Update: In early 2021, SBA released new forgiveness forms and rules for first- and second-draw PPP loans. Click here to read our overview of what’s new and what hasn’t changed.
With application portals now open for Paycheck Protection Program (PPP) loan forgiveness and many borrowers still working out how to best spend and account for their funds, the Small Business Administration (SBA) and the Treasury Department continue to release additional guidance on the program’s complex loan forgiveness eligibility and application.
Read on for a summary of current insights on the COVID-19 business relief program, in areas including:
- Payroll costs (including eligible amounts of owner compensation)
- Nonpayroll costs
- Loan forgiveness reductions
- General forgiveness process information
All information is from the SBA/Treasury FAQ first released Aug. 4 unless otherwise noted. We will continue to add to this page as new information becomes available, so check back for updates.
Types of eligible payroll costs: The Aug. 4 FAQ confirms whether certain types of costs are counted as payroll costs and eligible for loan forgiveness. See the full document for examples of select types of costs or situations.
- Yes: Payroll costs that were incurred during the Covered Period or the Alternative Payroll Covered Period but paid after the Covered Period or the Alternative Payroll Covered Period, as long as they are paid on or before the next regular payroll date after the chosen period. (See our previous article for explanations of each period type.)
- Yes: Payroll costs that were incurred before but paid during the Covered Period.
- Yes: All forms of cash compensation paid to employees, including tips, commissions, bonuses, and hazard pay. (“Note that forgivable cash compensation per employee is limited to $100,000 on an annualized basis,” SBA says.)
- The FAQ specifies that when calculating cash compensation, use the gross amount before deductions for taxes, employee benefits payments, and similar payments, not the net amount paid to employees.
- Group health care benefits
- Yes: Employer expenses for employee group health care benefits that are paid or incurred by the borrower during the Covered Period or the Alternative Payroll Covered Period.
- No: Expenses for group health care benefits paid by employees (or beneficiaries of the plan) either pre-tax or after tax, such as the employee share of their health care premium.
- No: Expenses for group health benefits accelerated from periods outside the Covered Period or Alternative Payroll Covered Period.
- “If a borrower has an insured group health plan, insurance premiums paid or incurred during the Covered Period or Alternative Payroll Covered Period qualify as ‘payroll costs,’ as long as the premiums are paid during the applicable period or by the next premium due date after the end of the applicable period,” the FAQ says. “As noted, only the portion of the premiums paid by the borrower for coverage during the applicable Covered Period or Alternative Payroll Covered Period is included, not any portion paid by employees or beneficiaries or any portion paid for coverage for periods outside the applicable period.”
- See the “Owner compensation” section below for guidance on eligibility for owner’s health insurance.
- Contributions for retirement benefits
- Yes: Generally, employer contributions for employee retirement benefits that are paid or incurred by the borrower during the Covered Period or Alternative Payroll Covered Period. “The employer contributions for retirement benefits included in the loan forgiveness amount as payroll costs cannot include any retirement contributions deducted from employees’ pay or otherwise paid by employees,” the FAQ says.
- No: Employer contributions for retirement benefits accelerated from periods outside the Covered Period or Alternative Covered Period.
- See the “Owner compensation” section below for treatment of retirement benefits for owners.
Partial pay periods: The FAQ provides the following guidance and example for whether and how borrowers must calculate payroll costs for partial pay periods:
“If the borrower uses a biweekly or more frequent (e.g., weekly) payroll cycle, the borrower may elect to calculate eligible payroll costs using the eight-week (for borrowers that received their loans before June 5, 2020, and elect this Covered Period length) or 24-week period that begins on the first day of the first payroll cycle following the PPP Loan Disbursement Date (referred to as the Alternative Payroll Covered Period). However, if a borrower pays twice a month or less frequently, it will need to calculate payroll costs for partial pay periods. The Covered Period or Alternative Covered Period for any borrower will end no later than Dec. 31, 2020.
“Example: A borrower uses a biweekly payroll cycle. The borrower’s 24-week Covered Period begins on Monday, June 1, and ends on Sunday, Nov. 15. The first day of the borrower’s first payroll cycle that starts in the Covered Period is June 7. The borrower may elect an Alternative Payroll Covered Period that starts on June 7 and ends on Nov. 21 (167 days later). Payroll costs incurred (i.e., the pay was earned on that day) during this Alternative Payroll Covered Period are eligible for loan forgiveness if the last payment is made on or before the first regular payroll date after Nov. 21.”
Owner compensation: “The amount of compensation of owners who work at their businesses that is eligible for forgiveness depends on the business type and whether the borrower is using an eight-week or 24-week Covered Period,” SBA says. “In addition to the specific caps described below, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at $20,833 per individual [or $15,384 for borrowers that received their loan before June 5, 2020, and choose an eight-week Covered Period] in total across all businesses in which he or she has an ownership stake.” If their total compensation across PPP loan-receiving businesses exceeds the cap, “owners can choose how to allocate the capped amount across different businesses.”
Note that owner-employees with less than a 5 percent ownership stake in a C or S Corporation are not subject to these caps, according to an SBA Interim Final Rule released Aug. 24. “This exemption is intended to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated,” the rule states. They are, however, still subject to the general limitation of $100,000 in forgivable cash compensation per employee on an annualized basis.
The Aug. 4 FAQ provided the following limitation examples for a borrower using a 24-week Covered Period:
- “C Corporations: The employee cash compensation of a C-corporation owner-employee, defined as an owner who is also an employee (including where the owner is the only employee), is eligible for loan forgiveness up to the amount of 2.5/12 of his or her 2019 employee cash compensation, with cash compensation defined as it is for all other employees. Borrowers are also eligible for loan forgiveness for payments for employer state and local taxes paid by the borrowers and assessed on their compensation, for the amount paid by the borrower for employer contributions for their employee health insurance, and for employer retirement contributions to their employee retirement plans capped at the amount of 2.5/12 of the 2019 employer retirement contribution. Payments other than for cash compensation should be included on lines 6-8 of PPP Schedule A of the loan forgiveness application (SBA Form 3508 or lender equivalent), for borrowers using that form, and do not count toward the $20,833 cap per individual.
- “S Corporations: The employee cash compensation of an S-corporation owner-employee, defined as an owner who is also an employee, is eligible for loan forgiveness up to the amount of 2.5/12 of their 2019 employee cash compensation, with cash compensation defined as it is for all other employees. Borrowers are also eligible for loan forgiveness for payments for employer state and local taxes paid by the borrowers and assessed on their compensation, and for employer retirement contributions to their employee retirement plans capped at the amount of 2.5/12 of their 2019 employer retirement contribution. Employer contributions for health insurance are not eligible for additional forgiveness for S-corporation employees with at least a 2% stake in the business, including for employees who are family members of an at least 2% owner under the family attribution rules of 26 U.S.C. 318, because those contributions are included in cash compensation. The eligible non-cash compensation payments should be included on lines 7 and 8 of PPP Schedule A of the Loan Forgiveness Application (SBA Form 3508), for borrowers using that form, and do not count toward the $20,833 cap per individual.
- “Self-employed Schedule C (or Schedule F) filers: The compensation of self-employed Schedule C (or Schedule F) individuals, including sole proprietors, self-employed individuals, and independent contractors, that is eligible for loan forgiveness is limited to 2.5/12 of 2019 net profit as reported on IRS Form 1040 Schedule C line 31 (or 2.5/12 of 2019 net farm profit, as reported on IRS Form 1040 Schedule F line 34) (or for new businesses, the estimated 2020 Schedule C (or Schedule F) referenced in question 10 of Paycheck Protection Program: How to Calculate Maximum Loan Amounts – By Business Type). Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness; health insurance and retirement expenses are paid out of their net self-employment income. If the borrower did not submit its 2019 IRS Form 1040 Schedule C (or F) to the Lender when the borrower initially applied for the loan, it must be included with the borrower’s forgiveness application.
- “General Partners: The compensation of general partners that is eligible for loan forgiveness is limited to 2.5/12 of their 2019 net earnings from self-employment that is subject to self-employment tax, which is computed from 2019 IRS Form 1065 Schedule K-1 box 14a (reduced by box 12 section 179 expense deduction, unreimbursed partnership expenses deducted on their IRS Form 1040 Schedule SE, and depletion claimed on oil and gas properties) multiplied by 0.9235. (This treatment follows the computation of self-employment tax from IRS Form 1040 Schedule SE Section A line 4 and removes the “employer” share of self-employment tax, consistent with how payroll costs for employees in the partnership are determined.) Compensation is only eligible for loan forgiveness if the payments to partners are made during the Covered Period or Alternative Payroll Covered Period. Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness. If the partnership did not submit its 2019 IRS Form 1065 K-1s when initially applying for the loan, it must be included with the partnership’s forgiveness application.
- “LLC owners: LLC owners must follow the instructions that apply to how their business was organized for tax filing purposes for tax year 2019, or if a new business, the expected tax filing situation for 2020.”
Types of eligible nonpayroll costs: As with payroll costs, the Aug. 24 FAQ confirms whether certain types of costs are counted as nonpayroll costs and eligible for loan forgiveness. See the full document for examples.
- Yes: Eligible business mortgage interest costs, eligible business rent or lease costs, and eligible business utility costs incurred prior to and paid during the Covered Period.
- Yes: Nonpayroll costs incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.
- No: Interest on unsecured credit. “Payments of interest on business mortgages on real or personal property (such as an auto loan) are eligible for loan forgiveness. Interest on unsecured credit is not eligible for loan forgiveness because the loan is not secured by real or personal property,” SBA says. “Although interest on unsecured credit incurred before Feb. 15, 2020, is a permissible use of PPP loan proceeds, this expense is not eligible for forgiveness.”
- Yes: Payments made during the Covered Period on recently renewed leases, or interest payments on refinanced mortgage loans on real or personal property, provided the original lease or mortgage existed prior to Feb. 15, 2020.
- No: Rent, lease, utility, or mortgage interest amounts attributable to the business operation of a tenant or sub-tenant of the borrower. The Aug. 24 interim final rule provides examples to illustrate this disallowance, such as: “A borrower rents an office building for $10,000 per month and sub-leases out a portion of the space to other businesses for $2,500 per month. Only $7,500 per month is eligible for loan forgiveness.”
- Also, in cases where a borrower shares a rented space with another business, “When determining the amount that is eligible for loan forgiveness, the borrower must prorate rent and utility payments in the same manner as on the borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings.”
- No: Household expenses for home-based businesses. “When determining the amount of nonpayroll costs that are eligible for loan forgiveness, the borrower may include only 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,” the Aug. 24 interim final rule states.
- Sometimes: Rent or lease payments to a related party. According to the Aug. 24 interim final rule – which defines a related party for these purposes as “any ownership in common between the business and the property owner” – these amounts are eligible for forgiveness if:
- “The amount of loan forgiveness requested for rent or lease payments to a related party 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
- “The lease and the mortgage were entered into prior to Feb. 15, 2020.”
Note, however, that while borrowers must provide documentation of mortgage interest to substantiate these rent and lease payments, mortgage interest payments to a related party are not eligible for forgiveness. “PPP loans are intended to help businesses cover certain nonpayroll obligations that are owed to third parties, not payments to a business’s owner that occur because of how the business is structured,” the Aug. 24 interim final rule states. “This will maintain equitable treatment between a business owner that holds property in a separate entity and one that holds the property in the same entity as its business operations.”
Alternative Payroll Covered Period: “The Alternative Payroll Covered Period applies only to payroll costs, not to nonpayroll costs,” the Aug. 4 FAQ states. To be eligible for loan forgiveness, nonpayroll costs must be paid or incurred during the Covered Period, which always starts on the date the lender makes a disbursement of the PPP loan.
Distribution of transportation: The CARES Act includes in covered utility payments a “payment for a service for the distribution of … transportation.” The FAQ clarifies: “A service for the distribution of transportation refers to transportation utility fees assessed by state and local governments. Payment of these fees by the borrower is eligible for loan forgiveness.” (For more information on transportation utility fees, see this Department of Transportation page.)
Electricity supply charges: SBA confirmed in the FAQ that electricity supply charges that are charged separately from electricity distribution charges are eligible for forgiveness: “The entire electricity bill payment is eligible for loan forgiveness (even if charges are invoiced separately), including supply charges, distribution charges, and other charges such as gross receipts taxes.”
LOAN FORGIVENESS REDUCTIONS
The FAQ clarifies two potential reductions to borrowers’ forgiveness amounts:
Forgiveness reductions for reductions in FTE employees
- Accounting for employees who declined rehire offers: “In calculating its loan forgiveness amount, a borrower may exclude any reduction in FTE employees if the borrower is able to document in good faith the following: 1) an inability to rehire individuals who were employees of the borrower on Feb. 15, 2020, and 2) an inability to hire similarly qualified individuals for unfilled positions on or before Dec. 31, 2020,” the FAQ states. Borrowers must inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the rejection. To show compliance, borrowers should maintain documentation including “the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual.”
- Accounting for employees who made more than $100,000 in 2019: One question in the FAQ asks, “When calculating the FTE Reduction Exceptions in Table 1 of the PPP Schedule A Worksheet on the Loan Forgiveness Application (SBA Form 3508 or lender equivalent), do borrowers include employees who made more than $100,000 in 2019 (those listed in Table 2 of the PPP Schedule A Worksheet)?” SBA responds in the affirmative: “The FTE Reduction Exceptions apply to all employees, not just those who would be listed in Table 1 of the Loan Forgiveness Application (SBA Form 3508 or lender equivalent). Borrowers should therefore include employees who made more than $100,000 in the FTE Reduction Exception line in Table 1 of the PPP Schedule A Worksheet.”
- Seasonal employers: Seasonal employers that elect to use a 12-week period between May 1, 2019, and Sept. 15, 2019, to calculate their maximum PPP loan amount must use the same 12-week period as the reference period for calculation of any reduction in the amount of loan forgiveness.
Forgiveness reductions for reductions in employee salary or hourly wage: SBA previously established that unless certain safe harbors were met, “if the salary or hourly wage of a covered employee is reduced by more than 25% during the Covered Period or the Alternative Payroll Covered Period, the portion in excess of 25% reduces the eligible forgiveness amount.” The FAQ provides three thorough examples for determining these reductions, and also notes that for purposes of this calculation, the borrower should take into account decreases only in salaries or wages, not all forms of compensation.
GENERAL APPLICATION INFORMATION
Eligibility for the EZ application form: SBA confirmed that “sole proprietors, independent contractors, and self-employed individuals who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form” automatically qualify to – and should – use the simplified Loan Forgiveness Application Form 3508EZ (or their lender’s equivalent).
Electronic signatures and documentation: PPP lenders are allowed to accept scanned copies of signed loan forgiveness applications, as well as of documents containing the information and certifications that the application requires. They also may accept “any form of E-consent or E-signature that complies with the requirements of the Electronic Signatures in Global and National Commerce Act (P.L. 106-229).” SBA advises that “if electronic signatures are not feasible, then when obtaining a wet ink signature without in-person contact, lenders should take appropriate steps to ensure the proper party has executed the document.” (SBA cautions, however, that “This guidance does not supersede signature requirements imposed by other applicable law, including by the lender’s primary federal regulator.”)
Loan payments prior to SBA remitting the forgiveness amount: “As long as a borrower submits its loan forgiveness application within ten 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,” the FAQ states. If the loan is fully forgiven, the borrower is not responsible for any payments; if only a portion is forgiven, or if the forgiveness application is denied, any remaining balance due must be repaid on or before the maturity date of the loan. During the time between loan disbursement and SBA remittance of the forgiveness amount, interest will accrue, and the borrower is responsible for paying that interest on any unforgiven amount of the loan. “The lender is responsible for notifying the borrower of remittance by SBA of the loan forgiveness amount (or that SBA determined that no amount of the loan is eligible for forgiveness) and the date on which the borrower’s first payment is due, if applicable,” the FAQ states.
Appealing an SBA decision on the forgiveness amount: In mid-August, SBA released an interim final rule establishing guidelines for appealing SBA decisions that a borrower was ineligible for all or part of the amount approved (or not approved) by their lender. Read our full alert for details.
Coronavirus Resource Center
InsightSVOG recipients: Prepare for your federal audit requirementsPaul R. Ballasy, Rebecca W. LymanBoth for-profit and not-for-profit SVOG grantees may face additional compliance audits. Read key rules and how to prepare
InsightUnderstanding SBA's Economic Injury Disaster Loans programBusinesses that have suffered losses related to the COVID-19 pandemic can apply for Small Business Administration (SBA) loans of up to $2 million. Here’s what to know.
InsightQ&A: Appealing an SBA decision on a PPP loan or PPP loan forgivenessStephanie O’RourkAn SBA interim final rule establishes who can appeal Paycheck Protection Program loan decisions, when and how appeals must be filed, and more. Read highlights.
InsightThe Restaurant Revitalization Fund: What to knowStephanie O’Rourk, Taylor SphonRead about eligibility, application guidelines, grant amount calculations, and more key information on the American Rescue Plan Act’s RRF program.
InsightShuttered Venue Operators Grant program open for applicationJohn LanzaRead insights on what businesses and not-for-profits impacted by COVID-19 need to know on Shuttered Venue Operators Grants (SVOG).