The Small Business Administration (SBA), in consultation with the Department of the Treasury, issued additional guidance (in the form of FAQs released on August 11th) regarding PPP Loan Forgiveness for funds advanced as part of section 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as amended by the Paycheck Protection Program Flexibility Act (Flexibility Act). While below we have provided a summary of the August 11th release, a full transcript of the FAQs can be obtained online at the U.S. Department of the Treasury website.
Some of the key takeaways from this Q&A:
- 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 forgiveness amount is remitted to the lender by SBA. If the loan is fully forgiven, the borrower is not responsible for any payments. The borrower is responsible for paying the accrued interest on any amount of the loan that is not forgiven.
- Payroll costs incurred before the covered period but paid during the covered period are eligible for forgiveness.
- Payroll costs include all forms of cash compensation paid to employees, including tips, commissions, bonuses, and hazard pay. Note that forgivable cash compensation per employee is limited to $100,000 on an annualized basis.
- For purposes of calculating cash compensation, borrowers should use the gross amount before deductions for taxes, employee benefits payments, and similar payments.
- Forgiveness is not provided for expenses for group health benefits or retirement benefits accelerated from periods outside the Covered Period or Alternative Covered Period.
- New limits on employer health benefits and retirement contributions for owners, depending on the type of entity, and limited to 2.5/12 of prior year employer group health benefits and retirement contributions allocable to owners.
- 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 because the loan is not secured by real or personal property. Although interest on unsecured credit incurred before February 15, 2020 is a permissible use of PPP loan proceeds, this expense is not eligible for forgiveness
- Payments made on recently renewed lease or interest payments are deductible as long as the original lease or mortgage existed prior to February 15, 2020.
- Transportation costs were referred to transportation utility fees assessed by state and local governments.
- Seasonal Employers who used a 12 week period between May 1, 2019 and September 15, 2019, to calculate its maximum PPP loan amount MUST use the same 12-week period as the reference period for calculation of any reduction in the amount of loan forgiveness.
- The salary/hourly reduction calculations are based on the “Pay Rate”. Examples are provided to show neither a reduction in hours work nor should a reduction in all other forms of compensation be considered. Further, for purposes of calculating reductions in the loan forgiveness amount, the borrower should only take into account decreases in salaries or wages.
Additionally, as released previously, while the SBA opened its portal and began accepting PPP loan forgiveness applications submitted by lenders on August 10, 2020, many banks have stated they do not expect to open the bank portals to accept borrower applications until late August or September. The reason for this delayed opening in the banks’ portals is the continued expectation of additional changes to the legislation and process by which certain loans are ultimately evaluated for forgiveness. As noted previously pending legislation is currently under consideration for automatic forgiveness of PPP loans of $150K or less (of which approximately 87% of PPP loans advanced fall into this threshold) and may extend to loans up to $2 million (pending legislation from Congress in the weeks ahead). There continues to be a growing push to automatically forgive these smaller PPP loans from the SBA, and while Senate Republicans have included automatic forgiveness for loans below $150,000 as part of their stimulus proposal introduced Monday (August 3rd), they have also introduced a middle tier of forgiveness requirements for loans falling in the $150,000 and $2 million range. For these loans, their proposal merely requires businesses to complete a certification and retain relevant records with supporting worksheets for up to three (3) years, though banks would still need to submit a loan forgiveness application to the SBA. As such there is a high likelihood of changes occurring in the near term that leaves borrowers in a ‘wait and see’ mode at this point.
We will continue to monitor the situation and will provide subsequent updates as we obtain additional information from the Small Business Administration (SBA) and Department of the Treasury. If you have any questions regarding the PPP forgiveness calculations, please contact your local Blue & Co. advisor.