Paycheck Protection Program Update: Don’t Forget the Forgiveness!

August 27, 2020

Last Updated: August 24, 2020

The Paycheck Protection Program (PPP) was created on March 27, 2020 when President Trump signed the CARES Act. The PPP is a forgivable loan program that ran through August 8, 2020, which was established to assist small businesses nationwide adversely impacted by the COVID-19 emergency, by providing resources needed to maintain their payroll, hire back employees who may have been laid off and cover applicable overhead. Subsequent to the enactment of the PPP, the Small Business Administration (SBA) has provided volumes of incremental guidance for PPP borrowers and lenders, chiefly in the form of Interim Final Rules and a list of frequently asked questions.1

On May 15, 2020, SBA released the first version of its PPP forgiveness application form (Form 3508, Paycheck Protection Program Loan Forgiveness Application). Following the June 5, 2020 passage of the Paycheck Protection Program Flexibility Act (Flexibility Act), SBA on June 16, 2020 made conforming changes to Form 3508 and released a streamlined version of the forgiveness application (Form 3508EZ). SBA provided clarification in a number of areas when it released (and subsequently revised) Form 3508. A number of open questions remain even at this late date.

With most PPP borrowers having reached the end of the original eight-week forgiveness covered period, we’ve updated our PPP Loan Forgiveness Q&A List based on the most recent SBA guidance. Please note this list includes questions we and many of our clients have raised; it is not intended as an exhaustive list. Further, special situations such as seasonal businesses, industry-specific provisions, and Schedule C filers are intentionally omitted from this list.

PPP Loan Forgiveness Q&A List 2
1. How much of our PPP loan may be forgiven?Up to 100% of a PPP loan may be forgiven if required conditions are met.
2. Can both PPP loan principal and accrued interest be forgiven, or just the principal portion?According to SBA’s 1st Interim Final Rule on the PPP, the amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest.
3. How do we apply for loan forgiveness under the PPP?Forgiveness requests are to be submitted to the lender that is servicing the loan using SBA Form 3508 or Form 3508EZ.
4. How do we determine the amount of loan forgiveness to apply for?PPP loan forgiveness is based on the borrower’s forgivable costs over a 24-week period commencing on the date the lender disburses the PPP loan. PPP borrowers whose loans were funded prior to June 5, 2020 have the option of using an eight-week period instead of a 24-week period. The 24-week period and the eight-week period are hereafter referred to collectively as the “forgiveness covered period”.3
5. By what date must we submit our loan forgiveness application?The forgiveness application can be submitted any time before maturity date of the loan. If the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness, the forgiveness application can be submitted prior to the end of the forgiveness covered period. 
6. What types of costs qualify as forgivable costs?Forgivable costs fall into two broad categories: (i) forgivable payroll costs and (ii) forgivable non-payroll costs.
7. What are forgivable payroll costs?Forgivable payroll costs generally consist of: (i) cash compensation4, subject to an annualized $100,000 cap (i.e., $15,385 for an eight-week forgiveness covered period or $46,154 for a 24-week forgiveness covered period); and (ii) non-cash compensation. Non-cash compensation consists of (i) employer-paid health insurance (including dental and vision); (ii) employer-paid retirement benefits; and (iii) employer-paid state and local payroll taxes.
8. Do forgivable payroll costs include amounts for business owners (i.e., owners who are also employees)? Here’s where it gets a little complicated. There are different rules depending on the entity type and the forgiveness covered period. Refer to the table below (Click table to enlarge):*These rules do not apply to C Corporation or S Corporation shareholders that hold an ownership stake of less than 5%.
**Employer-paid health insurance is excluded for this purpose since it is reflected in W-2. Employer-paid health insurance for family members of > 2% S Corporation shareholder should also be excluded.
***For this purpose, the 2019 amount represents self-employment earnings (net of section 179 expense, unreimbursed partnership expenses and oil/gas depletion) multiplied by 0.9235.
9. What are forgivable non-payroll costs?Forgivable non-payroll costs include: (i) interest on real and personal property mortgage obligations incurred before 2/15/20, net of a FMV-based allocation for any subleased space; (ii) rent payments on real and personal property leases in force before 2/15/20, net of associated sublease income; and (iii) utility payments under service agreements that began before 2/15/20.
10. Are related party mortgage obligations and leases eligible?Mortgage interest payments to a related party are not eligible for forgiveness. Related party rent payments are eligible for forgiveness as long as the claimed amount does not exceed mortgage interest on the property (if any) during the forgiveness covered period.
11. What types of costs can be included for utility payments?The definition of utilities in the CARES Act includes electricity, gas, water, transportation5, telephone, or internet access. Unless and until the definition of utilities is expanded in subsequent SBA guidance, PPP borrowers should be conservative with what they include in this category.
12. Are forgivable costs measured on an accrual basis or cash basis?Costs paid or incurred during the covered period are eligible for forgiveness. Costs incurred during the forgiveness covered period but paid in the normal course subsequent to the forgiveness covered period are includable as forgivable costs.6
13. Does sick leave for which a credit is allowed under the FFCRA require special handling?Qualified sick and family leave wages for which a credit is allowed under the FFCRA is excluded from forgivable payroll costs.
14. Are there any factors that might cause the amount of forgiveness to be limited?Yes. PPP loan forgiveness may be limited if: (i) employee salaries/wages are reduced (the “salary/wage reduction rule”); (ii) employee headcount levels are not maintained (the “headcount reduction rule”); or (iii) payroll costs represent less than 60% of total forgivable costs.
15. How does the salary reduction rule work?The salary reduction rule applies only to non-owner employees who were compensated at an annualized rate of less than or equal to $100,000 in 2019. It reduces the amount of loan forgiveness (on a dollar-for-dollar basis) that would otherwise be available to the extent individual salary or wage levels decrease by more than 25% during the forgiveness covered period, as compared to the period 1/1/20 to 3/31/20.7
16. How does the headcount reduction rule work?The headcount reduction rule reduces the amount of loan forgiveness that would otherwise be available based upon the quotient of x ÷ y, where: x = the average number of non-owner FTEs8 per week during the forgiveness covered period; and y = (i) the average number of non-owner FTEs per week during the period beginning 2/15/19, and ending 6/30/19, or (ii) the average number of non-owner FTEs per week during the period 1/1/20 and ending 2/29/20.9 
17. How are FTEs calculated for purposes of the headcount reduction rule?To determine the FTE value for an employee, take the average number of hours paid per week, divide by 40, and round the total to the nearest tenth (capped at 1.0). A simplified calculation may be used, where employees who work 40 hours or more per week are assigned a value of 1.0, and employees who work fewer than 40 hours per week are assigned a value of 0.5.
18. What can my business do if we already reduced headcount or salaries?Borrowers can cure any reduction in FTEs or compensation that occurred between 2/15/20, and 4/26/20 if they do it by December 31, 2020.
19. Are there any exceptions to the headcount reduction rule?Yes, there are a growing number of exceptions to the headcount reduction rule. For any of the following situations, the applicable FTE statistics should be excluded: (i) borrower makes a good-faith, written offer to rehire or restore the reduced hours of an employee during the forgiveness covered period, the offer was rejected and the borrower has documentation of the offer and rejection; (ii) the employee was fired for cause; (iii) the employee voluntarily resigned; (iv) the employee requested and received a reduction of their hours; (v) the borrower in good faith can document the inability to rehire individuals who were employees on February 15, 2020 and hire similarly qualified employees for unfilled positions on or before December 31, 2020; (vi) the borrower in good faith can document the inability to return to the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued related to COVID-19.
20. How does the 60% rule work?The 60% rule establishes a limitation on the amount of forgiveness based on forgivable payroll costs. Specifically, PPP loan forgiveness cannot exceed the quotient of x ÷ y, where x = forgivable payroll costs, and y = 60%. For example if forgivable payroll costs during the forgiveness covered period were $750,000, then PPP loan forgiveness could not exceed $1,250,000 (i.e., $750,000 ÷ 60% = $1,250,000).10
21. Which PPP borrowers are allowed to use Form 3508EZ?To use Form 3508EZ, PPP borrowers generally (i) must not run afoul of the salary reduction rule (see above) and (ii) either (a) must not have reduced the number of employees, or the average paid hours of employees between January 1, 2020 and the end of the forgiveness covered period, or (b) must have been unable to operate during the forgiveness covered period at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.
22. What supporting documentation will we need to submit with our forgiveness application?Borrowers should be prepared to submit documentation such as third-party payroll service provider reports, payroll tax filings, bank account statements, cancelled checks, invoices and leases. A complete list of the documents a borrower must submit, as well as documents that must be maintained but don’t need to be submitted, is included with the instructions to Form 3508 and Form 3508EZ.11
23. Is there anything else that needs to be submitted with our forgiveness application?Yes. There is a list of representations and certifications that must be signed by the borrower’s representative and submitted as part of the application.
24. When will we know if our application for loan forgiveness is approved?Lenders will submit their decision on loan forgiveness to SBA within 60 days of receipt of the application. SBA is then expected to remit payment to the lender within 90 days (subject to any review by the SBA).
25. Is forgiveness treated as income for federal income tax reporting purposes?No. PPP loan forgiveness is tax-free to borrowers. But see also item 26 below. 
26. Does PPP loan forgiveness affect the tax deductibility of the associated forgivable costs?Yes. According to IRS Notice 2020-32, “no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (March 27, 2020) and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.” 12
27. What happens if a portion of our PPP loan is not forgiven?Any loan amounts not forgiven must be repaid over either a five-year or a two-year term13 with interest at 1.00% per annum. Payments are deferred through 10 months following the last day of the forgiveness covered period or until a determination of the amount of forgiveness is made by the SBA, during which time interest will continue to accrue.
28. If our PPP loan approved for forgiveness, how should it be treated in our financial statements?Please consult with your Aprio advisor for PPP financial accounting considerations.
29. How should PPP loan forgiveness and the associated forgivable costs be reflected in our income tax returns?Please consult with your Aprio tax advisor to discuss the particulars of your entity’s PPP loan and tax situation.

Please keep in mind that fact patterns will vary from entity to entity, and gaps in guidance remain. As a threshold matter and in light of heightened SBA scrutiny, be sure to:

  • Keep PPP loan proceeds segregated or clearly identifiable to the extent possible;
  • Track the usage of PPP loan proceeds carefully;
  • Plan out your forgiveness covered period;
  • Maintain appropriate supporting documentation; and
  • Protect confidential data.

[1] As of the date of this blog, there were 23 Interim Final Rules and 77 frequently asked questions.

[2] Aprio LLC is not, by means of this publication, rendering professional advice or services, and you should not take any action based on this information without first seeking professional advice tailored to your specific needs and circumstances.

[3] PPP borrowers with a bi-weekly (or more frequent) payroll schedule may elect to align the start of their forgiveness covered period with the first day of their first pay period following their loan disbursement date. This alternative forgiveness covered period applies only to forgivable payroll costs and not to forgivable non-payroll costs.

[4] Cash compensation includes all forms of cash compensation paid to employees, including salaries/wages, tips, commissions, bonuses and hazard pay.

[5] Transportation costs in this context refers to transportation utility fees assessed by state and local governments.

[6] Payroll costs incurred, but not paid during the borrower’s last pay period of the forgiveness covered period are eligible for forgiveness if paid on or before the next regular payroll date; otherwise payroll costs must be paid during the forgiveness covered period. An eligible non-payroll cost must be paid during the forgiveness covered period or incurred during the forgiveness covered period and paid on or before the next regular billing date (even if the billing date is after the forgiveness covered period). Forgiveness is not provided for costs accelerated from periods outside the forgiveness covered period.

[7] For purposes of this calculation tips, commissions, bonuses and hazard pay are not considered. In addition, the salary/wage reduction rule applies for the entire forgiveness covered period, even if a borrower submits their forgiveness application prior to the end of their forgiveness covered period. An Interim Final Rule released on June 22, 2020 provides an example: A borrower is using a 24-week covered period. This borrower reduced a full- time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period, with an FTE of 1.0. In this case, the first $250 (25 percent of $1,000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $1,200 as the salary/ hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by 24 weeks). If the borrower applies for forgiveness before the end of the covered period, it must account for the salary reduction for the full 24-week covered period (totaling $1,200).

[8] Whereas PPP loan eligibility is tied to headcount, the forgiveness provisions (i.e., the headcount reduction rule) are expressed in terms of FTEs.

[9] For a borrower submitting its forgiveness application prior to the end of its forgiveness covered period, current guidance does not address how the headcount reduction rule will be applied. It is our understanding that the FTE calculations will cut off as of the final payroll date for which PPP funds were used. 

[10] Based on the wording of prior guidance, some had speculated that this rule could result in no (i.e. $0) PPP loan forgiveness, if less than the specified percentage of a borrower’s loan proceeds were used to pay forgivable payroll costs during the forgiveness covered period. With the release of Form 3508 and its instructions, it is clear this will not be the case.

[11] Borrowers must retain this and other PPP-related documentation for six years after the date the loan is forgiven or repaid in full and must also allow authorized SBA representatives to access such files upon request.

[12] Legislation with the intent of overturning IRS Notice 2020-32 has been proposed.

[13] The maturity of the loan is 2 years for loans made prior to June 5, 2020 and 5 years for loans made on and after June 5, 2020. Loans with a maturity of 2 years can be extended to 5 years with the agreement of the lender.

Got questions? Connect with an experienced Aprio PPP Loan Assistance for Borrowers advisor today. 
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