Skip to Main Content
Services Talent Knowledge
Site Search
Menu

Alert

Our attorneys stay on top of changes in legislation, agency regulations, case law, and industry trends—then craft timely legal alerts to keep clients up to date on legal developments important to their business.

August 6, 2020

COVID-19: SBA Releases Additional FAQs on Paycheck Protection Program Forgiveness

On August 4, the Small Business Administration (SBA) provided enhanced guidance to address borrower and lender questions concerning Paycheck Protection Program (PPP) loan forgiveness. Published in the form of FAQs, the guidance covers general loan forgiveness, forgiveness of payroll costs, forgiveness of non-payroll costs, and loan forgiveness reductions.

The guidance confirms the EZ loan application form is appropriate for independent contractors, sole proprietors, and self-employed individuals with no employees and reiterates that, as long as a borrower submits their forgiveness application within 10 months of the completion of their covered period, the borrower isn’t required to make any payments on the loan until the forgiveness is remitted to the lender by the SBA. If the loan is forgiven in full, the borrower isn’t responsible for making any payments. However, if only a portion of the loan is forgiven or the forgiveness application is denied, any remaining balance due must be paid on or before the maturity date.

The SBA clarified that all forms of cash compensation paid to employees are included in the definition of “payroll costs,” such as tips, commissions, bonuses, and hazard pay. Payroll costs incurred during the covered period or the alternative payroll covered period but paid after the covered period or the alternative payroll covered period are eligible for loan forgiveness if paid on or before the next regular payroll date after the end of the covered period or alternative payroll covered period. Payroll costs incurred before the covered period but paid during the covered period are also eligible for forgiveness.

For example, ABC, Inc. received its PPP loan and is using a 24-week covered period, which runs from Monday April 20 through Sunday, October 4. ABC, Inc. has a biweekly payroll cycle with a pay period ending on October 4, but they won’t make the corresponding payroll payment until the next regular payroll date of Friday, October 9. Under these circumstances, the payroll costs were incurred during the covered period, and ABC, Inc. may seek loan forgiveness for the payroll costs paid on October 9 because the cost was incurred during the covered period and the payment was made on the first regular payroll date after the covered period.

If a borrower uses a biweekly or more frequent payroll cycle, the borrower may elect to calculate eligible payroll costs using the eight-week (for borrowers that received loans prior to June 5, 2020 and elected this length) or 24-week period that begins on the first day of the first payroll cycle following the PPP loan disbursement date; this is referred to as the alternative payroll covered period. A borrower who pays twice per month or less frequently will need to calculate payroll costs for partial pay periods. Additionally, for purposes of calculating cash compensation, the SBA stated borrowers should use the gross amount of compensation before deductions for taxes, employee benefits payments, and similar payments.

The SBA also detailed what expenses for group health care benefits and retirement benefits will be considered payroll costs eligible for loan forgiveness. Employer expenses for employee group health care benefits that are paid or incurred by the borrower during the covered period or the alternative payroll covered period are payroll costs eligible for loan forgiveness. However, expenses for group health care benefits paid by employees or beneficiaries of the plan either pre-tax or after tax, such as the employee share of their health care premium, are excluded. Additionally, expenses for group health benefits accelerated from periods outside the covered period or alternative payroll covered period aren’t eligible for forgiveness. If a borrower has an insured group health plan, insurance premiums paid or incurred during the covered period or alternative payroll covered period qualify as payroll costs eligible for forgiveness as long as the premiums are paid during the applicable period or by the next premium due date after the end of the applicable period.

Generally, employer contributions for employee retirement benefits that are paid or incurred by the borrower during the covered period or alternative payroll covered period qualify as payroll costs and, therefore, are eligible for loan forgiveness. However, the employer contributions can’t include any retirement contributions deducted from employees’ pay or otherwise paid by employees, and forgiveness isn’t provided for employer contributions accelerated from periods outside the covered period or alternative covered period.

The guidance also shed more light on how the amount of owner compensation eligible for loan forgiveness is determined with respect to C-corporations, S-corporations, self-employed Schedule C or Schedule F filers, general partners, and LLC owners. In addition to the caps on forgiveness specific to each type of owner, the amount of loan forgiveness requested for owner-employees’ and self-employed individuals’ payroll compensation is capped at $20,833 per individual across all businesses in which they have an ownership stake. That said, if an individual’s total compensation across businesses that receive a PPP loan exceeds the cap, owners can choose how to allocate the capped amount across different businesses. Specific examples pertaining to each type of ownership mentioned above can be found in Question 8 of the FAQs.

Of note in FAQ Question 8 is a correction by the SBA with respect to self-employed individuals. Prior guidance excluded new businesses from receiving forgiveness by stating that owner’s pay for self-employed individuals was limited to the profits reflected on the 2019 tax return. So, if a borrower didn’t have 2019 profits, they would have no amount of owner compensation eligible for forgiveness. However, the FAQs allow for new businesses to use the estimated 2020 of profits to be shown on their 2020 tax return in calculating their forgiveness eligibility amount.

Additionally, the FAQs clear up confusion created by the loan forgiveness application for S-corporation shareholders. The forgiveness application led borrowers to the conclusion that the $20,833 cap applied both to wages and contributions to a qualified retirement plan. However, the SBA clarified that this isn’t the case, and owner-employees of S-corporations are eligible for loan forgiveness up to the amount of 2.5/12 of their 2019 employee cash compensation and 2.5/12 of their 2019 employer retirement contribution.

As with payroll costs, non-payroll costs are also eligible for loan forgiveness if incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period. Non-payroll costs incurred prior to the covered period but paid during the covered period are eligible as well. It’s important to note that the alternative payroll covered period applies only to payroll costs, not to non-payroll costs.

Non-payroll costs have been clarified to include the following:

  • Payments made on recently renewed leases or interest payments on refinanced mortgage loans if the original lease or mortgage existed prior to February 15, 2020
  • Transportation costs, and
  • Entire electricity bills (even if charges are invoiced separately), including supply charges, distribution charges, and other charges such as gross receipts taxes

The FAQs further clarify what is included in transportation costs. Although many borrowers believed gas for vehicles was a forgivable expense, the guidance states otherwise, specifically noting that “transportation costs” refer to transportation utility fees assessed by state and local governments. Payments of interest on business mortgages on real or personal property, such as a car loan, are eligible for loan forgiveness. However, specifically excluded from non-payroll costs and this forgiveness, is interest payable on unsecured credit. The SBA draws the distinction that, although it’s a permissible use of PPP loan proceeds to pay interest on unsecured credit before February 15, 2020, it isn’t an expense eligible for forgiveness.

In calculating its loan forgiveness amount, a borrower may exclude any reduction in full-time equivalent (FTE) employees if the borrower is able to document in good faith an inability to rehire individuals who were employees on February 15, 2020 and an inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020.

Borrowers are required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the rejection and should maintain the following to prove compliance:

  1. The written offer to rehire
  2. A written record of the offer’s rejection, and
  3. A written record of efforts to hire a similarly qualified individual

For purposes of calculating FTE reduction exceptions on the loan forgiveness application, all employees are to be included, even those who made more than $100,000. Additionally, a borrower is subject to reductions in the loan forgiveness amount if the salary or hourly wage of a covered employee is reduced by more than 25 percent during the covered period or alternative payroll covered period. The portion in excess of 25 percent reduces the eligible forgiveness amount unless the borrower satisfies the salary and hourly wage reduction safe harbor. When calculating loan forgiveness reduction amounts, a borrower should only take into consideration decreases in salaries or wages as opposed to total compensation.

For example, an employee earned a wage of $20 per hour between January 1, 2020 and March 31, 2020 and worked 40 hours per week. During the covered period, the employee’s wage wasn’t changed, but their hours were reduced to 25 hours per week. In this case, the salary and hourly wage reduction for that employee is zero, because the hourly wage was unchanged. As a result, the borrower would enter $0 in the “Salary/Hourly Wage Reduction” column for that employee on the PPP Schedule A Worksheet, Table 1. The employee’s reduction in hours would be taken into account in the borrower’s calculation of its FTE during the covered period, which is calculated separately and may result in a reduction of the borrower’s loan forgiveness amount.

If only a portion of the loan is forgiven or the forgiveness application is denied, any remaining balance due must be paid on or before the maturity date. Interest accrues from the time of the disbursement of the loan and SBA remittance of the forgiveness amount. The borrower is responsible for paying this accrued interest on any amount of the loan that isn’t forgiven.

If you have any questions regarding the content of this alert, please contact Roger Cominsky, Financial Institutions & Lending Practice Area chair, at rcominsky@barclaydamon.com; Danielle Katz, associate, at dkatz@barclaydamon.com; or Samantha Podlas, associate, at spodlas@barclaydamon.com.

We also have a specific team of Barclay Damon attorneys who are actively working on assessing regulatory, legislative, and other governmental updates related to COVID-19 and who are prepared to assist clients. Please contact Yvonne Hennessey, COVID-19 Response Team leader, at yhennessey@barclaydamon.com or any member of the COVID-19 Response Team at COVID-19ResponseTeam@barclaydamon.com.

Subscribe

Click here to sign up for alerts, blog posts, and firm news.

Subscribe

Sign up to receive our latest news via email

Practice Areas

Featured Industries

New & Emerging Industry Practice Areas

Other

View our Privacy Policy

Featured Media

Alerts

NYS Office of Renewable Energy Siting Proposes New Rules Implementing the Major Renewable Energy Development Program

Alerts

Strict New Criteria for Community Medicaid Program Takes Effect October 1

Alerts

FERC Formalizes Its Practice That States Have a Full Year to Act on Section 401 Certification Requests for Natural Gas Act Infrastructure Projects

Alerts

Have You Received an "Urgent Notice" About Your Trademark?

Alerts

COVID-19: Anticipated RESTAURANTS Act of 2020 Will Establish a $120 Billion Fund for Assistance

Alerts

Post-ARRA COBRA Litigation May Signal COBRA Lawsuits to Come

This site uses cookies to give you the best experience possible on our site and in some cases direct advertisements to you based upon your use of our site.

By clicking [I agree], you are agreeing to our use of cookies. For information on what cookies we use and how to manage our use of cookies, please visit our Privacy Statement.

I AgreeOpt-Out