CARES Act update August 4, 2020. SBA finally addresses loan forgiveness questions
August 4, 2020
Written by Paul M. Polito, CPA
It seems like forever since we have had any meaningful updates from SBA on the CARES Act. Today they published FAQs regarding loan forgiveness answering questions we have had since April!
- Payroll costs that were incurred prior to the covered period but paid during the covered period are eligible for forgiveness. Also, payroll costs that were incurred during the covered period but paid after the covered period are also eligible. This applies whether you use the covered period starting on the day you received the PPP Loan proceeds or if you choose the alternative payroll covered period. Note, if your payroll is paid twice a month or less frequent, you will have to calculate a cutoff payroll because the covered period is strictly 24-weeks (not 6 months).
- Payroll costs include all forms of cash compensation up to $100,000 on an annualized basis.
- Group health insurance premiums incurred and paid by the employer (not reimbursed by the employee) are considered forgivable payroll costs. Pre-tax or after-tax employee deductions for medical benefits are not includable in the forgiveness calculation.
- Retirement contributions paid by the employer (not employee deferrals) are permitted. However, retirement contributions related to periods outside of the covered period are not permitted (such as the 2019 contributions).
- Owner compensation that is eligible for forgiveness:Total of $20,833 per individual across all businesses using the 24-week period. For businesses using the 8-week period, the total is $15,385.
- Special rules by business type:
- C Corporations: Up to 2.5/12 of his/ her 2019 compensation. Also, payments for employer paid state and local payroll taxes, employer contributions for health insurance premiums and employer paid retirement plan contributions.
- S Corporations: Up to 2.5/12 of his/ her 2019 compensation.
Also, payments for employer paid state and local payroll taxes and 2.5/12 of 2019 employer retirement plan contributions. For S Corporation Shareholders, no group medical insurance premiums paid on behalf of greater than 2% shareholders can be included in the forgiveness amount (including certain family members of the shareholder).
- Self-employed Schedule C or Schedule F filers: 2.5/12 of 2019 net profit reported on IRS form 1040 (schedule C or Schedule F). Group health insurance premiums and retirement plan contributions paid on behalf of a self-employed person are not forgivable items.
- General Partners: 2.5/12 of their 2019 net earnings from self-employment, with certain reductions, multiplied by .9235. Payments must be paid to the partner during the covered period and do not include health insurance or retirement contributions.
- LLC Owners: Follow the guidelines for the tax election in use.
- Special rules by business type:
- Non-payroll costs incurred prior to the covered period but paid during the covered period are eligible for forgiveness. Non-payroll costs incurred during the covered period but paid after the covered period are also eligible for forgiveness provided they were paid on or before the next billing cycle. The guidance did not address payments made before the covered period but incurred during the covered period (such as rents paid for May on April 30, with a covered period beginning 5/1). It appears that these costs are not eligible for forgiveness.
- The alternative payroll covered period applies only to payroll costs; not non-payroll costs. The covered period only must be used for non-payroll costs.
- Obligations such as leases that were renewed after February 15, 2020 are eligible for forgiveness.
- What are eligible transportations costs? These eligible transportation costs are transportation utility fees assessed by state and local governments; much more limited than we thought initially.
- Loan forgiveness reductions:
- FTE reductions:
- No reduction of forgiveness amount if there is a reduction in FTE and the borrower offered to rehire one or more laid off employees but the employees declined and similarly qualified employees could not be hired. This exception requires documentation including in the case of an attempted re-hire, informing the applicable state unemployment insurance office of the rejection of the offer.
- Seasonal employers who elected to use a 12-week period between May 1, 2019 and September 15, 2019 to calculate their maximum loan amount must use the same 12-week period as the reference period.
- FTE reductions include all employees including those in Table 2 of PPP Schedule A worksheet who were identified as “over $100,000 employees”.
- Wage reductions in excess of 25%: The amount of pay reductions during the covered period in excess of 25% is included in the reduction amount. This includes only salary and wage amounts.
- FTE reductions:
This is a very detailed document with many examples. I encourage you to visit the SBA’s website and read these FAQs over if you have any unanswered questions.