On August 4, 2020, the Small Business Administration and the Treasury Department issued a set of FAQs devoted to the Paycheck Protection Program (“PPP”) loan forgiveness. This long awaited guidance provides borrowers and lenders with some answers to certain aspects of the program. While the guidance does not come with a bang, it does offer some much-needed clarity.
The PPP loan, created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), provides loans to qualifying businesses that are forgiven on a tax-free basis if a specified portion of the loans is spent on payroll and other covered costs during the covered period (“Covered Period”).
The twenty-three FAQs are divided into four sections addressing different issues that should be considered in calculating the PPP loan forgiveness amount. The first section covers general loan forgiveness issues, such as the loan forgiveness application and repayment terms. The second and the third sections address payroll and nonpayroll cost calculations under either the Covered Period or the Alternative Payroll Covered Period. The last section, meanwhile, sets out the calculation of items that reduce the loan forgiveness amount.
What You Need to Know
The FAQs confirm that payroll costs include all forms of cash compensation paid to employees, including tips, commissions, bonuses, and hazard pay limited to $100,000 on an annualized basis. The FAQs also address how an owner’s compensation should be calculated for purposes of loan forgiveness based on business type.
Regarding health care benefits, the FAQs affirm that employer expenses paid for employee group health care benefits are includable in payroll costs and are eligible for loan forgiveness. Similarly, the employer contributions for employee retirement benefits paid or incurred by the borrower during the Covered Period or Alternative Payroll Covered Period qualify as payroll costs and thus are eligible for loan forgiveness.
As for nonpayroll costs, the FAQs make them eligible for forgiveness whether they are incurred prior to the Covered Period and paid during it, or are incurred during the covered period but paid after it. However, the guidance confirms that the Alternative Payroll Covered Period applies only to payroll cost.
Loan forgiveness reduction is an issue of great concern to many PPP loan applicants that the guidance address. The FAQs reiterate that a borrower’s loan forgiveness amount will not be reduced due to a reduction in FTE employees if offers to rehire were made to laid-off employees but who nonetheless declined employment. Additionally, the FAQs clarify that the FTE Reduction Exceptions apply to all employees, including those who made more than $100,000.The FAQs offer guidance on how to calculate the reduction in loan forgiveness arising from reductions in employee salary or hourly wages through the use of several examples.
Although the new FAQs shed light on some of the PPP loan forgiveness issues, some aspects of the guidance need additional clarification, such as the detail and level of documentation a business should maintain to ensure the maximum amount of loan forgiveness. Should you have specific questions regarding the PPP loan forgiveness, the CARES Act, or any other tax issues, please contact Steve at [email protected].