More Changes to PPP Forgiveness Rules
On August 4, 2020, the Treasury and the Small Business Administration released a set of Frequently Asked Questions (“FAQs”), changing and clarifying the rules that were outlined in the Loan Forgiveness Applications released last month. Most significantly, the FAQs confirm that an 8- or 24-week Covered Period or Alternative Covered Period may, in fact, include more than 8- or 24-weeks of pay, depending on a borrower’s loan disbursement date and payroll cycles. However, prepaid health premiums and certain retirement plan contributions are no longer allowed as expenses that can be included for forgiveness. In addition, we finally have a definition of the transportation costs that all but eliminates previous concepts of what qualified for forgiveness. We have clarification that renewals of leases qualify as leases in place on February 15, 2020, and new guidance on the limits for amounts paid to owner-employees that can be included in forgiveness. With the recent statutory changes, allowing for a 24-week covered period and the ability to use up to 40 percent of the forgiveness amount for non-payroll costs, most borrowers will still be able to achieve 100 percent forgiveness, notwithstanding the changes.
Many people are inclined to file for forgiveness as soon as they possibly can as compiling expenses and documentation of those expenses can be time consuming. In general, we advise borrowers to not rush into filing for forgiveness until they are certain that they have achieved the maximum level of forgiveness. Only in special situations (e.g., acquisitions) do we think that early filing is good idea.
In general, wages paid or incurred can be used for loan forgiveness. This focus on both amounts paid and incurred allows a borrower to include in the forgiveness application wages for periods before the loan disbursement date as long as the paycheck distribution or ACH initiation are during the 8- or 24-week period. In addition, a paycheck or ACH initiation after the end of the covered period can be included in the loan forgiveness calculation as long as the wages are incurred during the covered period. Bonuses, tips, hazard pay and amounts paid to replace commissions that were not earned can be included in forgiveness wages.
Wages paid or incurred include amounts paid to employees and salary reduction amounts paid for group health benefits and retirement plans. In addition to this compensation, amounts paid by the employer for health benefits and retirement plan contributions for employees are payroll costs that can be used for forgiveness.
The FAQs make clear that health benefits cannot be prepaid, but must be payments paid or incurred during the 8 or 24 week period or, in the case of insurance premiums, paid by the next premium due date after the end of the 8 or 24 week period and incurred during the 8- or 24-week period. Paying health benefit costs during the covered period for benefits to be provided after the covered period does not result in a payment that can be used for loan forgiveness.
With respect to employer retirement plan contributions, the rules are not as clear. We believe that the intent is not to allow prepayment of retirement plan contributions. The language states that “contributions for benefits accelerated from periods outside” the 8- or 24-week period cannot be used for forgiveness. This seems to mean that only matching contributions related to employee contributions during or before the 8- or 24-week period can be included. What is less clear is whether a proportionate share of a 2020 annual profit sharing can be included as a forgivable cost if paid within the 8- or 24-week period. It would seem that 8/52 or 24/52 of a 2020 retirement plan contribution can be included if paid within the 8- or 24-week period. Because the language specifically focuses on accelerating payments, any 2019 retirement plan contribution paid during the covered period seems to be includible in forgiveness amounts.
Owner Employee Rules
With release of the loan forgiveness application, instructions were clear that, for borrowers using the 24-week period, an owner-employee’s payroll costs could not exceed $20,833, the amount of wages used in calculating the maximum loan amount. For those borrowers using the eight-week covered period, the limit is $15,385. This limit applies to all businesses in which the individual has any ownership stake. In addition, additional limits apply depending of the type of business.
A C corporation owner-employee’s wage amount is limited to 2.5/12 of 2019 employee cash compensation. In addition, employer contributions for owner-employee health insurance is a cost that can be included in the forgiveness application. Employer retirement plan contributions for an owner-employee are capped at 2.5/12 of the 2019 retirement plan contribution. Only cash compensation and not retirement plan or group health plan costs count toward the $15,385 or the $20,833 limit.
S corporation owner-employees are treated a bit differently. For owner-employees with less than a two percent ownership interest, determined with attribution, the rules of C corporation owner-employees apply. A more than two percent shareholder employee has group health benefits included in wages and thus no additional amount for group health benefits can be used in loan forgiveness applications. Retirement plan contributions for all S corporation shareholder employees are capped at 2.5/12 of the 2019 retirement plan contribution. Pass-through income or loss on the S corporation Form K-1 has no impact on the forgiveness amount. Only cash compensation and not retirement plan or group health plan costs count toward the $15,385 or the $20,833 limit.
Wages for a partner are 0.9235 times the self-employment income reported on their Form K-1, reduced by unreimbursed partnership expenses and the section 179 expense deduction. In addition, no amount can be included in the forgiveness application for group health benefits or retirement plan contributions for these individuals as these amounts are paid by the partner and not the partnership. Only the amount paid to the partner during the 8- or 24-week period can be included in the forgiveness calculation.
Sole proprietors filing a Schedule C or F are limited to the 2.5/12 of the net profit reported for tax purposes. These individuals are not able to get forgiveness for any health insurance payments or retirement plan contributions.
LLC owners follow the rules for either general partners or corporations, matching how the LLC filed its 2019 taxes, or for new LLCs in 2020, the planned method of filing in 2020.
In addition, while earlier guidance stated that borrowers could submit either copies of filed 2019 tax documents or drafts of such documents, the current FAQs seem to require copies of actual filed documents. Thus it would appear that borrowers will need to complete their 2019 tax forms before applying for forgiveness.
Non-payroll costs include mortgage interest, rent or lease payments and utilities. These amounts need to be paid or incurred during the 8 or 24 weeks. Past due amounts paid during the 8 or 24 week period can be included for forgiveness as well as amounts paid after the end of the covered period, incurred in the covered period, and paid on or before the next billing date. Other than a prohibition against counting prepaid mortgage interest, there is no guidance regarding whether the other amounts can be prepaid. It is clear that more than 8 or 24 weeks of expenses can be included because of the interplay of the paid or incurred rules and the timing of bills.
The FAQs make clear that payments on leases in place on February 15, 2020, which expired and were renewed can be used for forgiveness. In addition, electricity supply, distribution charges and other charges such as gross receipts taxes are utility payments, making the entire electricity bill eligible for loan forgiveness.
The FAQs define a “payment for a service for the distribution of transportation” as a transportation fee assessed by a state or local government. The most prominent example provided are Transportation Utility Fees used in a handful of states and localities. The interim final regulations for PPP loans for self-employed persons note that gasoline for business vehicles is eligible for forgiveness for those individuals.
Loan Forgiveness Reduction
The rules require a reduction in the amount of the expenses incurred in the 8- or 24-week period that can be used to apply for loan forgiveness. These reductions are based on reduced FTE employment levels and reduced annual salaries or hourly wages. The reductions apply to the total expenses incurred and not to the loan amount. The costs incurred during the 24-week period may be large enough that the required reduction may not reduce the allowable expenses below the loan amount, enabling the borrower to still get the entire PPP loan forgiven even though FTE employment levels or annual salaries or wages have declined.
Loan Forgiveness Reductions for Employment Levels
In determining the number of FTE employees, a borrower can include individuals employed on February 15, 2020, who decline employment when a valid offer to rehire was extended and no similarly qualified individual can be hired for the unfilled position on or before December 31, 2020. The borrower needs to inform the applicable state unemployment insurance office of the rejection of the employment offer within 30 days of the rejection of the offer. Documentation of this individual’s inclusion as an employee for the FTE employee calculation includes the written offer to rehire, a written record of the rejection and a written record of the effort made to hire a similarly qualified individual.
The previously issued interim final regulations provide that in making the FTE employment level reduction calculation an employee who is fired for cause or voluntarily resigns can also be included in the FTE calculation as if they were still employed. Documentation required for this include records demonstrating that the individual was fired for cause or resigned.
Loan Forgiveness Reductions for Annual Salaries/Hourly Wages
In addition to the loan forgiveness reduction for employment levels, there is a reduction if the borrower has reduced the annual salary or hourly wage for an individual who made less than $100,000 on an annualized basis in all payroll periods in 2019 by more than 25 percent. This amount only applies to annual salaries and hourly wages and does not consider bonuses, tips or other compensation. This reduction is the reduction in excess of 25 percent for the 8 or 24 weeks. If an application is filed before the end of the 24-week period, the reduction is calculated over the entire 24 weeks.