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August 13, 2020
On August 4, 2020, the Small Business Administration (SBA), in consultation with the Department of the Treasury, released Frequently Asked Questions (FAQs) regarding the loan forgiveness aspects of the Paycheck Protection Program (PPP). Here are the key take-aways.
FORGIVENESS OF PAYROLL COSTS
Payroll Costs Incurred or Paid Outside of the Covered Period
Borrowers who incur payroll costs during the Covered Period but pay them after the Covered Period are eligible for loan forgiveness if they pay the payroll costs on or before the next regular payroll date after the Covered Period. In addition, borrowers who incur payroll costs before the Covered Period but pay them during the Covered Period are eligible for loan forgiveness.
What Constitutes Payroll Costs?
All Forms of Cash Compensation
Payroll costs include all forms of cash compensation, including tips, commissions, bonuses, and other forms of incentive pay. However, $100,000 (on an annualized basis) per employee is the maximum amount of cash compensation eligible for forgiveness.
When calculating cash compensation, borrowers should use the gross amount of compensation paid to an employee, not the net amount following deductions for taxes, employee benefits, or other payments.
Employer Expenses for Group Health Care Benefits
Employer expenses for employee group health care benefits that a borrower pays or incurs during the Covered Period constitute payroll costs that are eligible for loan forgiveness. However, group health benefits expenses accelerated from periods outside of the Covered Period are not eligible for forgiveness, nor are employee contributions to those benefits.
If a borrower has an insured group health plan, insurance premiums that it pays or incurs during the Covered Period qualify as payroll costs, as long as the borrower pays the premiums during the Covered Period or by the next premium due date after the end of the Covered Period.
Generally, employer contributions for employee retirement benefits that a borrower pays or incurs during the Covered Period qualify as payroll costs that are eligible for loan forgiveness. Forgiveness does not include employee contributions to such benefits or employer contributions that are accelerated from periods outside of the Covered Period.
Forgiveness of Owner Compensation
For owners who work at their business, the amount of their compensation 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 noted in the FAQs per business type, forgiveness is capped at a total of $20,833 per individual across all businesses in which he or she has an ownership stake. For borrowers that received a PPP loan before June 5, 2020 and elected to use an eight-week Covered Period, this cap is $15,385. If an owner’s total compensation across businesses that receive a PPP loan exceeds the cap, the owner can choose how to allocate the capped amount across different businesses.
FORGIVENESS OF NON-PAYROLL COSTS
Non-Payroll Costs Incurred or Paid Outside of the Covered Period
Eligible business mortgage interest costs, eligible business rent or lease costs, and eligible business utility costs incurred prior to the Covered Period and paid during the Covered Period are eligible for loan forgiveness. They also are eligible for loan forgiveness if a borrower incurred them during the Covered Period and paid them on or before the next regular billing date, even if the billing date is after the Covered Period.
Interest on Unsecured Credit
Payments of interest on business mortgages on real or personal property (such as an auto loan) are eligible for loan forgiveness. Interest on unsecured credit is not eligible for loan forgiveness.
Recently-Renewed Leases or Refinanced Mortgage Loans
If a borrower renews a lease that expired on or after February 15, 2020, but existed prior to that date, the lease payments that a borrower makes pursuant to the renewed lease during the Covered Period are eligible for loan forgiveness. Similarly, if, on or after February 15, 2020, a borrower refinances a mortgage loan on real or personal property that existed prior to February 15, 2020, the interest payments on the refinanced mortgage loan during the Covered Period are eligible for loan forgiveness.
Full-Time-Equivalent (FTE) Employee Reduction Exceptions
In calculating its loan forgiveness amount, a borrower may exclude a reduction in FTE employees if the borrower is able to document in good faith: (1) an inability to rehire individuals who were employees of the borrower on February 15, 2020; and (2) an inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020. Borrowers must inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer. To show compliance with this exemption, borrowers should maintain a record of the written offer to rehire an individual, a written record of the individual’s rejection of the offer, and a written record of efforts to hire a similarly qualified individual.
Calculating Loan Forgiveness Arising from Reductions in Wages
Certain pay reductions during the Covered Period may reduce the amount of a borrower’s loan forgiveness. If a borrower reduces the salary or hourly wage (not other forms of compensation) of a covered employee by more than 25% during the Covered Period, the portion in excess of 25% reduces the eligible forgiveness amount unless the borrower satisfies the Salary/Hourly Wage Reduction Safe Harbor (as described in the Loan Forgiveness Application).
Scans, e-Signatures, and e-Consents
All PPP lenders may accept scanned copies of signed loan forgiveness applications and documents containing the information and certifications required by the loan forgiveness applications. Lenders also may accept any form of e-Consent or e-Signature that complies with the requirements of the Electronic Signatures in Global and National Commerce Act (P.L. 106-229). However, this guidance does not supersede signature requirements imposed by other applicable law, including by the lender’s primary federal regulator.
When Do Loan Repayments Begin?
As long as a borrower submits its loan forgiveness application within ten months of the completion of the Covered Period, the borrower is not required to make any payments until the SBA remits the forgiveness amount to the lender (the lender is responsible for notifying the borrower of the SBA’s remittance). Obviously, if the loan is fully forgiven, the borrower is not responsible for any payments. If only a portion of the loan is forgiven, or if the forgiveness application is denied, the borrower must repay any balance due on the loan on or before the loan’s maturity date. Interest accrues during the time between the disbursement of the loan and the SBA’s remittance of the forgiveness amount. The borrower is responsible for paying the accrued interest on any amount of the loan that is not forgiven.
Rubin Fortunato will provide further updates on the PPP and other pandemic-related relief as it becomes available, and we stand ready to assist you with the PPP loan forgiveness process.
 The Covered Period is either (1) the 24-week (168-day) period beginning on the PPP loan disbursement date; or (2) if the borrower received its PPP loan before June 5, 2020, the borrower may have elected to use an eight-week (56-day) Covered Period. In no event may the Covered Period extend beyond December 31, 2020.
 The FAQs address C Corporations, S Corporations, self-employed Schedule C or F filers, general partners, and LLC owners.