Loan forgiveness is fundamental to the SBA’s Paycheck Protection Program (PPP), which provides loan assistance to businesses to help keep them afloat and retain employees during the COVID-19 pandemic. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) initially provided $349 billion in forgivable PPP loans for small businesses with fewer than 500 employees. When that money ran out, Congress approved an additional $320 billion to replenish the funds.
As of June 1, 2020, the SBA had approved 4.5 million PPP loans totaling more than $510 billion, and 79% of the loans are under $100,000. Now that the SBA has released the application for loan forgiveness, it is essential to understand its requirements.
PPP Loan Recap
PPP loans are forgivable if the employer spends 60% of the loan amount on covered payroll costs and meet certain other tests. Loans must all originate prior to June 30, 2020. Borrowers must have been in business by February 15, 2020 with employees on payroll. If they meet all of the program’s requirements, up to 100% of the tax-free loan proceeds may be forgiven. To seek forgiveness, the borrower must submit an application to the lender that includes documentation verifying the number of employees, pay rates and canceled checks which show mortgage, rent or utility payments.
The loan proceeds per the CARES Act are to be used during an 8-week “covered period”, beginning on the date of the first loan disbursement. The bill passed by the Senate on June 3, 2020, H.R. 7010, allows for an extension of the covered period. The covered period would begin on the date of the loan origination and ending 24 weeks later or by December 31, 2020, whichever is earlier. This bill allows certain eligible borrowers to elect the original 8-week covered period, forgoing the extension.
PPP Loan Forgiveness Application
The SBA recently released the PPP Loan Forgiveness Application. The instructions in the application guide borrowers through the issues they must understand in planning how they will spend their PPP loan proceeds during the covered period. The following information provides key highlights of the loan forgiveness requirements. This application is likely to change with the passage of H.R. 7010.
Eligible Payroll Costs
Payroll costs incurred during the final days of the covered period and paid on or before the next regular payroll date are eligible for forgiveness. The maximum payroll for any one individual during the eight-week covered period is $15,385, and the cap for owner-employees, self-employed individuals and self-employed partners is $15,385 based on 8/52 of 2019 compensation. Guidance is expected regarding the treatment of wages attributed to relatives, spouses or children of owners, though it appears the wages will be included in loan forgiveness. With the passage of H.R. 7010, guidance will determine if the forgiveness amount can now be 24/52 of 2019 compensation.
There are no limitations on costs during the covered period, and there may be an opportunity for employers to pay 2019 accrued retirement contributions during this period and have the costs count toward the 60% payroll costs threshold. Again, there may be guidance that will provide specifics.
- Health Insurance
Self-insurance and employer-sponsored group health plans are considered eligible costs, minus the employee’s contributions. Guidance is expected to clarify accrued costs during the covered period.
Employer state taxes are included under eligible payroll costs.
- Eligible Non-Payroll Costs
The loan forgiveness application includes costs not associated with payroll. These costs must be paid or incurred during the covered period and paid on or before the next billing date. However, borrowers may determine whether they want to exclude any portion of non-payroll costs in the application.
- Mortgage Interest
Borrowers may include interest on business mortgages for real or personal property, as long as it was in place before February 15, 2020. The rules appear to include loans for equipment and vehicles. Prepayments are not allowed.
Rent or lease payments for real or personal property in effect prior to February 15, 2020 are eligible. The rules appear to include loans for equipment and vehicles.
Covered services in effect before February 15, 2020 include telephone, gas, internet, water, electricity and transportation, though guidance is needed regarding which costs are included under transportation.
Employers should also take note of loan forgiveness reductions for fractional employees and reference periods to determine full-time employee (FTE) reductions. Borrowers will need to certify that their tax documents are consistent with their IRS and state tax filings.
These highlights provide a broad overview of the loan forgiveness guidelines. Each borrower will have specific considerations that can best be reviewed with their business and tax advisors. Our Loan Forgiveness FAQ provides further details about the loan forgiveness aspects of the PPP. Please note that guidance is continuing to evolve, and we will keep you updated on new developments.
Goldin Peiser & Peiser is assisting business owners with the PPP loan application. Our CARE team can help ensure you are receiving the maximum amount of loan forgiveness by complying with program requirements.
COVID-19 Resources and Planning Services
Need timely updates and helpful links to COVID-10 disaster relief programs? Visit GPP’s COVID-19 Business Assistance and Resource Center. To learn the best path forward for your business during this challenging time, our COVID-19 Business Advisory and Planning Services Group is ready to assist.
For immediate questions, email CARETEAM@GPPcpa.com
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.