On Friday, May 22, the SBA followed up the release of Form 3508, the Loan Forgiveness Application for Paycheck Protection Program (PPP) loans with an Interim Final Rule (IFR), finally clarifying some of the provisions related to forgiveness of PPP loans.
There are several items that borrowers should be aware of that came from the IFR:
Generally, loan proceeds must be used in the eight-week (56-day) period (Covered Period) immediately following the date the loan was disbursed by the lender (Disbursement Date). A borrower with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs starting at the beginning of the first payroll period following the Disbursement Date and continuing for eight weeks (the Alternative Payroll Covered Period).
No more than 25 percent of the loan forgiveness amount (as opposed to the full loan amount) may be attributable to non-payroll costs (at least 75 percent of the forgiveness amount must be attributable to payroll costs). Any loan amount above the forgiveness amount will be a loan, payable over two years with 1% interest, as indicated prior.
Payroll costs include 1) salaries, wages, commissions, tips or similar compensation, 2) vacation, parental, family, medical, or sick leave and severance pay, 3) group health care benefits, including insurance premiums (employer’s share only), 4) retirement benefits (employer’s share only), 5) state and local tax assessed on the compensation of employees, and 6) self-employment income paid to partners in a partnership and owner-members of a limited liability company (which is taxed as a partnership). The IFR has clarified that bonuses and hazard pay may be paid using PPP loan proceeds during the Covered Period, provided such bonus and hazard pay will be deemed compensation and is thus included in the $15,385 cap described below.
The PPP’s definition of “payroll costs” excludes salaries and wages in excess of $100,000 on an annualized basis for any individual prorated for the Covered Period. Therefore, borrowers must be aware that forgiveness for salaries and wages for any individual will be limited to $15,385. This limitation includes any amounts paid as bonuses or for hazard pay.
Owner-employees, self-employed and general partners must not exceed 8/52 of 2019 compensation during the Covered Period (or the Alternative Payroll Covered Period) and this is similarly capped at $15,385 per individual. No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals (including Schedule C filers and general partners) as such expenses are paid out of their net self-employment income.
Timing of Payment of Payroll Costs
There has been significant confusion regarding whether a cost had to be both incurred and paid during the Covered Period. The Loan Forgiveness Application provides that Permitted Expenditures that are paid or incurred during the Covered Period are now eligible for forgiveness; provided that incurred Permitted Expenditures must still be paid no later than the regular payment dates following the Covered Period. Thus, the Loan Forgiveness Application provides some flexibility and allows payment and forgiveness for certain costs incurred prior to the Disbursement Date and paid during the Covered Period, as well as certain costs incurred during the Covered Period and paid after that period.
Documentation to Submit with PPP Loan Forgiveness Application
PPP Schedule A outlines the documents required to be submitted to the lender to support the PPP Loan Forgiveness Application:
- Bank account statements (or third-party payroll service provider reports) documenting the amount of cash compensation paid to employees.
- Tax forms (or equivalent third-party payroll service provider reports), including payroll tax filings and state quarterly business and individual employee wage reporting and unemployment insurance tax filings.
- Payment receipts cancelled checks or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the borrower included in the forgiveness amount.
- The average number of full-time equivalent (FTE) employees on payroll per month employed between February 15, 2019 and June 30, 2019;
- The average number of FTE employees on payroll per month employed between January 1, 2020 and February 29, 2020; or
- In the case of a seasonal employer, the average number of FTE employees on payroll per month employed between February 15, 2019 and June 30, 2019; between January 1, 2020 and February 29, 2020; or any consecutive 12-week period between May 1, 2019 and September 15, 2019
- Documents may include payroll tax filings (typically Form 941) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings. Documents may cover periods longer than the specific time period.
- Business Mortgage Interest Payments: Copy of the lender amortization schedule and receipts or cancelled checks verifying eligible payments from the Covered Period; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments.
- Business Rent or Lease payments: Copy of the current lease agreement and receipts or cancelled checks verifying eligible payments from the Covered Period; or lessor account statements from February 2020 and from the covered period through one month after the end of the covered period verifying eligible payments.
- Business Utility Payments: Copy of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks or account statements verifying those eligible payments.
Please consult with your HTB advisor as you navigate the requirements for PPP loan forgiveness. As the rules are still developing, we will continue to keep you advised as to the requirements for forgiveness on PPP loans.