Latest PPP Guidance Provides More Pieces to the PPP Puzzle
August 6, 2020
After more than a month without additional guidance from the Treasury or the SBA, new guidance was released on August 4th in the form of Frequently Asked Questions on Loan Forgiveness. Many borrowers have completed their covered periods and spent most or all of their PPP funds at this point. Accordingly, this guidance will be most helpful to those who have elected to use a 24-week covered period or have yet to apply for a PPP loan. If you have spent all of your PPP funds already, take solace in the fact that the SBA has clarified that borrowers may rely on the guidance available at the time of their application. With that out of the way, I have outlined some of the new pieces to the PPP puzzle below.
Applying for Forgiveness
Borrowers must apply for forgiveness within 10 months of the completion of their covered period.
Borrowers do not need to begin making payments on amounts not forgiven until the forgiveness amount is remitted to the lender by the SBA. Interest accrues on amounts owed during the time between the disbursement of the funds and the SBA’s remittance of the forgiveness amount on any amount that is not forgiven.
After the lender receives notice from the SBA of the forgiveness amount, the lender is responsible for notifying the borrower of the forgiveness amount and the date on which the first payment is due. After that, the amount not forgiven must be repaid by the maturity date of the loan. Note that the maturity of the loan is 5 years if the loan was issued after June 5, 2020. For loans issued prior to June 5, the maturity date is 2 years, unless a different arrangement is reached between the lender and the borrower.
Cash v. Accrual
Accrual basis is reaffirmed for payroll costs incurred prior to the covered period, but paid during the covered period, and payroll costs incurred during the covered period, but paid by the next payroll date after the covered period.
All forms of cash compensation are includable as payroll costs (subject to the $100k annualized limit). This includes: tips, commissions, bonuses, and hazard pay. In calculating cash compensation to employees, it was not previously clear whether this would include the gross or net amount. The newest guidance clarifies that the gross amount before deductions for taxes, employee benefits payments, and similar payments should be used for calculating cash compensation.
Although not previously clear, the guidance clarified that forgiveness is not provided for group health payments accelerated from periods outside of a borrower’s covered period. However, those group health benefits payments by borrowers on behalf of employees that were incurred or paid during the covered period are still eligible for forgiveness.
As with group health benefits, forgiveness is not provided for employer contributions for retirement benefits accelerated from periods outside of a borrower’s covered period. However, employer contributions for retirement benefits on behalf of employees that were incurred or paid during the covered period are still eligible for forgiveness.
The guidance has provided detailed guidance on amounts paid to owners that are eligible for forgiveness for owners of C. Corps, S. Corps, Self-Employed Individuals, General Partners, and LLC Owners.
For payroll costs, borrowers may elect an alternative covered period, beginning on their first payroll date after receiving their funds. However, this is not permitted for non-payroll costs. For non-payroll costs, the covered period is limited to the period beginning on the date of the disbursement of the PPP loan.
Cash vs. Accrual
Accrual basis is reaffirmed for non-payroll costs incurred prior to the covered period, but paid during the covered period, and non-payroll costs incurred during the covered period, but paid during the next regular billing date after the covered period.
Prepayments of Non-Payroll
Prepayment of all non-payroll costs (except for mortgage payments) is not prohibited.
Interest payments on unsecured debts are not eligible for forgiveness. Forgiveness is limited to interest payments on business mortgages on real or personal property (like auto loans).
Renewal of Leases
and Refinancing of Mortgages
Payments on leases renewed during the covered period or mortgages that were refinanced during the covered period are eligible for forgiveness, so long as the obligation under the original agreement existed prior to February 15, 2020. Prepayments on lease obligations are not expressly prohibited.
Prior to the latest guidance, there was much confusion as to what constituted “transportation costs” as a permitted non-payroll cost. The guidance clarified that “transportation costs” refers to transportation utility fees assessed by state and local governments.
for Seasonal Employers
Seasonal employers are to use the same 12-week period used for calculation of their loan amount as the period used for calculation of any reduction in the amount of loan forgiveness.
More Than $100k
Borrowers are to include those employees who made more than $100,000 in 2019 on their forgiveness applications.
Finally, the guidance clarified that only decreases to an employee’s salary or wages are to be counted against a borrower for purposes of reductions to its forgiveness amount, as opposed to all reductions to that employee’s compensation.