Both the SBA and the U.S. Treasury have been busy throughout the month of August. We have seen the loan approval process close on August 8, the loan forgiveness application process open on August 10 (sort of), forgiveness rules clarification with the August 11th update of their FAQs, and a new interim final rules published on August 24th.
The closing of the PPP loan program is probably long overdue. After several extensions of the program, it appeared that the demand for the loan funds had come to a halt and there was not much of a demand for it in the later weeks. Hopefully this means that all businesses who were eligible and needed funds should have received them. The SBA’s opening of the loan forgiveness process has somewhat been meaningless, as borrowers apply for forgiveness through their lender, so it really just means it is the soonest a bank can fully process the application. With that said, almost three weeks have passed and I cannot say that I have seen widespread banks accepting forgiveness applications. In fact, the largest single processor of PPP loans, JPMorgan Chase & Co., said it would not have its forgiveness process up and running until possibly early September. As long as you have your funds properly spent and your ducks in a row to file, there is no rush to file. You have at least a year to file for forgiveness from the time the funds were received, based on the 10 months after the end of your Covered Period.
The August 11 FAQs provided clarification to a number of items in its eleven pages. Some of the key takeaways include:
- As long as the borrower submits its loan forgiveness application within 10 months of the completion of the Covered Period, the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by SBA. Of course, no payments will be required if the loan is forgiven.
- Forgiveness is not provided for expenses for group health benefits or retirement benefits accelerated from periods outside the Covered or Alternative Covered Period.
- Payroll costs can include the payment of lost tips, commissions or any other form of payment as long as it is paid within the Covered Period and is limited to the $100,000 annualized. Note that owner-employees may be subject to a lesser limit.
- The amount of owner-employee compensation is lesser than non-owner employees. Details can be found in our previous posting: blog.paymaster.com/ppp-forgiveness-update/
- Interest on personal property, such as an auto loan, are eligible for forgiveness, but interest on unsecured credit is not eligible.
- Payments made on recently renewed leases are forgivable, as long as the original lease existed prior to February 15, 2020.
- Non-payroll “Transportation” costs were clarified as transportation utility fees assessed by state and local governments.
- Non-payroll costs can be incurred during the Covered Period and paid on or before the next regular billing date, even if it is after the Covered Period, and still be eligible towards forgiveness.
- Any amount the borrower received under the Economic Injury Disaster Loan (EIDL) advance will reduce the borrower’s loan forgiveness by the same amount. Therefore, if you received a $10,000 EIDL Advance, your loan forgiveness would be automatically reduced by $10,000 and that would be due as part of the unforgiven loan amount.
The August 24 Interim Final Rule (IFR) has created a possible benefit to some employers, yet a negative for others. There are three points covered as summarized here:
- As we have seen in previous communication, the amount of wages paid to owner-employees is limited to a lesser amount than non-owner employees. For example the wage cap towards forgiveness is $20,833, rather than $46,154 if using the full 24-week covered period. This IFR has now defined that an owner-employee will be treated as a regular employee if their ownership in the business is less than 5%. This is good news for the minority interest owner, as it is intended to cover owner-employees who may not have a meaningful ability to influence decisions over how loan proceeds are allocated, and allow them to be treated as a regular employee.
- For non-payroll rent and interest costs, a borrower must prorate the amount that counts towards forgiveness, if space is shared with another business, sub-tenant of the borrower or for a home-based business. Let’s say you rent an office for $10,000 per month or own a building and have a $10,000 interest payment per month, and your business only occupies 75% of the space. The 25% that is sub-leased/rented is excluded from non-payroll costs towards forgiveness. For a home-based business, the business may only include the share of covered expenses that were deductible on the borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings.
- Rent paid to a related party may not be eligible towards forgiveness. Let’s say Entity A owns the property and related Entity B rents the property from Entity A. In this scenario, two conditions must be present to use that rent towards non-payroll cost forgiveness; a) The amount of rent attributable towards loan forgiveness is no more than the amount of mortgage interest owed on the property during the Covered Period that is attributable to the space being rented by the business, and b) both the lease and the mortgage were entered into prior to February 15, 2020. This means that if Entity A, in my example, owns the property outright with no debt, then zero of the rent paid by Entity B to Entity A is eligible towards forgiveness. If this applies to you, then you may want to rethink your covered period and utilize more costs towards payroll and stay out of the non-payroll cost pool.
Being this is our fifth posting on the topic of PPP loan forgiveness, there is no end in sight of Interim Final Rules being published. Until you file for forgiveness, it advised that you keep up with the latest changes and advisories to be sure you are complying with all of the rules.
While I make every attempt to ensure the accuracy and reliability of the information provided in this article, the information is provided “as-is” without warranty of any kind. PayMaster, Inc and Romeo Chicco do not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the information contained. Consult with your CPA, Attorney, and/or HR Professional as the SBA and Congress continues to produce new and revised guidance on this program.