when applying for forgiveness.
- If a borrower timely submits a loan forgiveness application within ten months following the borrower’s covered period, and the entire amount of the PPP loan is not forgiven, the borrower will not be required to make any loan payments until the forgiveness amount is remitted to its lender by the SBA.
Loan Forgiveness Payroll Costs FAQs
- The FAQs confirm that payroll costs before or after the borrower’s covered period are eligible for forgiveness if incurred either (a) during the borrower’s covered period but paid after (if paid on or before the next regular payroll date after the covered period) or (b) prior to the borrower’s covered period and paid during the covered period.
- A borrower should use the gross amount of cash compensation, before deductions for taxes, employee benefit payments, and similar payments, when calculating cash compensation.
- Tips, commissions, bonuses, and hazard pay are all eligible for forgiveness, although borrowers should note the total forgivable cash compensation per employee is limited to $100,000 on an annualized basis.
- The FAQs confirm that only employer expenses for group health benefits and employee retirement benefits, not employee expenses, are eligible for forgiveness. In addition, while an employer’s share of insurance premiums for a group health plan and employer contributions to retirement benefits are eligible for forgiveness if paid (a) during the covered period or (b) by the next premium due date after the covered period, the FAQs clarified that forgiveness is not provided for group health expenses or employer contributions for retirement benefits that are accelerated from periods outside the borrower’s covered period.
- The FAQs contain detailed instructions for calculating the amount of owner compensation eligible for forgiveness, the method for which varies depending upon the type of business entity. Regardless of entity type, forgivable owner compensation is capped at $20,833 per individual (for those electing a 24-week covered period) or $15,385 (for those electing an 8-week covered period). Further, these caps are the maximum amount the borrower can receive across all businesses the borrower owns.
Loan Forgiveness Nonpayroll Costs FAQs
- The FAQs confirm that nonpayroll costs incurred prior to a borrower’s covered period and paid during the covered period are eligible for forgiveness, as are nonpayroll costs incurred during the covered period and paid after the covered period (so long as such costs are paid on or before the next regular billing date).
- The FAQs confirm that the “Alternative Payroll Covered Period” applies only to payroll costs, not nonpayroll costs. A borrower’s covered period for nonpayroll costs always begins on the date the borrower’s lender disburses the PPP loan to the borrower.
- Payments of interest on unsecured credit are a permissible use of PPP proceeds, but those amounts are not eligible for forgiveness. Only payments of interest on business mortgages on real property or personal property (like an auto loan) are eligible for forgiveness.
- If a borrower renews a lease or refinances a mortgage during the covered period, the rent payments and mortgage interest payments are still eligible for forgiveness so long as the initial lease or mortgage existed prior to February 15, 2020.
- The forgivable expense of “payment[s] for a service for the distribution of…transportation” means transportation utility fees assessed by state and local governments. The FAQs refer borrowers to a Department of Transportation link for more information on such fees.
- Entire electricity bill payments are eligible for forgiveness (including supply charges, distribution charges, and other charges like gross receipts taxes), even if billed separately.
Loan Forgiveness Reduction FAQs
- The FAQs confirm that a borrower’s forgiveness amount will not be reduced based on full-time equivalent employment levels (“FTE”) if the borrower offered to rehire laid off employees but the employees declined and the employer was unable to hire similarly qualified individuals for unfilled positions. Employers must inform their state unemployment insurance office of the rejected offer of employment within 30 days of the rejection, and must maintain documentation evidencing the written offer to rehire the individual, a written record of the employee’s rejection of the offer and a written record of efforts to hire a similarly qualified individual. See our Client Alert here for more information on this and other loan forgiveness reduction exceptions.
- The FAQs confirm that all employees should be considered when calculating a FTE reduction, not just employees who made less than $100,000 in 2019.
- The FAQs confirm that a borrower’s forgiveness amount is reduced, dollar-for-dollar, by the amount an employee’s salary or hourly wage is reduced by more than 25% during the borrower’s covered period, assuming such employee is a “covered employee” (an employee who made more than $100,000 on an annualized basis during any pay period in 2019) and the borrower does not satisfy the salary/hourly wage reduction safe harbor (see the Salary/Hourly Wage Reduction section of Form 3508 Instructions). The FAQs include several detailed examples calculating the impact of salary/hourly wage reductions on loan forgiveness.
- When calculating a reduction to loan forgiveness based on salary/hourly wage reductions in excess of 25%, the borrower should only use reductions to salary or wages, not any other reductions to other forms of employee compensation.
This summary does not include or address every provision of Paycheck Protection Program under the CARES Act, which should be read in its entirety. Furthermore, pursuant to the CARES Act, the SBA continues to promulgate regulations for the implementation of the Paycheck Protection Program and, as such, there is still uncertainty relating to details of implementation.
We are here to help answer specific questions and offer advice on your options. Please contact any member of our Corporate & Business Group to discuss.