Small Business Administration and Treasury Issue FAQs on Paycheck Protection Program Loan Forgiveness Issues Four Days prior to Loan Application Deadline
On August 4, 2020, the U.S. Small Business Administration (SBA), in consultation with the U.S. Treasury (Treasury), issued a series of 23 Frequently Asked Questions (FAQs) relating to Paycheck Protection Program (PPP) loan forgiveness issues. The FAQs arrive four days before the current August 8, 2020, deadline for applying for a PPP loan. While many of the FAQs merely aggregate and summarize previous guidance and rulemaking from SBA and Treasury, the FAQs do include some new and/or supplemental information that will be helpful to certain borrowers as they prepare to submit their PPP loan forgiveness applications.
For example, under the heading “General Loan Forgiveness FAQs,” SBA affirms that if a PPP borrower submits its loan forgiveness application within ten months after the end of its “covered period,” then the borrower will not be required to make any payments on the loan (including interest payments) until the forgiveness amount is remitted to the lender by SBA. If the PPP loan is not fully forgiven or if forgiveness is denied, the borrower would then be responsible for making payments on the loan (including the accrued interest on any amount of the loan that is not forgiven). The lender is responsible for notifying the borrower of remittance by SBA of the loan forgiveness amount (or that SBA determined that no amount of the loan is eligible for forgiveness) and the date on which the borrower’s first payment is due, if applicable.
Under the heading “Loan Forgiveness Payroll Costs FAQS,” SBA states that, for purposes of calculating an employee’s “cash compensation,” a borrower should use the employee’s gross amount of compensation (i.e., before deductions for taxes, employee benefits payments, and similar payments). This section also affirms that “payroll costs” include all forms of cash compensation paid to employees, including tips, commissions, bonuses, and hazard pay, but also notes that forgivable cash compensation per employee is limited to $100,000 on an annualized basis.
This section of the FAQs also confirms that forgiveness is not provided for employer expenses for group health benefits or retirement benefits accelerated from periods outside the borrower’s “covered period” or “alternative payroll covered period.”
Finally, this section affirms that the amount of compensation of owners who work at their business that is eligible for forgiveness depends on the business type and whether the borrower is using an eight-week or 24-week “covered period.” In addition to the specific caps described in the FAQs and prior rulemaking, the amount of loan forgiveness requested for owner-employees 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. For borrowers that received a PPP loan before June 5, 2020 and elect to use an eight-week “covered period,” this cap is $15,385. If their total compensation across businesses that receive a PPP loan exceeds the cap, owners can choose how to allocate the capped amount across different businesses. The FAQs include a series of examples for owner-employees of various entity types, including C-corporations, S-corporations, self-employed Schedule C (or Schedule F) filers, general partners and LLC owners. These examples provide further details on how such borrowers should complete their loan forgiveness applications with respect to “owner-employees” in light of their entity/tax status.
Under the heading “Loan Forgiveness Nonpayroll Costs FAQs,” SBA clarifies that payments made on recently renewed leases or interest payments on refinanced mortgage loans may be eligible for loan forgiveness as long as the original lease or mortgage existed prior to February 15, 2020. So, if a lease that existed prior to February 15, 2020 expires on or after February 15, 2020 and is renewed, the lease payments made pursuant to the renewed lease during the “covered period” are eligible for loan forgiveness. Similarly, if a mortgage loan on real or personal property that existed prior to February 15, 2020 is refinanced on or after February 15, 2020, the interest payments on the refinanced mortgage loan during the “covered period” are eligible for loan forgiveness.
Separately, this section of the FAQs states that, in respect to “transportation” utilities, forgivable costs in this category consist of “transportation utility fees assessed by state and local governments,” which is a narrower interpretation than many borrowers and advisors anticipated.
Finally, under the heading “Loan Forgiveness Reduction FAQs,” SBA affirms that in calculating loan forgiveness reductions based on full-time equivalent employee (FTE) levels, the borrower must include both those earning less than and those earning more than $100,000 on an annualized basis during the relevant periods.
For purposes of calculating loan forgiveness reductions based on salary or wage reductions, the FAQs confirm that the borrower need only consider decreases in salaries and wages (and not other forms of compensation, such as employee health and welfare benefits). This section also provides three example scenarios illustrating how borrowers should apply the loan forgiveness reduction calculations based on salary or wage reductions under various fact patterns.
While the SBA and Treasury’s most recent FAQs provide some useful additional information and guidance, borrowers and their advisors still have a number of questions relating to the forgiveness applications and process. For example, one critical open issue that was not addressed in FAQs relates to how FTE reductions will work if a borrower applies for forgiveness before the end of its covered period (for example, after 14 weeks instead of waiting the full 24 weeks). The current forms of applications, rulemaking and guidance do not provide a clear answer to this question and numerous others. We are also awaiting rulemaking on the appeals process that will apply when the SBA denies a borrower’s loan forgiveness request.
With this in mind, we will continue to track guidance from SBA and Treasury as well as legislative developments related to the PPP. We also encourage PPP borrowers to reach out to their Miller Johnson contacts to learn more about our flat-fee PPP Audit and Compliance Preparedness Program. This program offers clients a strategic solution to identify, gather and organize relevant documents and performance data to ensure their business is best positioned to comply with the ever-changing forms and rules governing the PPP. The program will also involve identifying key legal arguments so that clients are prepared for any potential enforcement action or inquiry. Additional details regarding this program are available here.