PPP Forgiveness Guidance Updates per FAQs Released Aug. 4, 2020

Jan. 6, 2021 PPP Update: The SBA released initial guidance for PPP loans updates per the Economic Aid Act passed on Dec. 27, 2020. We’re still diving into the details, which may affect the following information. Stay tuned for updates! In the meantime, visit the SBA's PPP web page for the most-up-to-date guidance. 

On August 4, the Small Business Administration (SBA), in consultation with the Department of Treasury, released a 10-page FAQ on PPP loan forgiveness that clarifies various topics, such as allowable costs, officer compensation, and forgiveness amount reductions due to FTE and wage/salary levels. The SBA updated the FAQs with information on Economic Injury Disaster Loans on August 11.

If you're not game for reading another 10+ pages on PPP, here are the key takeaways from the PPP Loan Forgiveness FAQs that we found most informative:

  • Salary/Hourly Wage Comparison: the guidance (see: Q&A 4 & 5, pages 8 - 10) confirms our understanding that employers, which did not reduce their employee's salaries or hourly rates of pay by more than 25%, shouldn't be subject to any loan forgiveness reductions even if they had employees whom experienced an overall reduction in gross wages due to reduced hours or a drop in income from other earnings such as tips, commissions or bonuses. In simple terms, if you did not cut your employee's hourly rates or annualized salaries by more than 25%, you should be good.
  • Paid or Incurred Payroll Costs (not "and"): throughout the words "paid and incurred" caused all sorts of debates, but the guidance (see: Q&A 1 - 3, pages 2 & 3) clarifies that employers can essentially include any payrolls that were paid or incurred during the covered periods. 
    • Question #1 speaks to pay periods that had wages incurred (the pay period work days were during a coverage period), but paid after the coverage period. 
    • Similar, question #2 supports that payroll costs that were incurred before the covered period, but were paid during the coverage period also may be included in loan forgiveness. 
    • Question #3 is still a bit confusing, but speaks to situations where employers may have partial pay periods at the tail end of a coverage period paid outside of a coverage period. This is where those on a bi-weekly or weekly pay frequency may opt to use the alternative payroll coverage period, so they don't have to worry about pro-rating payroll costs for partial pay periods paid outside of the coverage period.  
    • Question #3 didn't provide an example for those on a semi-monthly or monthly basis though. Let's hope employers on semi-monthly or monthly pay frequencies don't have to include those final payroll periods to reach full forgiveness because reading between the lines here seems to suggest they would need to pro-rate that last pay period to include only those incurred during the covered period.
  • Do NOT "Accelerate" Payments to Get Them Included: at various points in this guidance there are references to "accelerated payments"; essentially the direction to borrowers is clear, they cannot prepay items that were not incurred or for which liability became due during a covered period. 
    • Health Insurance: (see: Q&A #6 page 4) "forgiveness is not provided for expenses for group health benefits accelerated from periods outside the Covered Period or Alternative Payroll Covered Period".
    • Retirement Benefits: (see Q&A 7 page 4) "forgiveness is not provided for employer contributions for retirement benefits accelerated from periods outside the Covered Period or Alternative Payroll Covered Period".
    • Nonpayroll Costs: (see Q&A #1, 2, 3 page 6-7)  While the term accelerated isn't used here, the intention is clear as detailed in the answer to #3, "Nonpayroll costs must be paid or incurred during the Covered Period to be eligible for loan forgiveness".
  • Avoid Including Nonpayroll Expenses for Past-due Rent and Utilities: Admittedly, this is not specifically stated in the guidance, but rather an interpretation based on reading between the lines of the examples provided in the guidance (see: Q&A #1&2, page 6). Regardless, it would appear to be overly aggressive should a borrower include business rent, lease or utility costs incurred prior to a Covered Period that weren't paid according to the regular payment terms in their loan forgiveness calculations. Example: A borrower, who was behind on rent or utilities that incurred prior to and which became past due prior to the coverage period, should try to avoid including those amounts in their forgiveness calculations even though they may have been paid during the covered period.
  • Transportation Costs: (see:Q&A #6, page 7) The guidance released here may be the biggest shocker from the August 4th FAQ's as it points to a total re-definition of transportation costs which had been widely discussed during webinars across the CPA industry and even during those attended by SBA representatives. Essentially, this eliminates transportation costs as eligible for forgiveness for most borrowers. It re-defines transportation costs as those limited to understanding that had been described during previous webinars & industry discussions including those hosted by AICPA.
  • Gross Wages/Cash Compensation NOT Net: (see: Q&A #4&5, page 3) - guidance here makes it clear for those still confused that gross wages should be used in determining forgiveness & for reporting cash compensation on schedule A's. In addition, Q#5 make it clear the total should include all taxable wage types including bonuses, commissions, hazard pay, and tips. As a reminder, the PPP Applicable Payroll Report we've been sharing with employers will simplify things for those struggling with what payroll wages/taxes are applicable to forgiveness -- however, the report isn't able to exclude those with wages in excess of $15,385 for an 8-week coverage period or $20,833 for a 24-week coverage period, employers should still spot check those to insure they aren't exceeding the $100K max rule.
  • Health & Retirement Employer Expense Only: (see: Q&A #6&7, page 4) - don't go off your bank statements to determine your expense of these items. Employers that deduct a portion of health premiums pre-tax or after-tax from their employee's paychecks may only include the net cost to the employer. Thus employers will need to reference the payroll reports to confirm they are properly deducting these employee paid amounts before arriving at the employer's health expenses. Similar, employers may only include the employer match portion of payments made to retirement programs not simply the total amount paid which includes the employee portions -- see treatment of owner's health/retirement below for special considerations.
  • S-Corporation Owners / 2% or Greater Shareholders & Health Insurance: guidance (see: Q&A 8, pages 4 &5) released clarifies that officer health insurance costs should be treated as cash compensation since it is reported or should be reported as box 1 wages on an officer's W2 each year. While owner's health costs can technically count towards forgiveness, they could be limited since as wages they will be subject to the $100K cap calculations per individual. Mechanics of this cost and reporting may need to be discussed with lenders, reason being, most officers tend to only report these health amounts with their final payrolls of each calendar year for W2 reporting as opposed to with each payroll during a calendar year. Please check with your lenders on this matter to see if they will require these amounts be reported in the payroll reports during the coverage period vs. simply substantiated from health insurance invoices. If they do wish to see the items listed on officer's pay stubs during the coverage period, please let us know and we can record this memo item after the fact to adjust the reporting as the item will not create any additional tax liabilities even if corrected in retro (preference being reporting in Q3 since Q2 941's would require an amended return).
  • Owner's Retirement Match Calculations: (see: Q&A 8, pages 4 &5) company retirement match contributions related to owners are capped at no more than 2.5/12 of the 2019 employer retirement contribution. However, these amounts as well as those associated with state unemployment premiums do not count toward the $15,385 8-week or $20,833 24-week caps per individual.
  • Owner's Compensation Capped Across All Entities: (see: Q&A 8, page 4) the amount of loan forgiveness requested for owner-employee and self-employed individuals' payroll compensation is capped at $20,833 per individual in total across all businesses in which he or she has an ownership stake.
  • Seasonal Employers FTE Reference Period: If borrower used a 12-week period between May 1, 2019 and September 15, 2019 to calculate the original loan basis, the borrower should use the same 12-week period as a the reference period for calculation of any reductions in loan forgiveness related to FTE or salary/hourly wage comparisons.

Disclaimer: This information is provided as a self-help tool and does not constitute legal or financial advice. Laws, regulations and lending products are changing daily and decisions as to whether or how to use this information and/or what actions to take in response to the COVID19 Pandemic are solely those of the employer. The providers of this information disclaim any and all responsibility and liability for its accuracy, completeness or fitness for your particular business purposes.