New Guidance and Clarification on PPP Loan Forgiveness

The business challenges presented by the COVID-19 pandemic caught many of us off guard. The abrupt changes resulting from stay at home orders and forced business closures left many with few options to sustain their business. Many were left with little choice but to sharply cut expenses and start employee layoffs or terminations to manage. New Jersey was recently ranked as the 7th most impacted state by the COVID-19 orders, an eye-opening number. There was also a scramble to secure additional working capital to prevent businesses from closing completely. The Paycheck Protection Program (PPP) has been a popular option because of the attractive forgiveness feature. Now that many borrowers have reached the end of the covered period, the Small Business Administration (SBA) has updated and released new guidance to help with the process. On August 4, 2020, the SBA released another round of frequently asked questions (FAQs) on loan forgiveness. The most recent FAQ’s provides essential information on eligible expenses, forgiveness reductions calculations, and other important topics.

PPP Loan Forgiveness FAQs

• Which loan forgiveness application should sole proprietors, independent contractors, or self-employed individuals with no employees complete? Sole proprietors, independent contractors, and self-employed individuals who had no employees at the time of the PPP loan application and did not include any employee salaries in the Borrower Application Form automatically qualify to use the Loan Forgiveness Application Form 3508EZ or lender equivalent and should complete that application.
• Are payroll costs incurred during the Covered Period or the Alternative Payroll Covered Period, but paid after the Covered Period or the Alternative Payroll Covered Period eligible for loan forgiveness? Yes, if the payroll costs are paid on or before the next regular payroll date after the Covered Period or Alternative Payroll Covered Period.  Additionally, payroll costs incurred before the Covered Period but paid during the Covered Period are eligible for loan forgiveness.
• How is the amount of owner compensation that is eligible for loan forgiveness determined? The compensation of owners who work at their business that is eligible for forgiveness depends on the business type and whether the borrower uses an eight-week or 24-week Covered Period. The amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at $20,833 per individual in total across all businesses in which he or she has an ownership stake. For borrowers that received a PPP loan before June 5, 2020, and elect to use an eight-week Covered Period, this cap is $15,385. If their total compensation across businesses that receive a PPP loan exceeds the cap, owners can choose how to allocate the capped amount across different businesses.
• Will, a borrower, be subject to a reduction to its forgiveness amount due to a decrease in FTE employees during the Covered Period if the borrower offered to rehire one or more laid-off employees, but the employees declined? In calculating its loan forgiveness amount, a borrower may exclude any reduction in FTE employees if the borrower can document in good faith the following: (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 are required to inform the applicable state unemployment insurance office of any rejected rehire offer within 30 days. The documents that borrowers should maintain to show compliance with this exemption include the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual.
• When calculating the FTE Reduction Exceptions in Table 1 of the PPP Schedule A Worksheet on the Loan Forgiveness Application (SBA Form 3508 or lender equivalent), do borrowers include employees who made more than $100,000 in 2019? Yes. The FTE Reduction Exceptions apply to all employees, not just those listed in Table 1 of the Loan Forgiveness Application (SBA Form 3508 or lender equivalent). Therefore, borrowers should include employees who made more than $100,000 in the FTE Reduction Exception line in Table 1 of the PPP Schedule A Worksheet.
• How do borrowers calculate the reduction in their loan forgiveness amount arising from reductions in employee salary or hourly wage? Specific pay reductions during the Covered Period or the Alternative Payroll Covered Period may reduce loan forgiveness. Suppose the salary or hourly wage of a covered employee is reduced by more than 25% during the Covered Period or the Alternative Payroll Covered Period. In that case, the portion over 25% reduces the eligible forgiveness amount unless the borrower satisfies the Salary/Hourly Wage Reduction Safe Harbor.
• For calculating the loan forgiveness reduction required for salary/hourly wage reductions over 25% for certain employees, are all forms of compensation included or only salaries and wages? To calculate reductions in the loan forgiveness amount, the borrower should only consider decreases in salaries or wages.
• If a borrower submits a timely loan forgiveness application, does the borrower have to make payments on its loan before to SBA remitting the forgiveness amount, if any? As long as a borrower submits its loan forgiveness application within ten months of the Covered Period’s completion, the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by SBA. If the loan is fully forgiven, the borrower is not responsible for any payments. Suppose only a portion of the loan is forgiven or the forgiveness application is denied. In that case, any remaining balance due on the loan must be repaid by the borrower on or before the loan’s maturity date. Interest accrues during the time between the disbursement of the loan and SBA remittance of the forgiveness amount. The borrower is responsible for paying the accrued interest on any amount of the loan that is not forgiven.

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The recently issued FAQs provide essential information to borrowers seeking maximum loan forgiveness. Since the SBA will begin accepting forgiveness applications from lenders on August 10, now is the time to focus on your PPP loan forgiveness calculations. Given there are many complex calculations and pending legislation, it is important to consult with a qualified advisor. If you have questions about the information outlined above or need assistance with PPP forgiveness, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon.

The above represents our best understanding and interpretation of the material covered as of the date of this post. The content should not be construed as accounting, tax, or financial advice.