PF-1: Can my PPP loan be forgiven in whole or in part?
Yes, the amount of loan forgiveness can be up to the full principle 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.
PF-2: How is the forgiveness amount calculated for businesses?
Forgiveness on a covered loan is equal to the sum of the following payroll costs incurred during the covered twenty-four week period compared to the previous year or time period (see update 2 below for clarity on the twenty-four week period), proportionate to maintaining employees and wages (excluding compensation over $100,000):
- Payroll costs plus any payment of interest on any covered mortgage obligation (not including any prepayment or payment of principal on a covered mortgage obligation) plus any payment on any covered rent obligation plus and any covered utility payment
- Update 1: Per April 8, 2020 FAQ document published by the SBA, in consultation with the Department of the Treasury, further clarity was provided with regards to accounting for federal taxes when determining its payroll costs for purposes of the maximum loan amount, allowable uses of a PPP loan, and the amount of a loan that may be forgiven. See question PB-2 for further detail
- Update 2: The twenty-four week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower. The lender must make the first disbursement of the loan no later than 10 calendar days from the date of loan approval.
PF-3: What amounts shall be eligible for forgiveness if you are an individual with self-employment income who files a Form 1040, Schedule C?
The amount of loan forgiveness can be up to the full principal amount of the loan plus accrued interest. The actual amount of loan forgiveness will depend, in part, on the total amount spent over the covered period on:
- Payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual), as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums);
- Owner compensation replacement, calculated based on 2019 net profit, with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit, but excluding any qualified sick leave equivalent amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act (FFCRA) or qualified family leave equivalent amount for which a credit is claimed under section 7004 of FFCRA;
- Payments of interest on mortgage obligations on real or personal property incurred before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business mortgage payments);
- Rent payments on lease agreements in force before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business rent payments); and
- Utility payments under service agreements dated before February 15, 2020 to the extent they are deductible on Form 1040 Schedule C (business utility payments).
Contact a Baker Tilly specialist to determine your specific loan and forgiveness amount. There are nuances in what and how much of the proceeds can be forgiven and it is important to consider those at time of origination.
PF-4: How do I get forgiveness on my PPP loan?
You must apply through your lender for forgiveness on your loan and you must include:
- Documentation verifying the number of employees on payroll and pay rates, including IRS payroll tax filings and state income, payroll and unemployment insurance filings.
- Documentation verifying payments on covered mortgage obligations, lease obligations and utilities.
- Certification from a representative of your business or organization that is authorized to certify that the documentation provided is true and that the amount that is being forgiven was used per the program’s guidelines for use. See question PF-5 for expansion of these certifications
PF-5: What certifications need to be made?
On the PPP application (here) an authorized representative of the applicant must certify in good faith to all of the below. (Note: A representative of the applicant can certify for the business as a whole if the representative is legally authorized to do so.)
- The applicant was in operation on Feb. 15, 2020, and had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.
- Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.
- The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments and utility payments; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable such as for charges of fraud. As explained above, not more than 25% of loan proceeds may be used for non-payroll costs.
- Documentation verifying the number of full-time equivalent employees on payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight-week period following this loan will be provided to the lender.
- Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. As explained above, not more than 25% of the forgiven amount may be for non-payroll costs.
- During the period beginning on Feb. 15, 2020, and ending on Dec. 31, 2020, the applicant has not and will not receive another loan under this program.
- I further certify that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than 30 years and/or a fine of not more than $1,000,000.
- I acknowledge that the lender will confirm the eligible loan amount using tax documents I have submitted. I affirm that these tax documents are identical to those submitted to the Internal Revenue Service. I also understand, acknowledge, and agree that the lender can share the tax information with SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA loan program requirements and all SBA reviews.
PF-6: What documentation will I be required to submit to my lender with my request for loan forgiveness; if I am an individual with self-employment income who files a Form 1040, Schedule C?
In addition to the borrower certification (as described in Q PF-5), to substantiate your request for loan forgiveness, if you have employees, you should submit Form 941 and state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records that best correspond to the covered period (with evidence of any retirement and health insurance contributions). Whether or not you have employees, you must submit evidence of business rent, business mortgage interest payments on real or personal property, or business utility payments during the covered period if you used loan proceeds for those purposes.
The 2019 Form 1040 Schedule C that was provided at the time of the PPP loan application must be used to determine the amount of net profit allocated to the owner for the eight-week covered period.
PF-7: What happens after the forgiveness period?
Any loan amounts not forgiven are carried forward as described in question PB-11.
PF-8: When determining debt forgiveness amounts, should you only include FTEs?
Yes
PF-9: The forgiveness language has provisions for pro-rata reduction if you fall below full-time headcount and compensation levels during the eight weeks covered period post-loan origination. How does this process work in practice? (i.e., stack this on top of the flat dollar amount calculation applied to “covered costs” like payroll, mortgage, rent and utilities?)
This is pending further guidance, but in general, these are going to have to be actually incurred costs.
PF-10: For the portion of loan that can be forgiven under the CARES Act, can it be excluded from taxable income for the year?
Federal taxes are excludable, however, state is still unclear. It has not yet been addressed under the CARES Act is if the wages or expenses which allow for the forgiveness of the loan will be deductible. If they are, then this will become a permanent difference.
PF-11: Do PPP loans cover paid sick leave?
Yes. PPP loans covers payroll costs, including costs for employee vacation, parental, family, medical and sick leave. However, the CARES Act excludes qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127). Learn more about the paid sick leave refundable credit here.
PF-12: How should miscellaneous payments (i.e. Retention bonuses, “combat pay” profit sharing, high performance, discretionary bonuses, etc.) be factored into the eight week period of forgiveness as it relates to the calculation?
As of April 14, 2020, there are no known rules limiting these types of payments.
PF-13: What differences may be included in eight to twenty-four week period for cash basis vs accrual basis taxpayers?
The act specifies “Costs incurred and payments made during the covered period”.
The forgiveness clause – SEC. 1006. LOAN FORGIVENESS
(b) FORGIVENESS.—An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period:
(1) Payroll costs.
(2) Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation).
(3) Any payment on any covered rent obligation.
(4) Any covered utility payment.
One of the above is labeled “costs” and three are labeled as “payments”. This should be interpreted as whatever is labeled “costs” should be treated as “costs incurred”, and whatever is listed as a “payment” should be treated as “payments made”. Therefore, “payroll costs” should be whatever is incurred during the eight to twenty-four week period, and all the other “payments” are whatever payments are actually made in the eight to twenty-four week period. These “payments” are also all non-payroll costs, and therefore cannot exceed 40% of the loan forgiveness amount, which will prevent businesses from excessive behaviors such as prepaying 6 months of rent or utilities, or whatever. This interpretation also prevents prepaying wages or salary, or doing a large 401K match that covers more time than the eight to twenty-four week period.
PF-14: Does the requirement that 60% of PPP proceeds be used on payroll costs to be eligible for forgiveness create a cliff effect?
PPP loans will be forgiven under Section 1106 of the Act to the extent the proceeds are used to fund payroll costs, interest on a covered mortgage obligation, covered rent obligations or covered utilities. However, the interim rule issued by the SBA on April 2, 2020 provides that:
- “not more than 40 percent of the loan forgiveness amount may be attributable to non-payroll costs” and
- “at least 60 percent of the PPP loan proceeds shall be used for payroll costs.”
It is unclear whether these requirements in concert create a cliff effect, and if not, how the forgivable amount of the loan would be calculated if less than 60% of the proceeds were used for payroll costs.
Consider a business that receives a $100K PPP loan, and uses $50K on payroll costs, the remainder on qualifying rent expense. Since only 50% of the proceeds were used to fund payroll costs, is any of the loan forgivable? This would seem to be an unusually harsh result, especially considering the Congressional intent of the law. Further, reading the language that “not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs” on its own would suggest forgiveness is not an all-or-nothing proposition.
Assuming the absence of a cliff effect, the calculation of the amount of the loan eligible for forgiveness is unclear. A reasonable approach would be to divide the $50K of payroll costs by 75% to arrive at $66,667 of total forgiveness, meaning all $50K of the payroll costs and $16,667 of the qualifying rent expense is forgiven. This satisfies the 25% test, but the result is that 2/3 of the qualifying rent, which is use eligible for forgiveness by the statute, must be paid back.
The above-mentioned interim rule notes that future guidance on the loan forgiveness will be forthcoming, however, in the meanwhile, clients considering spending more than 40% of their PPP loan proceeds on non-payroll costs must be made aware of these issues.
PF-15: Are expenses paid after June 30th eligible for the loan forgiveness program?
Section 1102 of the CARES Act provides that PPP loans are only available during the “covered period” of Feb. 15 – June 30, 2020, and during that time, may only be used to pay payroll costs, mortgage interest, rent, utilities, and interest on other debt during the “covered period”.
Then, Section 1106 provides that only amounts spent during the “covered period” are eligible for forgiveness. But for these purposes, the covered period is separately defined as the 8-week period following the receipt of the loan proceeds.
The issue then arises as to what happens to a borrower who receives a PPP less than eight weeks before the June 30th deadline, but with the covered period for forgiveness ending at the end of July. Will payments made post-June 30th be eligible for forgiveness?
To date, no guidance has been provided on this issue. Hopefully, either Treasury or the SBA will clarify this in the near term. However, we should be advising clients that receive PPP loans after May 1st of this potential trap in the loan forgiveness program.
PF-16: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?
No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness. To qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
