The more things change…Well, the more they change.
Late last week, the House passed revisions to the Paycheck Protection Program (PPP) and if passed by the Senate (looks as though that will happen), will be signed by the President. Once passed, it will change my prior comments on forgiveness. Barring changes by the Senate, here is the proposal by the House:
- Increase the time period for usage from 8 weeks to 24 weeks;
- Reduce the amount to be spent on payroll from 75% to 60%;
- Allow recipients of PPP loans to also defer their payroll taxes;
- Allow small businesses full loan forgiveness without regard to rehiring all full-time employees lost due to the pandemic, as long as the business can demonstrate an inability to operate at the same level it did prior to February 15, 2020;
- Increase the time period to apply for a loan from June 30, 2020 to December 31, 2020; and
- Increase the repayment timeframe from 2 years to 5 years
What’s forgivable?
Eligible payroll costs
Eligible payroll costs include salaries, wages, bonus, commissions, etc. as well as others previously defined in the Interim Final Rules. However, the most recent guidance states for owner-employees, self-employed individuals and general partners the amounts paid to this group are capped at the lesser of 1) $15,385 ( the equivalent of 8 weeks of $100,000 annual salary) per individual; or 2) the 8 week equivalent of their applicable 2019 compensation. For owner-employees, it includes retirement plan and medical insurance payments to arrive at the $15,385. For self-employed and general partners these are excluded in arriving at the $15,385.
Observations: For owner-employees (typically those employed by corporations) the total is capped at $15,385, whereas for non-owner employees the amount included for forgiveness can be greater as it includes employer retirement plan contributions and employer-paid medical insurance in addition to the salary.
There is no defined percentage at this time as to who qualifies as an owner-employee. More importantly, how will the Small Business Association (SBA) and Treasury apply owner-employee definition for employed family members? In other words, similar to the overall limit of $15,385 for owner-employees, self-employed individuals and general partners owning multiple businesses, will SBA and Treasury limit overall compensation for a family group under attribution rules? I expect there will be further guidance on both points.
Other covered costs
Costs such as mortgage, rent and utility obligations are eligible for forgiveness so long as they were in place or incurred before 2/15/20. What’s clearer is mortgage and rent obligations include both real and personal property. Unlike payroll, these costs must be incurred or paid during the 8 week covered period of the loan.
The proportion of other covered costs eligible for forgiveness remains at 25% of the forgivable costs.
Timing for forgiveness
The forgiveness application defines two options for calculating covered payroll costs:
- Covered Period: “…The eight-week (56-day) Covered Period of your PPP loan. The first day of the Covered Period must be the same as the PPP Loan Disbursement Date.
- Alternative Payroll Covered Period: “Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date.”
The application states how payroll and non-payroll costs paid and incurred during the applicable period may be forgiven. For example, amounts eligible for forgiveness may include pay earned during a pay period, but paid after, or utilities and rent incurred prior to the 8-week period. However, be sure not to count it twice. In other words, if the cost is counted as incurred and subsequently paid it counts as an eligible expense once.
Forgiveness is a detail-oriented process to present to your lender, and will require a business to demonstrate how the money was spent via underlying supporting source documentation, such as payroll tax returns or registers, as well as invoices. The more logical the underlying support the easier the process will go and the more likely all of your eligible costs will be forgiven. Although there continues to be many unanswered questions, we encourage each of you to review your process and documentation. If you require assistance, please contact us — we’re here to help.