By Raffi Yousefian | Published 05/26/2020
Treasury has issued long-awaited guidance regarding PPP loan forgiveness. We learned a lot from the loan forgiveness application as we’ve outlined here, and some more from the recently issued guidance. However, neither address the two most concerning components of PPP loan forgiveness; the requirement that PPP funds be spent during the 8-week period following the loan, and the requirement that 75% of funds be spent on payroll to qualify for forgiveness. On the bright side, these two issues are the focus of multiple bills being considered in Congress this week. The Senate’s version of a bill could extend the 8-week window to 16 weeks or 24 weeks, and eliminate the 75/25% restriction. The House will be voting on legislation that will extend the 8-week window to 24 weeks, eliminate the 75/25% restriction, extend the loan term, and extend the rehiring date beyond 6/30. Nonetheless, there seems to be bipartisan alignment on these issues, so we’re confident that something will get passed soon. We’ll continue to keep you updated.
Without further ado, here is some additional information on loan forgiveness:
Applying for Forgiveness
The borrower must submit an application after the 8-week period to receive forgiveness, but the due date is not yet clear. The lender has 60 days from the completed application date to issue a decision. The guidance establishes that the SBA may review any PPP loan, regardless of size, to determine if the borrower is eligible for PPP loans, calculated the loan amount correctly, used the funds for eligible costs, or is eligible for the amount of loan forgiveness it requests.
Payments to Owner Employees, Partners, and Self-employed Individuals
The amount of loan forgiveness for owner employees, self-employed individuals, and managing partners is limited to the lesser of (1) $15,385 ($100k annualized) during the 8-week period (2) or 8/52 x 2019 compensation. It has been clarified that the cap for Schedule C filers is based on their 2019 net profit. If your 2019 Schedule C was showing a loss then the amounts you pay yourself are not eligible for forgiveness. General partners or managing partners are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235. No additional forgiveness is provided for retirement or health insurance contributions for owner employees, self-employed individuals, and managing partners.
As we know 25% of forgivable amounts can be attributable to nonpayroll costs such as rent, utilities, and mortgage interest. A nonpayroll cost is eligible for forgiveness if it is:
- paid during the covered period; or
- 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.
This means you could potentially prepay or pay overdue amounts for qualified nonpayroll costs and have the amounts forgiven. However, Treasury has clarified that advance payments of interest on mortgage obligations are not eligible for forgiveness.
Reduction in Amounts Forgiven
The amounts forgiven are impacted if you reduce your workforce during the 8-week period. In our previous emails, we advised that employees whom the borrower offered to rehire or offered to restore wages are generally exempt from the loan forgiveness reduction calculation. It has now been clarified that the borrower may exclude any reduction in full-time equivalent employee headcount that is attributable to an individual employee if:
- the borrower made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or the alternative payroll covered period;
- the offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;
- the offer was rejected by such employee;
- the borrower has maintained records documenting the offer and its rejection; and
- the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer. This process will be defined on the SBA’s website.
Forgivable amounts will not be reduced if a decrease in FTE count or wages is attributable to employees who have been fired for cause, voluntarily resigned, or voluntarily requested a reduced schedule during the cover period.
This is all I’ve got for now, please feel free reach out if you have any questions.