PPP Loan Forgiveness FAQs: Eight Week Period for Some Borrowers Is Next Week!
We recently received an FAQ list that discussed a number of issues that clients have presented relative to the PPP loans.
We are sharing the below information compiled by Armanino, LLP, with our own comments appended. It is our goal to provide the best useful information, regardless of the source, as long as it is credible and valuable. We hope you find this helpful as for many, the end of your eight-week period will be next week.
We are continuing to monitor Congressional action (or inaction!) and will update you as any changes/clarifications are available. Our goal is always to make the complex simple.
29 FAQs Regarding PPP Loan Forgiveness
1. My eight-week Covered Period won’t allow me to make four regularly scheduled payrolls and two monthly rent payments because of the way the calendar falls. What should I do?
If you pay rent every other month (so only one rent payment would hit during the eight-week period), you are allowed to accrue for the second month of rent and include it, provided you have proof that you paid that rent in the next billing cycle in which it was due. Similarly, with payroll, you include all the payrolls as they come out of your bank account. You are also allowed to accrue for pay that is earned after that last payroll comes out of your account, as long as you pay that payroll in the next cycle after your eight-week period ends. Be aware that the Senate is reviewing the House recommendations to extend the eight-week period to 24 weeks. As of noon on June 3, it has NOT been approved.
2. What happens to my Covered Period if I received my funds after May 6? My eight weeks runs out after June 30. Does that change anything?
No, the same rules apply. At this point, there has been no change to the fact that the SBA still wants you to have reinstated your salaries and FTE by June 30.
3. Are payments made with forgiven funds deductible on taxes?
You do not have to pay tax on the forgivable portion of those funds; it's a loan. But you are also not allowed to deduct the expenses that you use the money for that are forgiven. There is bipartisan support to overturn the Treasury/IRS ruling on the deductibility of expenses paid with PPP funds. As of noon on June 3, it has NOT been changed.
4. What happens if I don’t use all the money?
The balance turns into a two-year loan at 1% interest. Be aware that the Senate is reviewing the House recommendations to extend the two-year term of the loan. As of noon on June 3, it has NOT been approved.
5. Do I have to re-hire everyone, and can I fire them all again on July 1?
You don't have to rehire everyone if that's not the right answer for your business. If you'd rather keep the cash in your account and hold on to it so that you have it in August when you're back at work, do that. If you decide that you are going to rehire everyone on June 30 and pay them for one day (eight hours) at full wage to show that you didn't reduce anything, theoretically, you can do that, as well. You could also fire them again on July 1. There is no rule against it, but it would create a lot of unemployment paperwork and ruffle a lot of feathers.
6. What expenses are considered “utilities”?
Water, gas, electric, internet access, and phone access. Also, gasoline used in any vehicle that is owned or leased by the business. Reimbursements for employee cell phone expenses are forgivable as long as you can show that the business reimbursed employee cell phone bills before the pandemic.
7. Can property taxes and insurance be included as “rent costs” under a triple-net lease?
Property taxes and insurance cannot be included unless they're included in your rent and not listed separately on your bill. If they are listed separately, those expenses need to come out. Some “experts” say that lease payments on personal property are also included – we are waiting on clarification.
8. If we deferred our March rent and pay it during the Covered Period, is it forgivable?
No, because the expense was not incurred during the Covered Period.
9. Does forgiveness use the same $100,000 payroll cost per person limit as the loan application calculation?
The $100,000 per person limit remains but is not a cliff. Do not exclude employees who make more than $100,000 annually. Instead, include payroll costs for those employees up to the limit.
10. Can I include the payroll cost in the forgiveness calculation for people I did not include in the loan application (e.g., equity partners)?
Yes, and it would be helpful to do so because it helps you get your FTE and your wages up.
11. If I don’t think I can get to the 75% payroll threshold for forgiveness, can I repay some of my loan now to lower my denominator and better my chances?
No. The loan amount is determined by the loan document on record, not how much you have repaid. Furthermore, the 75% payroll threshold is relative to what you spent, not what the total loan amount was. Be aware that the Senate is reviewing the House recommendations to change the 75/25 split to 60/40. As of noon on June 3, it has NOT been approved.
12. Do HSA contributions to employees count as health insurance benefits for forgiveness?
Yes, anything that goes toward employee welfare such as dental, vision, and HSA contributions (the employer portion) can be included in health insurance benefits.
13. Is there any forgiveness difference between employer payments for defined contribution plans vs. defined benefit plans?
There is no difference in forgiveness. However, you can only include the employer portion, and it must be what you incur and spend in this period.
14. Does the eight-week period start the date the funds are received?
Yes. Be aware that the Senate is reviewing the House recommendations to extend the eight-week period to 24 weeks. As of noon on June 3, it has NOT been approved.
15. What about the employees I hired during the eight weeks? Can I use the money that I spent on them for payroll costs in my forgiveness calculation?
Yes. You do not have to have the same bodies; you just need to have the same number of hours.
16. If a salaried employee gets a 20% salary reduction, do I have to count them as 0.8 FTE?
FTE is not the same as dollars. If you did not reduce their hours, you still have your full FTE count. However, if you reduced both their hours and pay, you would count them as 0.8 FTE.
17. I’m over the $2 million loan amount. I had other sources of borrowing available to me. Would I be eligible for partial forgiveness?
This is really a question of whether you were eligible for the money in the first place. Go back to your state of mind and the state of the business at the time you completed the original application. If you really shouldn't have applied, that's one answer. If you were eligible at the time because of the state of the economy and your business, that's fine. You just need to document it, and then you're eligible for forgiveness just like any other borrower.
18. If I received my funding on April 26, can I make my Alternative Payroll Covered Period start April 21, or does it have to be a date after the funding of the loan?
The Alternative Payroll Covered Period cannot pre-date the loan and would need to start after you received the funds.
19. What happens if we had to cut staff and now can’t spend 75% of the total loan amount on payroll?
Most people are aware of the fact that 75% or more of the loan proceeds are intended to be used for payroll costs. Conversely, therefore, up to 25% may be used for non-payroll costs. It’s important to understand the denominator here. The loan amount and the forgiveness amount may differ yet still be consistent with the 75/25 ratio.
Here’s an example: A business gets a $1 million loan. Therefore, $750,000 of that loan needs to be used for payroll costs. But in the course of the eight-week Covered Period, the business was only able to spend $800,000 of that $1 million and $600,000 of that was spent on payroll costs. Under the forgiveness math, 75% of the gross forgiveness amount, which is the $800,000, because that's what you spent, needs to be spent on payroll. That’s $600,000 — 75% of the $800,000. You're okay on the ratio. So, all of that $800,000 goes in as forgivable at that point. Then the question becomes, “what about that other $200,000 we didn't spend from our $1 million loan?” That's what rolls over into a loan. It still needs to be used 75% for payroll, so of that $200,000 that rolls over into a two-year note, $150,000 must be spent on payroll. Be aware that the Senate is reviewing the House recommendations to change the 75/25 split to 60/40. As of noon on June 3, it has NOT been approved.
20. We would like to pay some bonuses in June. Is that an allowable payroll expense?
A bonus payment is an allowable payroll cost and forgivable up to the point where the employee has earned $15,385 in gross wages.
21. I’m confused about the salary reduction calculation. We cut pay 40% starting May 1, but if we restore those cuts before June 30, are we okay?
The actual amount of loan forgiveness depends in part on whether the average salary or hourly wages of certain employees (those under $100,000 annualized) during the Covered Period or Alternative Payroll Covered Period was less than during the first quarter of 2020. If the average during the Covered Period was more than 25% lower for any employee, the reduction factor applies.
There is a safe harbor available, but it only is available if the average salary or wage was lower during the period of February 15 through April 26 than the individual employee’s pay was at February 15, AND the borrower restores the salary/hourly wage levels back to the February 15 level by June 30. This calculation needs to be performed for each employee individually, not in the aggregate. A similar safe harbor provision exists for restoring FTE cuts. Again, the salary/wage reduction safe harbor applies only to those employees who earned an annualized pay of $100K and less during any single pay period in 2019.
22. I’m concerned about the idea that there will be audits to look back at whether a borrower really needed the loan. What do I need to consider in building a defense of my position as it existed back in March?
If you'll recall on the application for the loan, the first certification that you needed to make as a borrower was that the current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant. Necessity is undefined. What did come back in late April was all of this attention paid to large corporations, some of them publicly traded, that took out loans and became very much in the spotlight of the Treasury Department.
As a result, the rules were refined to advise that any company that took more than $2 million in loans is going to be audited for both necessity and spending of the loan proceeds. If you're not certain about that — and there is no definition around how much liquidity was enough, not enough, too much — you will have to look internally at how best you can demonstrate that need. However, it is advisable to prepare that position now while the business perspective of late March is still reasonably fresh.
23. Can I use PPP funds to buy inventory?
24. Owners get paid by K-1 sometimes and not by W-2s, so can we include those payments in calculating our payroll costs for forgiveness purposes?
Yes, but be careful to document these as guaranteed payments, not distributions. On the K-1, there are boxes that describe the earnings as self-employment earnings, and they're akin to wages. It's what LLC owners and members get paid. Again, it is subject to the $100,000 cap — which is $15,385 within the eight-week covered period — and K-1 documentation will be required, so be sure you're not paying distributions of profit. You actually have to pay the owners “guaranteed payments” that are designated as self-employed income on the K-1, much like a W-2 is income for work performed for the organization.
25. I know I can put health insurance premiums into payroll costs for my employees. What about premiums for the owners who get paid by K-1?
No. For owners who are paid by K-1, health insurance premiums are not an eligible use of PPP funds.
26. Should payments to an independent contractor or sole proprietor be included as payroll costs?
No. Any amounts that an eligible borrower has paid to an independent contractor or sole proprietor should be excluded from the eligible business’s payroll costs. It’s an operating expense.
27. I am confused by this mixed cash and accrual system. How does it work for calculating forgiveness?
A recent clarification was a big help in fixing some bad wording. Borrowers can now include expenses that have been incurred but not yet paid. Businesses may now include accrued expenses that have been incurred during the eight-week period, even if they have not yet been paid. To qualify, the business must be sure to pay those expenses in the next regular pay cycle after the end of the eight-week period.
28. Does paid sick leave count as a covered payroll expense?
Yes. PPP loans cover payroll costs, including costs for employee vacation and parental, family, medical, and sick leave. However, the CARES Act excludes qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.
29. How do we handle seasonal employees?
The SBA has not defined seasonal employees. However, the clear implication is they are referring to summer workers. Employers using seasonal employees — from agricultural workers to lifeguards — have the option to include either of the two elective periods or a consecutive 12-week period between May 1, 2019, and Sept. 15, 2019.