Paycheck Protection Program (PPP) Loan Forgiveness

When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.

Yes, SBA is extending the repayment date for this safe harbor to May 18, 2020, to give borrowers an opportunity to review and consider FAQ #46. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor.

The CARES Act explicitly states that loan forgiveness would be non-taxable.  Therefore, the expenses that normally would be deductible that are forgiven by a PPP loan, are not a deductible expense. As it currently stands, your taxable income will be increased by the amount of these expenses. Finally, the income associated with the forgiveness is excluded from gross income.

The IRS Code disallows any otherwise allowable deduction for the amount of any payment of an eligible PPP expense to the extent of the resulting covered loan forgiveness, preventing a double-tax benefit.  Many commentators assume that the intent of Congress was that this deductibility would be an additional benefit to the borrowers.  Unfortunately, Congress did not include any language in the CARES Act stating that expenses, would in fact, be deductible.

According to the SBA: The following methodology, which is one of the methodologies contained in the CARES Act, will be most useful for many applicants.

• Step 1: Aggregate payroll costs (detailed below) from the last twelve months for employees whose principal place of residence is the United States.
• Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.
• Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).
• Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.
• Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan (because it does not have to be repaid).

For example: None of these employees make more than $100,000

• Annual payroll: $120,000
• Average monthly payroll: $10,000
• Multiply by 2.5 = $25,000
• Maximum loan amount is $25,000

By clicking on the link here, you will be able to access an interactive loan calculator.

The 8 week period to determine the amount of the forgiveness begins on the date the lender makes the first disbursement of the loan. The lender must make the first disbursement of the loan no later than 10 calendar days from the date of the loan approval.

Applications/Documentation for loan forgiveness will be submitted to your lender. After you submit your application/documentation for forgiveness, your lender has to provide a response within 60 days.

Documentation for Loan Forgiveness In addition to the borrower certification required by Section 1106(e)(3) of the Act, to substantiate your request for loan forgiveness, if you have employees, you should submit:

• Form 941
• 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. The Administrator, in consultation with the Secretary, determined that for purposes of loan forgiveness it is appropriate to require self-employed individuals to rely on the 2019 Form 1040 Schedule C to determine the amount of net profit allocated to the owner during the covered period.

SBA recognizes that eligible borrowers that use PEOs or similar payroll providers are required under some state registration laws to report wage and other data on the Employer Identification Number (EIN) of the PEO or other payroll provider. In these cases, payroll documentation provided by the payroll provider that indicates the amount of wages and payroll taxes reported to the IRS by the payroll provider for the borrower’s employees will be considered acceptable PPP loan payroll documentation. Relevant information from a Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers, attached to the PEO’s or other payroll provider’s Form 941, Employer’s Quarterly Federal Tax Return, should be used if it is available; otherwise, the eligible borrower should obtain a statement from the payroll provider documenting the amount of wages and payroll taxes. In addition, employees of the eligible borrower will not be considered employees of the eligible borrower’s payroll provider or PEO.

Acceptable uses of the PPP loan funds include payroll costs, health care benefits, mortgage interest payments, rent, utility, interest payments on debt incurred prior to February 15, 2020, and/or refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.

According to SBA, payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.

According to the SBA, in general,borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019. For seasonal businesses, the applicant may use average monthly payroll for the period between February 15, 2019, or March 1, 2019, and June 30, 2019. An applicant that was not in business from February 15, 2019 to June 30, 2019 may use the average monthly payroll costs for the period January 1, 2020 through February 29, 2020.

Borrowers may use their average employment over the same time periods to determine their number of employees, for the purposes of applying an employee-based size standard. Alternatively, borrowers may elect to use SBA’s usual calculation: the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application (or the average number of employees for each of the pay periods that the business has been operational, if it has not been operational for 12 months).

Both the amount of a PPP loan and the loan forgiveness provisions are based in principal part upon the employer’s “payroll costs.” As defined in the CARES Act, payroll costs include “the sum of payments of any compensation with respect to employees that is salary, wage, commission, or similar compensation.” By this definition, which can be up to the reader’s interpretation, it seems as though bonuses would be considered as a part of the employee’s salary and as such, addressed as payroll costs.

That being said, it’s unclear whether such payments will be considered payroll costs eligible for forgiveness. (Section 4116 of the CARES Act specifically references bonuses). SBA might limit wage payroll costs to the average wages paid to the employee in a past measurement period. We will provide additional information as it becomes available.

The employee federal withholding is included in allowable payroll costs for the purposes of determining the amount to be forgiven. The employer federal payroll taxes (i.e. FICA and Medicare taxes) imposed on the gross payroll are not eligible payroll costs for the loan forgiveness calculation.

At least 75% of the loan proceeds must be used for payroll costs. If salaries decrease by more than 25% for any employee who made less than $100,000 annualized in 2019 OR if the number of FTEs decreases, the forgiveness amount will be reduced.

By clicking on the link here, you will be able to access an interactive loan calculator.

Unfortunately, a clear definition of a full time equivalent (FTE) is unavailable in the statute and additional guidance provided by the SBA. The traditional calculation of an FTE is an employee’s scheduled paid hours divided by the employer’s hours for a full-time workweek, however the rules of the SBA typically treat all employees, regardless of full time, part-time or temporary, equally.

Your pre-COVID-19 FTE headcount will likely be either the average monthly FTEs from February 15, 2019, through June 30, 2019, or the average monthly FTEs from January 1, 2020, through February 29, 2020. You can choose which pre-COVID-19 period to use, so calculate the headcount for each period and select the lower of the two to help minimize any reduction in the forgiveness amount.

We will watch for (and share when available) additional guidance on the treatment of the following employees categories:

• furloughed employees
• employees on workshare programs
• employees on reduced schedules
• former employees receiving severance
• employees who voluntarily terminated
• employees who were terminated for cause
• employees on paid leave

We will need to wait for additional guidance. Once more information becomes available, we will provide an update.

No, the forgiveness of the loan does not constitute taxable income.

No, mileage reimbursement for business travel does not count towards PPP forgiveness.

No, mileage reimbursement for business travel does not count towards PPP forgiveness.

• Owner compensation replacement (calculated based on 8/52 of 2019 net profit from Form 1040 Schedule C)
• Employee payroll costs (as defined by the interim rule) Business mortgage interest payments on real/personal property
• Business rent payments
• Business utility payments
• Interest payments on debt obligations incurred before February 15, 2020
• Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020

Note that the individual must have claimed or be entitled to claim a deduction for the included expenses on 2019 Form 1040 Schedule C.

The amount of the loan forgiveness will depend on the amount spent during the 8 week period on:

• Payroll costs as defined by the interim rule (does not include benefits for owners)
• Owner compensation replacement (limited to 8/52 of 2019 net profit and excluding any qualified sick or family leave equivalent amount for which a credit was claimed under FFCRA)
• Interest payments on mortgage obligations for real/personal property incurred before February 15, 2020
• Rent payments on lease agreements in force before February 15, 2020
• Utility payments under service agreements dated before February 15, 2020

*Note that for interest, rent and utility payments, the amounts must be deductible on Form 1040 Schedule C.

• certification that the documentation provided is true and correct and the amount for which forgiveness is required was used to retain employees, and make interest, rent and utility payments
• If the self-employed individual has employees, Form 941 and state quarterly tax reporting forms or equivalent payroll processor records that correspond to the covered period
• Evidence of business rent, mortgage interest payments or utility payments for loan proceeds used for these purposes
• 2019 Form 1040 Schedule C

There isn’t a specific timeline on when to request forgiveness but we suggest you do so as soon as the 8 weeks are up. At this point, the bank will have 60 days to respond to your request.

Applying the loan forgiveness provisions to partnerships and LLCs has generated much confusion. Guidance issued by SBA confirms that loans by partners are not permissible, and a partnership and its partners (and an LLC filing taxes as a partnership) are limited to one PPP loan.

Many questions remain. For example, SBA guidance states that “the self-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership.” It’s unclear if this means that a partnership with several active partners, each of which has more than $100,000 in self-employment income, is limited to $100,000 in the aggregate.

• Step 1: Compute 2019 payroll costs by adding the following:
  • 2019 Schedule K-1 (IRS Form 1065) Net earnings from self-employment ofindividual U.S. based general partners that are subject to self-employment tax, computed from box 14a (reduced by any section 179 expense deduction claimed, unreimbursed partnership expenses claimed, and depletion claimed on oil and gas properties) multiplied by 0.9235,2 up to $100,000 per partner (if 2019 schedules have not been filed, fill them out);
  • 2019 gross wages and tips paid to your employees whose principal place of residence is in the United States, if any, which can be computed using 2019 IRS Form 941 Taxable Medicare wages & tips (line 5c-column 1) from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips, subtracting any amounts paid to any individual employee in excess of $100,000 and any amounts paid to any employee whose principal place of residence is outside the U.S;
  • 2019 employer contributions for employee health insurance, if any (portion of IRS Form 1065 line 19 attributable to health insurance);
  • 2019 employer contributions to employee retirement plans, if any (IRS Form 1065 line 18); and
  • 2019 employer state and local taxes assessed on employee compensation, primarily state unemployment insurance tax (from state quarterly wage reporting forms), if any.
• Step 2: Calculate the average monthly payroll costs (divide the amount from Step 1 by 12).
• Step 3: Multiply the average monthly payroll costs from Step 2 by 2.5.
• Step 4: Add any outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

There is no definite answer yet on land rent, we are still waiting for further clarity but as long as the agreement was in place before Feb 15, 2020 it has a chance. 

• Step 1: Compute 2019 payroll costs by adding the following:
  • 2019 gross wages and tips paid to your employees whose principal place of residence is in the United States, which can be computed using 2019 IRS Form 941 Taxable Medicare wages & tips (line 5c-column 1) from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips, subtracting any amounts paid to any individual employee in excess of $100,000 and any amounts paid to any employee whose principal place of residence is outside the U.S;
  • 2019 employer health insurance contributions (portion of IRS Form 1120 line 24 or IRS Form 1120-S line 18 attributable to health insurance);
  • 2019 employer retirement contributions (IRS Form 1120 line 23 or IRS Form 1120-S line 17); and
  • 2019 employer state and local taxes assessed on employee compensation, primarily state unemployment insurance tax (from state quarterly wage reporting forms).
• Step 2: Calculate the average monthly payroll costs (divide the amount from Step 1 by 12).
• Step 3: Multiply the average monthly payroll costs from Step 2 by 2.5.
• Step 4: Add the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

• Step 1: Compute 2019 payroll costs by adding the following:
  • 2019 gross wages and tips paid to your employees whose principal place of residence is in the United States, which can be computed using 2019 IRS Form 941 Taxable Medicare wages & tips (line 5c-column 1) from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips, subtracting any amounts paid to any individual employee in excess of $100,000 and any amounts paid to any employee whose principal place of residence is outside the U.S;
  • 2019 employer health insurance contributions (portion of IRS Form 990 PartIX line 9 attributable to health insurance);
  • 2019 employer retirement contributions (IRS Form 990 Part IX line 8); and
  • 2019 employer state and local taxes assessed on employee compensation, primarily state unemployment insurance tax (from state quarterly wage reporting forms).
• Step 2: Calculate the average monthly payroll costs (divide the amount from Step 1 by 12).
• Step 3: Multiply the average monthly payroll costs from Step 2 by 2.5.
• Step 4: Add the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).