Update: On June 17, 2020, the SBA released two “borrower-friendly” updates to the PPP loan forgiveness application to reflect changes made to the program by the PPP Flexibility Act. See the latest revised standard version and instructions.
There was also a new three-page “EZ” version released for borrowers who (i) are self-employed, or (ii) did not reduce wages by more than 25 percent and did not reduce the number or hours of their employees, or (iii) experienced reductions in business activities as a result of health directives related to COVID-19 and did not reduce wages by more than 25 percent. See the latest EZ application and instructions.
If your company was able to secure a PPP loan to cover *8 weeks of payroll and other related expenses, you may be wondering about the forgiveness portion of that loan. Here is our list of FAQs regarding PPP Loan Forgiveness, as asked by Stratus.hr clients.
The lender from whom the original loan originated will be the responsible party to determine loan forgiveness. This could mean that each lending institution might have a different interpretation of what they are willing to accept for forgiveness. The SBA released the loan forgiveness application (with instructions) on May 15, 2020. The SBA is expected to release further regulations and guidance to help borrowers with the applications, so watch for more information.
As of May 13, 2020, SBA announced a certification of safe harbor for loans less than $2 million. In other words, if your loan is less than $2M, you are automatically deemed to have met the qualification of financial-necessity for the loan application. Loans beyond $2M will be subject to review by SBA to determine if there’s an “adequate basis for the necessity of the loan request.”
In the SBA guidance released May 15, 2020, the SBA outlined an “Alternative Payroll Covered Period” that allows Borrowers with a biweekly or more frequent payroll to begin the calculation of eligible payroll costs on the first day of their first pay period following their PPP Loan Disbursement Date. “For example, if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20.” Borrowers using this method must apply the Alternative Payroll Covered Period throughout the application whenever there is reference to “the Covered Period or the Alternative Payroll Covered Period.
The IRS uses the term “incurred and paid” which would disallow this from being a qualified expense. Remember, the intent of the program is to cover *8 weeks of payroll costs; we anticipate the IRS issuing a penalty or fine if this is manipulated.
If we decide to pay a bonus during the 8 weeks, how will that be treated for forgiveness?
Bonuses should be treated as incurred for a period of time (monthly, quarterly, annually) and should be annualized (de-annualized) into a weekly amount, then calculated for *8 weeks only.
The program indicates that if any employees laid off between February 15, 2020 and April 26, 2020 are brought back by Dec. 31, 2020 at the same wage level as before, those employees will count towards the FTE calculation, per the PPP Flexibility Act.
For purposes of loan eligibility, any individual “employed on a full-time, part-time or other basis” is considered as one employee rather than a fraction of a full-time equivalent.
By contrast, the CARES Act uses the standard of “full-time equivalent employees” to determine the extent to which the loan forgiveness amount will be reduced in the event of workforce reductions.
Document the written offer of rehire, as well as the employee’s rejection, and retain the documentation in your records. The SBA’s guidance released on May 15, 2020 includes an “FTE Reduction Exception” that allows employers in this situation to number all FTEs who have rejected offers of rehire and exclude them from what would have been a reduction of loan forgiveness. Employees who reject offers of re-employment may be ineligible for continued unemployment compensation.
The forgiveness of your PPP Loan is not subject to be taxed directly as any type of income. However, the wages and expenses paid with the PPP Loan monies are not eligible to be deducted as they were previously, or as paid without PPP Loan funds.
Given the program is deemed *8 weeks, any wage paid during this period should be annualized to determine the $100k cap and then minimized to a weekly count. Under this logic, no employee should have eligible wage costs in excess of $15,384.62 for the *8-week forgivable period. This does NOT include qualified benefits, retirement contributions, or state and local taxes. Those “other” costs do not have a per employee cap.
Stratus.hr will provide reporting based on client’s applicable loan date that includes wage costs separated from other costs by employee. We will break out bonus costs so you can determine how much of those bonuses should be included in your eligible costs. We will also identify those employees whose wages exceed $15,384.62 during the *8-week period.
You will be directed by the SBA to repay those amounts and may be subject to fraud charges for the unauthorized use.
*The 8-week period was extended to 24 weeks, per the Paycheck Protection Flexibility Act.
Sources:
Treasury.gov FAQs
SBA.gov (PPP Loan Program)
Forbes.com
SBA Interim Final Rule (federalregister.gov)
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