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PPP Loan Forgiveness Update: Rules, guidance and the application

by Brad Johnson on September 21, 2020
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In August 2020, The Small Business Administration (SBA) closed the Paycheck Protection Program (PPP) application window and issued the guidance, "Frequently Asked Questions (FAQs) on PPP Loan Forgiveness". The first step towards PPP remittal is knowing what costs are (and aren't) eligible:

Eligible PPP Loan forgiveness costs

      • Salaries and paychecks
      • Cash compensation
      • Group healthcare benefit costs
      • Retirement contributions
      • Owner compensation
      • Utility costs
      • Business mortgage interest payments (principal portion amount is not eligible)
      • Business rent or lease payments

Ineligible PPP Loan forgiveness costs

      • Employee health care premiums
      • Employee retirement contributions
      • Compensation above $100,000 annually (owner or non-owner) 
      • Interest on unsecured credit
    •  

Learn the PPP loan forgiveness rules and guidance for each and how to ace the application below.

Eligible PPP Loan forgiveness costs: Payroll

Salaries and paychecks are eligible for PPP forgiveness if the:

  • Payroll cycle began before your Covered Period (CP) and continued during your CP
  • Payroll cycle occurred during your CP
  • Payroll cycle began during your CP and ended after the CP close date.

    Example: Your two week pay cycle started June 12, ended June 26, and your Covered Period began June 19. Under this rule, salary/paycheck costs from June 12-26 are forgivable. This rule also applies to pay cycles that started during your CP but finished after.

Cash compensation costs up to $100,000 per employee, per year before tax deductions are eligible for remittal. Employee benefits payments, tips, commissions, bonuses, hazard pay, or other forms of incentive pay qualify for forgiveness under this category. 

Group healthcare benefit costs,"paid or incurred by the borrower during the Covered Period or the Alternative Payroll Covered Period," are forgivable under the newly issued guidance. This includes premiums and contributions made by employers only, and does not extend before or after the CP or Alternative Payroll Covered Period (APCP).

Retirement contributions made by employers to employee plans are eligible for remittal if they were paid or incurred by the borrower during the Covered Period or Alternative Payroll Covered Period. However, the FAQ PPP Forgiveness guidance states, "employer contributions for retirement benefits included in the loan forgiveness amount as payroll costs cannot include any retirement contributions deducted from employees’ pay or otherwise paid by employees."

Owner compensation forgiveness is capped at $20,833 per individual that has an ownership stake in multiple companies, or $15,385 per individual for borrowers who received their PPP Loan before June 5 and elected an 8 week Covered Period.

The forgiveness rules for C Corps, S Corps, Self-employed Schedule C (or Schedule F) filers, General Partners, and LLC Owners are as follows:

C Corps are eligible for loan forgiveness up to the amount of 2.5/12 of 2019 employee cash compensation, employer state and local taxes, employer health insurance contributions, and employer retirement contributions. Additionally, the guidance states, “Payments other than for cash compensation should be included on lines 6-8 of PPP Schedule A of the loan forgiveness application (SBA Form 3508 or lender equivalent), for borrowers using that form, and do not count toward the $20,833 cap per individual.”

S Corps have the same forgiveness rules as above, minus the health care component. “Employer contributions for health insurance are not eligible for additional forgiveness for S-corporation employees with at least a 2% stake in the business, including for employees who are family members of an at least 2% owner under the family attribution rules of 26 U.S.C. 318, because those contributions are included in cash compensation,” according to the FAQ PPP Forgiveness guidance.

Self-employed Schedule C (or Schedule F) filers such as sole proprietors, self-employed individuals, and independent contractors, are eligible for loan forgiveness up to the amount of 2.5/12 of 2019 net profit as reported on IRS Form 1040 Schedule C line 31[link ] . “Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness; health insurance and retirement expenses are paid out of their net self-employment income.”

General Partners are eligible for loan forgiveness up to 2.5/12 of their 2019 net earnings from self-employment that is subject to self-employment tax, which is computed from 2019 IRS Form 1065 Schedule K-1 box 14a, multiplied by 0.9235 for loan forgiveness if the payments to partners are made during the CP or Alternative Payroll Covered Period (APCP). Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness. If the partnership did not submit its 2019 IRS Form 1065 K-1s when initially applying for the loan, it must be included with the partnership’s forgiveness application.

LLC Owners must follow the instructions that apply to how their business was organized for tax filing purposes for tax year 2019, or if a new business, the expected tax filing situation for 2020.

If your original application didn’t include the above form(s), the SBA requires you include this information in your PPP loan forgiveness application.

Eligible PPP Loan forgiveness costs: Non-Payroll

Utility costs for your business like electricity are eligible for PPP forgiveness if they satisfy any of the following rules:

  • A utility billing cycle that began before your Covered Period (CP) and finished during your CP
  • The utility billing cycles that occurred during your CP
  • A utility billing cycle that began during your CP and ended after the CP finished

    Example: Your electricity bill is invoiced on a monthly basis. June’s statement started on the 1st and ended July 1st. Your Covered Period began June 15 in the middle of a billing cycle. Under this rule, costs from June 1-July 1 are eligible for full remittal. The same rule applies to utility billing cycles that started during your CP but finished after; the entire billing cycle is eligible for remittal.

Business mortgages and leases on real or personal property are eligible for forgiveness. Your business' auto loan, business mortgage interest costs, and business rent or lease costs fall under forgivable non-payroll costs, but only during the Covered Period.

Example: You renewed a five year lease on your office space in February before your Covered Period began in June. Lease payments before or after your Covered Period do not qualify, only lease payments for the duration of your CP can be remitted. 

Ineligible PPP Loan forgiveness costs

Costs that aren’t eligible for PPP loan remittal include employee health care premiums, employee retirement contributions, owner compensation that exceed the above limits, non-payroll costs otherwise not considered to be eligible costs and interest on unsecured credit. When filing your PPP Loan forgiveness application, omit these ineligible costs or risk denial.

 

How to Ace PPP Loan Forgiveness Application

Here are five steps and tips we recommend for acing your PPP loan forgiveness application:
  1. Choose the appropriate form. 3508EZ is the PPP Loan Forgiveness Application Form for sole proprietors, independent contractors, or self-employed individuals with no employees should file. SBA Form 3508 is the PPP Loan Forgiveness Application Form for all other filers. Check with your lender to determine which form is appropriate for you given your specific circumstances.
  2. Review the terms of your loan. Refresh yourself on the terms of your PPP Loan and Covered Period dates and/or Alternative Covered Period dates. Accuracy is key when filing your forgiveness application, so a review of your terms will help with filing it right the first time. 
  3. Access your payroll solution. Pull up your payroll solution to access the information you’ll need to apply like reports, business documents, etc..
  4. Contact your lender for their submission preferences. After filling out the form that's appropriate for your business, contact your lender to learn how they'd like to receive said form. Keep in mind the SBA permits scanned copies of documents, E-signatures, or E-consents for loan forgiveness applications and loan forgiveness documentation, but each lender's preferences are different.
  5. Prepare sooner (rather than later). The SBA isn't processing PPP forgiveness loan applications yet, but we encourage you to contact your lender and start preparing as soon as possible. This way, you'll be fully prepared to file as soon as your lender and The SBA are ready to process forgiveness applications.  

Failure to accurately file your PPP Loan forgiveness application could result in its denial and you having to pay back the full amount plus interest. Contact our experts with any challenges or questions that you come across during the process.