PPP Paycheck Protection Program Loans & Forgiveness – (by: Mattisyahu Teichman, CPA)

[Update 9/2/2020 – On 8/27/2020 the SBA came out with a new rule1. The rule clarified as follows: (1) owners of “S” or “C” Corps with less than 5% ownership are not subject to the compensation limits applying to owners. For example a “S” Corp owner with 4.99% ownership, if using a 24-week period, would be limited to $1,923 in weekly compensation which over 24 weeks can total $46,154. Under the prior guidance, they were limited to the lesser of 2.5/12 of 2019 compensation or $20,833. (2) The rule clarifies that non-payroll expenses attributable to sub-tenants are not eligible for forgiveness, and (3) it limits rent paid to a related party to the amount of mortgage interest the related party is paying on that property. This serves to prevent increasing the eligible costs as compared to the scenario where the property is owned directly. For most borrowers we don’t expect these changes to have any impact. As noted in the 8/7/2020 update below, the article has not been updated to reflect these recent changes.

Update 8/7/2020 – On 8/4/2020 the SBA came out with a new FAQ2 that addressed various points. Notably it clarified the rules for owner-employees. It defined “cash compensation” as gross payroll before deduction, which aligns with the changes for owner-employees. For “C” Corp owners, their cash compensation will be similar to regular employees and this is the portion limited to the lesser of 2.5/12 of 2019 cash compensation or $20,833, if using 24-weeks. For their health and retirement benefits it is in addition to the cash compensation and is limited to 2.5/12 of 2019 amounts. For “S” Corp owners that own at least 2%, their cash compensation includes their health benefits, hence the limit of the lesser of 2.5/12 of 2019 amounts or $20,833 applies to that combined amount. Their retirement benefits are in addition to this, but limited to 2.5/12 of 2019 amounts. For partners and sole proprietors there are no changes to the prior rules. Previously I had suggested that owners for the limitation rules are those who own 20% or more of an entity (based on the loan application instructions), whereas the FAQ seems to indicate any ownership share qualifies you as an owner. I don’t expect this distinction to make much of a difference in terms of the amount you end up qualifying for forgiveness given the change to 24 weeks. The article below has NOT been updated to reflect the rule changes. As these rules changes should only be of minimal relevance due to the change, in June, to a 24-week covered period I don’t anticipate updating this. Congress is also currently negotiating additional PPP lending and likely changes to the rules. If relevant I expect to update or write a new post at that time.

Updated 6/18/2020 – This post has been updated to reflect the rule changes issued by the SBA on 6/17/2020. The SBA also issued two new loan forgiveness applications. The full application, found here and its instructions found here, and a simplified EZ application found here and its instructions found here. For those eligible, see the instructions to the EZ application, the EZ application will make applying for forgiveness a lot simpler.

The updated rules clarified that the cap, if using the 24-week period, on owner-compensation is $20,833 and for employees is $46,154. The rules also were changed to reflect the new 24-week period, the option to elect an 8-week period if you received your loan prior to 6/6/2020, the safe harbor date to restore salary or FTE is now 12/31/2020, and the new safe-harbors for FTE reductions (see loan forgiveness section for discussion of the safe-harbors), 

While the information in the loan forgiveness section here should be sufficient to help understand how to complete the loan forgiveness application, this article is organized to help you understand the program and not for the purpose of completing an application. The loan forgiveness calculation has many technical steps (if using the full application and not the EZ application) that require a separate step-by-step guide to work through]

We have been getting numerous questions about the Paycheck Protection Program (PPP) under Section 1102 of the CARES Act, created in response to the COVID-19 epidemic. The following provides some limited information regarding the program. While I attempted to cover every relevant material aspect of this program, it would be impossible to delve into every detailed aspect while maintaining the readability of this. Also, please understand that the rules are constantly being updated and our understanding of them is constantly changing. Accordingly, anything discussed here is subject to change and may reflect an outdated or incorrect understanding of the rules. If you have any questions or corrections please contact me. Also just want to say thanks to all of my colleagues who were kind enough to read this and especially those who have made some valuable corrections.

The PPP is a program designed to provide loans to small businesses via the Small Business Administration (SBA) in order to help cover payroll costs and some nonpayroll costs. If various requirements are met the loans can be forgiven in full or part. These loans are applied for via a bank or other lender. They carry a low interest rate (1%) and the maturity (on any portion not forgiven) is two years (for loans made on or after 6/5/2020 the maturity is five years).

There are three calculations here relevant to the loan. (1) How the loan amount is computed, (2) how you can use the loan, and (3) how the loan forgiveness is computed. There are various differences between each of these, which can make this confusing, but they are important to understand. The most critical discussion here is likely the loan forgiveness section as that will be what most of you will be making decisions based on.


LOAN AMOUNT

The loan amount is based on the 2.5 months of average salary plus 2.5 months of various employee benefits (e.g. employer provided retirement and group health care coverage, including insurance premiums). In addition, employer paid state and local taxes (generally unemployment contributions) are included.

Average salary is generally computed by taking either the 2019 or last 12 months (April 1, 2019 – March 31, 2020) salary, dividing by 12 and multiplying by 2.5.

For Sch C (Sole Proprietors), they can apply for the loan based on their 2019 Sch C income. The calculation for them is divide the Sch C income by 12 and multiply by 2.5. This is in addition to any loan amount they would be eligible for based on their employees as discussed above. Health care costs and retirement paid for the owner is not included (for employees as mentioned above it is included).

For partners, they can apply for the loan based on their self-employment income as reported on line 14 of Sch K-1 for 2019 (less any Sec 179 deducted, unreimbursed partnership expenses, and depletion on oil and gas properties). First multiply by 0.9235 then divide by 12 and multiply by 2.5. If there are employees this would be in addition to the amount for them. [The $100,000 cap (discussed below) is determined after you multiply by 0.9235. The 0.9235 calculation is intended to be equivalent to removing the employer share of payroll taxes]. The annual cost should be divided by 12 and multiplied by 2.5 to calculate the amount of loan eligible for that component.

Note: for sole proprietors and partners the application is done in the business name and is a single one together with any employees. The SBA will only approve one application per business so it is important that you include all costs in your initial application in order to get the maximum amount you are eligible for.

For the portion of the loans computed based on salary, Sch C income, and Partnership self-employment income, the amounts are capped at $100,000 annualized (for salaries this is per employee). This means that for this component the maximum loan amount can be $100,000 / 12 x 2.5 = $20,833. As discussed already the non-salary component is added to this amount and there is no dollar limitation.

For partnerships that did not include partner K-1 self-employment income in their original application it is our understanding that you can apply with you bank to adjust the loan request.


LOAN CERTIFICATION

In order to get the loan you have to certify in “good faith” that there is a need for the loan and that it will be used to retain employees and maintain salaries.

Initially there was concern what this certification entailed. The SBA and Treasury had indicated that in making the certification one has to look at liquidity and access to funds, but precisely what that meant was not clear.

On May 13 the SBA clarified that for a loan under $2,000,000 this certification will automatically be considered to be made in good faith (i.e. you will not be criminally liable if the SBA thinks you did not have sufficient basis to make this  certification). For loans above $2,000,000 they will be subject to review by the SBA and if found to lack adequate basis for the certification they will seek repayment of the loan. If the loan is repaid the SBA will not pursue any additional action against the borrower.

On May 22 the SBA further clarified that all loans, regardless of the amount, are subject to review at the SBA’s discretion and if the certification was made without sufficient basis they can demand repayment. We think the distinction here is that for loans under $2,000,000 the SBA will not seek criminal liability for making this certification (if not paid back).

For anyone concerned about whether they can make this  certification in good faith, we recommend you consult with legal counsel. While we don’t think there will be criminal liability for loans under $2,000,000 with regard to this certification, this is a legal question with limited guidance to make a decision on.


LOAN USE

The SBA and Treasury decided that the loan has to be used minimally 60% (Update: under prior law this was 75%) for payroll costs. The remaining amount can be used for eligible nonpayroll costs. Both of these are described below.

Eligible Payroll Costs for Loan Use are the following:

    • Salaries and other compensation (tips3, vacation and other paid leave, dismissal, etc) paid to employees – These costs are capped at $100,000 annualized (maximum average weekly amount is $1,923). [you can increase pay to employees during the covered period4].
    • [The next 3 points describe payroll costs for owner’s (self-employed individuals, general partners, and owner-employees). You cannot increase pay to owners as compared to 2019.]
      • Self-employed individuals (Sch C) – These costs are limited to the amount paid for 2019 equivalent compensation. Take 2019 Sch C Income (capped at $100,000), divide by 52 to calculate the maximum average weekly amount (maximum average weekly amount is $1,923).
      • General partners (K-1 from Partnership or LLC) – These costs are limited to the amount paid for 2019 equivalent compensation. First, take 2019 Sch K-1, line 14, self-employment income (less, any Sec 179 deducted, unreimbursed partnership expenses, and depletion on oil and gas properties) multiply by 0.9235 and cap this amount at $100,000. Next divide by 52 to calculate the maximum average weekly amount (maximum average weekly amount is $1,923).
      • Owner-employees (W-2 from Corporation) – These costs are limited to the amount paid for 2019 equivalent compensation. Take 2019 cash compensation plus retirement and health care contributions made by the employer (the sum is capped at $100,000), divide by 52 to calculate the maximum average weekly amount (maximum average weekly amount is $1,923). [The amount of cash compensation usually can be calculated by looking at the W-2. As there may be various amounts added to cash compensation in computing the W-2 amounts it may require some modification to derive this figure].
    • Group health care coverage, including insurance premiums paid by the employer. [Not capped at $100,000].
    • Retirement costs paid by the employer. [Not capped at $100,000].
    • State and local taxes on salary paid by the employer. [Not capped at $100,000].
    • [For owner-employees, retirement and health care costs are added to cash compensation. For self-employed individuals and partners these costs are not added as their income for this calculation (as described above) is before these costs are deducted5.]

Eligible Nonpayroll Costs for Loan Use are the Following:

These have to be business related (i.e. deducted and eligible to be deducted on your business tax return [Sch C, 1120, 1120S, or 1065] and they have to be arrangements entered into by 2/15/2020).

    • Interest (not principal) on mortgage obligations on real or personal property
    • FOR LOAN USE ONLY, BUT NOT LOAN FORGIVENESS – Interest on other debt obligations
    • Rent on real or personal property
    • Utility bills (electric, gas, water, transportation, telephone or internet service. As the service for these has to have started before 2/15/2020, we are not clear on what transportation costs are included).

The use of the funds can extend over the period you have the loan (there is no specific time-limit to use the funds). Please note, this is a very important distinction from the loan forgiveness provisions discussed later.

Note: There are two “60%” provisions as to payroll costs. One, for the use of funds, and the other for the loan forgiveness. They apply separately for each calculation.

The loan use and the loan forgiveness provisions use many similar terms and can really mix you up, so it is important to think about them each separately and understand the distinctions between them.


LOAN FORGIVENESS

Ok, finally down to the part you are likely here for. This is also the most difficult part and the guidance is not complete so there is some guess-work here.

Loan forgiveness, is based on use of the funds in the “covered period” or “alternative covered period” (discussed later). The “covered period” is either 24-weeks (Update: under prior law this was only 8-weeks) or you can elect it to be 8-weeks. This is discussed in more detail later.

At least 60% (Update: under prior law this was 75%) of the amount forgiven has to be used for payroll costs (this is separate from the 60% loan use requirement). The rest of the amount forgiven can be for nonpayroll costs.

The calculation for loan forgiveness is as follows:

    • Add payroll costs and nonpayroll costs, deduct the reduction for salary/hours.
    • Multiply the result by the percentage reduction for full-time equivalency (FTE).
    • The loan forgiveness is the lesser of (A) the loan amount, (B) payroll costs divided by 60% [i.e. maximum forgiveness is based on 60% being used for payroll], and (C) the result of the above calculation.

The following discussion will help clarify for the purpose of the loan forgiveness what the payroll and non-payroll costs are and how they are calculated. I will also try to clarify the reduction calculations, which is the most difficult part of all this.

Eligible Payroll Costs for Loan Forgiveness are the following:

    • Salaries and other compensation (tips6, vacation and other paid leave, dismissal, etc) paid to employees – These costs are capped at $100,000 annualized (maximum amount is $46,1547 if using a 24-week period or $15,385 if using an 8-week period). [you can increase pay to employees during the 24-week or 8-week period].
    • [The next 3 points describe payroll costs for owner’s (self-employed individuals, general partners, and owner-employees; with an ownership share of 20% or more8). These costs are limited to either 2.5 months of 2019 equivalent compensation (if using a 24-week period) or 8-weeks of average weekly 2019 equivalent compensation, capped at $100,000 (depending on whether your period is 24-weeks or you elect an 8-week period this will be limited to either $20,8339 or $15,385 accordingly). You cannot increase pay to owners during the covered period as compared to 2019.]
      • Self-employed individuals (Sch C) – These costs are the lower of the amount paid in the 24-week or 8-week period (if elected) or 2.5 months of 2019 equivalent compensation (if using a 24-week period) or 8-weeks of equivalent 2019 compensation. Take 2019 Sch C Income (capped at $100,000), divide by 12 and multiply by 2.5 (if using 24-weeks), or divide by 52 and multiply by 8 (if using 8-weeks). The maximum amount is $20,833 or $15,385 accordingly.
      • General partners (K-1 from Partnership or LLC) – These costs are the lower of the amount paid in the 24-week or 8-week period (if elected) or 2.5 months of 2019 equivalent compensation (if using a 24-week period) or 8-weeks of equivalent 2019 compensation. First, take 2019 Sch K-1, line 14, self-employment income (less, any Sec 179 deducted, unreimbursed partnership expenses, and depletion on oil and gas properties) multiply by 0.9235 and cap this amount at $100,000. Next divide by 12 and multiply by 2.5 (if using 24-weeks), or divide by 52 and multiply by 8 (if using 8-weeks). The maximum amount is $20,833 or $15,385 accordingly.
      • Owner-employees (W-2 from Corporation) – These costs are the lower of the amount paid in the 24-week or 8-week period (if elected) or 2.5 months of 2019 equivalent compensation (if using a 24-week period) or 8-weeks of equivalent 2019 compensation. Take 2019 cash compensation plus retirement and health care contributions made by the employer (the sum is capped at $100,000), divide by 12 and multiply by 2.5 (if using 24-weeks), or divide by 52 and multiply by 8 (if using 8-weeks). The maximum amount is $20,833 or $15,385 accordingly. [The amount of cash compensation usually can be calculated by looking at the W-2. As there may be various amounts added to cash compensation in computing the W-2 amounts it may require some modification to derive this figure10].
    • Group health care coverage, including insurance premiums, paid by the employer. [Not capped at $100,000].
    • Retirement costs paid by the employer. [Not capped at $100,000].
    • State and local taxes on salary paid by the employer. [Not capped at $100,000].
    • [For owner-employees, retirement and health care costs are added to cash compensation. For self-employed individuals and partners these costs are not added as their income for this calculation (as described above) is before these costs are deducted11.

When payroll costs need to be paid / incurred

    • For all costs, the default period is a 24-week covered period from when the loan funds are received, ending no later than 12/31/2020. If you received your loan prior to 6/5/2020 you can elect to use an 8-week period instead. If electing to use an 8-week period for payroll costs you can elect to use (A) the “covered period” or (B) if your pay schedule is biweekly or more frequent, the “Alternative Covered Period.” The “covered period” is the 8 weeks from when the loan is received. The “Alternative Payroll Covered Period” is the 8 weeks beginning on the first day of the first pay period following the date the PPP loan is received.
    • Payroll costs have to either be (A) paid during the applicable 24-week or 8-week period or (B) incurred during the applicable 24-week or 8-week period and paid on or before the next regular payroll date (even if that date is after the 24-week or 8-week period is over).
    • Following the above rules, it is possible to include more than 24-weeks or 8-weeks, as applicable, of these cost (subject to the aforementioned maximum dollar limits).

Eligible Nonpayroll Costs for Loan Forgiveness are the Following:

These have to be business related (i.e. deducted and eligible to be deducted on your business tax return [Sch C, 1120, 1120S, or 1065] and they have to be arrangements entered into by 2/15/2020).

    • Interest (not principal) on mortgage obligations on real or personal property.
    • Rent on real or personal property
    • Utility bills (electric, gas, water, transportation, telephone or internet service. As the service for these has to have started before 2/15/2020, we are not clear on what transportation costs are included).
    • [For a sole-proprietor without employees, it is not clear if you can include these costs. We think you can, but we are not certain.]

When nonpayroll costs need to be paid / incurred

    • For nonpayroll costs the “covered period” is the 24-weeks ending no later than 12/31/2020 or, if you received your loan prior to 6/5/2020 you can elect that the covered period should be 8-weeks from when the loan is received (you have to use the same number of weeks for both payroll and nonpayroll costs).
    • For nonpayroll costs, they have to either be paid (A) during the covered period or (B) incurred during the covered period and paid on or before the next regular billing date (even if that date is after the covered period is over).
    • Following the above rules, it is possible to include more than 24-weeks or 8-weeks, as applicable, of these costs.
    • Prepaid interest is specifically excluded from the amount of loan forgiveness (i.e. you can only include paid interest that is already incurred).

Reduction calculation for Salary / Hours

    • This calculates the reduction for salary or hourly wages during the 24-week or 8-week period as compared to 1/1/2020-3/31/2020. This is deducted from the sum of the payroll costs and nonpayroll costs in computing the amount eligible for loan forgiveness.
    • Do not include any owner-employees, self-employed individuals, or partners in this calculation.
    • Do not include any employees that received salary or wages in excess of an annualized equivalent of $100,000 during any pay period in 2019 (or for new employees during any pay period in 2020). [It is unclear exactly what this means. For example, if an employee who is paid weekly, was paid for 1-week in 2019 greater than $1,923 (annualized equivalent for that period is over $100,000), but for the whole year was paid $100,000 or less, is that employee excluded from this calculation? Our recommendation is to assume for any employee that was employed the full year 2019 to use whatever their actual salary or wages for 2019 was, and for employees not paid for a full-year during 2019 to annualize their pay rate to make this determination.]
    • Only employees paid during the Covered Period or Alternative Covered Period are included in this calculation (i.e. if an employee was not rehired for the 24-week or 8-week period they don’t factor into this calculation).
    • This reduction only applies for employees whose salaries or hourly wages were reduced by more than 25%.
    • For salaried employees compare the average annual salary during the 24-week or 8-week period to the comparison period. Any reduction in excess of 25% should be divided by 52 and multiplied by 24 or 8 (i.e. since the total reduction is computed on an annual basis, you have to compute 24 weeks or 8 weeks of reduction).
    • For hourly employees compare their hourly wage rate during the 24-week or 8-week period to the comparison period. Any reduction in excess of 25% should be multiplied by average hours worked per week during 1/1/2020-3/31/2020 (the comparison period) and then multiplied by 24 or 8, as applicable (corresponding to the number of weeks).
    • Safe harbor – if the average annual salary or hourly wage was reduced in the period 2/15/2020-4/26/2020 as compared to 2/15/2020 and you restored salary or hourly wage levels by 12/31/2020 (or the date the application for forgiveness is submitted, whichever is earlier) for that employee there is no reduction in salary or hourly wages.

Reduction calculation for full-time equivalency (FTE)

    • This calculates the reduction in the amount of average FTE during the 24-week or 8-week period as compared to the reference period. The sum of the payroll costs and nonpayroll costs, less the reduction for salary/hours, should be multiplied by the proportional reduction in average FTE to compute the amount eligible for loan forgiveness.
    • For the reference period you can elect either 1/1/2020-2/29/2020 or 2/15/2019-6/30/2019 (for seasonal employers they can also select any 12-week consecutive period between 5/1/2019-9/15/2019).
    • Do not include any owner-employees, self-employed individuals, or partners in this calculation.
    • You can elect to calculate using either Method 1 or Method 2 (below). Use the same method for all employees.
      • Method 1 – For each employee, use average number of hours paid per week, divide by 40 and round to nearest tenth. Maximum for each employee is 1.0 (if employee works on average more than 40 hours, the result is 1.0).
      • Method 2 – For employees that work 40 hours or more per week assign 1.0. For employees that work fewer hours assign 0.5.
    • FTE Reduction Exemption #1 – For each employee that you had reduced their hours which (1) you made a good-faith written offer to restore hours (at same rate of salary or wages as prior to reduction) during the 24-week or 8-week period, (2) which was rejected by the employee, and (3) you maintained records documenting the offer and its rejection there is no reduction in FTE12.
    • FTE Reduction Exemption #2 – For any employee during the 24-week or 8-week period who was (a) fired for cause, (b) voluntarily resigned, (c) or voluntarily requested a reduction in hours; there is no reduction in FTE. Any employees hired to replace these employees takes their place for the FTE calculation13.
    • Safe harbor #1 – If the average FTE was reduced in the period 2/15/2020-4/26/2020 as compared to 2/15/2020 and you restored FTE by 12/31/2020 (or the date the application for forgiveness is submitted, whichever is earlier) there is no reduction in FTE.
    • Safe harbor #2 – (Update: this is a new safe harbor) If you can document in good faith an inability to rehire individuals who were employees as of 2/15/2020 and an inability to hire similarly qualified employees there is no reduction in FTE for those employees. Per the SBA you have to notify the applicable state unemployment office within 30 days of the employee’s rejection14.
    • Safe harbor #3 – (Update: this is a new safe harbor) If you can document in good faith an inability to return to the same level of business activity as before 2/15/2020, due to compliance with requirements or guidance of the Secretary of Health and Human Services, the Director of the Centers for Diseases Control and Prevention , or the Occupational Safety and Health Administration during the period 3/1/2020-12/31/2020, related to COVID-19, there is no reduction in FTE15.

DOCUMENTATION REQUIRED

The documentation requirements bear mentioning as you can meet all the above requirements for loan forgiveness but without meeting the documentation requirements you may not have the full amount forgiven. The Borrower must maintain all documentation related to the PPP loan, including documentation supporting Borrower’s certifications as to the necessity of the loan request and eligibility for a PPP loan, documentation necessary to support the loan forgiveness, and documentation demonstrating material compliance with PPP requirements. The documentation must be retained for 6 years from the date the loan is forgiven or repaid in full.

Payroll costs

    • Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
    • Tax forms (or equivalent third-party payroll service provider reports) for the 24-week or 8-week period. Generally, form 941 and State quarterly wage filings.
    • Receipts, cancelled checks, or account statements documenting the amount of employer contributions to health insurance and retirement plans.
    • Documentation (generally payroll tax filings) showing the average number of FTE employees for the comparison period elected.
    • Documentation supporting the calculation of average annual salary or hourly wages in the 24-week or 8-week period and 1/1/2020-3/31/2020.
    • Documentation supporting which employees received during 2019 compensation in any single pay period in excess of an annualized rate of $100,000.
    • If eligible for the safe harbor for FTE or salary/hourly wages, documentation supporting FTE employees or salary/hourly wages at 2/15/2020, the period 2/15/2020-4/26/2020, and 12/31/2020.

Nonpayroll costs

    • Mortgage interest – Copy of lender amortizations schedule and receipts or cancelled checks for the covered period; or lender account statements from February 2020 and the months of the covered period through one month after the end of the covered period verifying interest amounts and eligible payments.
    • Rent or lease payments – Copy of lease agreement and receipts or cancelled checks for covered period; or account statements from February 2020 and from the covered period through one month after the end of the covered period verifying eligible payments.
    • Utility payments – Copy of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks, or account statements verifying those eligible payments.

Various other points related to all this (sorry if this is a mess, but there is a lot of info to process and trying to keep it simple and understandable):

8-weeks vs 24-weeks – The default period to pay your eligible expenses is 24-weeks. If you received your loan prior to 6/5/2020 you can elect an 8-week period instead. One concern about using a 24-week period is that it would possibly extend the period for which reductions in salary or FTE would affect you. The SBA has since clarified that you can apply for forgiveness as soon as you have finished using all the funds. Accordingly any reduction for salary or FTE would be based on the period up till you submit the application (also any safe harbor date to rehire people by would be the  date you submit your application). You would compare your average FTE or average weekly salary for whatever length of period this happens to be. With regard to the reduction for salary, you would compare the average annual salary for the covered period against the average annual salary for the period 1/1/2020-3/1/2020. Any reduction in excess of 25% would be divided by 52 and multiplied by 24 (you would be penalized based on 24-weeks of reduced salary, even though the period you paid out the funds is less than that). I expect for most businesses they will find it beneficial to use 24-weeks now and not 8-weeks.

For sole proprietors and partners with no employees or corporations with the only employees being the owners, the 24-week period should allow you to receive full forgiveness based on the owner’s compensation (8-weeks, only allowed you to receive partial forgiveness for the loan amount based on owner’s compensation). For sole proprietors and partners this can also allow for additional tax-free income.

1099’s – Originally the law suggested that you can include 1099’s in your payroll loan, but the rules since clarified that you cannot. People receiving 1099’s should apply themselves if eligible.

Deferral of Payroll Tax Payments – The CARES Act, as amended, allows you to defer the employer’s share of social security and certain railroad retirement taxes. You can defer 50% of these taxes till 12/31/2021, with the balance due by 12/31/2022. This is equal to about 6.2% of salaries (up to the social security wage limit).

EIDL Grant – If you received an EIDL Grant ($1,000 per employee, up to $10,000) the amount of loan forgiveness for the PPP loan is reduced by that amount.

Employee Retention Credit (ERC) – The CARES Act also offers an ERC which covers 50% of payroll up to $10,000 in payroll ($5,000 credit) per employee. You cannot receive both an ERC and a PPP loan.

Increasing salary or head count – The provisions penalize you for reducing salary or head count. You can increase salaries (up to $100,000 annualized) or head count for the loan forgiveness calculation. For owners you cannot increase head-count or salary (due to being limited based on 2019 compensation).

Multiple Businesses – If you own multiple businesses, irregardless of form of ownership, it seems the SBA  limits the loan forgiveness for the owners (owner-employees, partners, self-employed individuals) to a combined total of 24/52 of 2019 compensation (as explained in the loan forgiveness section, with the amount capped at $100,000) across all businesses16.

Owners – The definition of the term owner for the purposes of the PPP Loan Forgiveness is difficult to find. The best information I was able to find with regard to who is considered an owner is in the instructions to the Loan Application (not forgiveness application),  found here. Per the instructions owners are those who own 20% or more of an entity17.

Paid Leave – The “Families First Coronavirus Response Act”, introduced various paid leave benefits for people affected by COVID-19. These paid leave benefits provide a credit to the employer for up to certain amounts. Any wages which a credit is received for is not included in payroll costs. For those using an 8-week period this might impact the amount of forgiveness eligible for as payroll costs might not be sufficient to claim the full amount. For those using a 24-week period, the impact of this would be expected to be negligible.

Parsonage – Parsonage is included in wages and compensation.

Partial unemployment / Work share – Employees should be eligible for partial unemployment or work share if you don’t rehire them fully. In terms of partial unemployment, unless you are paying them a small fraction of their prior salary, they will likely not be eligible for unemployment. In terms of work share they will be eligible as long as the reduction in employment meets the terms of the program. Once they receive work share they should also be eligible for the $600 pandemic unemployment assistance payments the Federal Government is providing. You should review the guidance on the reduction for FTE and Salary/Hourly Wage in determining whether employees on partial unemployment or work share will negatively impact your loan forgiveness.

Partners (K-1) & owner-employees (W-2) vs Sole Proprietors (Sch C) – Analysis of the difference in treatment – The CARES Act specifies for Sole Proprietors (self-employed individuals) that their loan amount and forgiveness is based on income and does not include health and retirement benefits in the respective calculations. For employees, the act specifies, that in addition to their wages and salary, amounts paid for group health and retirement are included in the respective calculations. As to partners (who are considered self-employed) and owner-employees (which are for some purposes considered like employees) the law is not clear as to whether they are treated like sole proprietors or employees (notable difference being whether you can include group health and retirement costs).

The SBA on 5/22/2020 issued, “Interim Final Rule – Business Loan Program Temporary Changes; Paycheck Protection Program – Loan Forgivenss” which clarified the treatment for partners and owner-employees. For sole proprietors, partners, and owner-employees, their total compensation is limited to $100,000 annualized. Retirement and health care contributions are not added after the cap of $100,000 on cash compensation, as for employees, rather it is included in the compensation that is capped. For sole proprietors the SBA clarified that their net income on the Sch C is before retirement and health contributions hence no need to add those amounts to Sch C income. For partners the net income from self-employment 18 is also before retirement and health contributions and so those costs are not added. For owner-employees, you will need to add retirement and health-care contributions paid by the employer to cash compensation to get the total compensation subject to the $100,000 limit 19. Depending on various factors this may not be the same amount as reported on the W-2.

Spouses – It is not clear if an owner’s spouse is treated as an employee or owner for the various payroll costs. Further guidance from the SBA here is necessary.

Tax implications – The law says that the loan forgiveness is tax-exempt. The treasury issued a notice20 stating that accordingly the expenses paid with the loan are not deductible. Congress may be passing a law reinstating a deduction for expenses here, which would be a very significant benefit for business receiving these loans. It should be noted, for Sch C and partner income replacement (possibly excluding any portion paid as a guaranteed payment) the law as it stands allows for tax free income for that portion.

12 Replies to “PPP Paycheck Protection Program Loans & Forgiveness – (by: Mattisyahu Teichman, CPA)”

  1. I am grateful for the opportunity to read clear & helpful info on the federal rulings & on the implementation of these temporary rulings. Clear & down to earth! Thank you kindly for sharing the info.

  2. This is the most comprehensive summary I have seen of the rules governing the PPP loan and forgiveness program. The topic was posted by Morris and extensively discussed among tax professionals on Internet discussion groups and many points were cleared. Morris has spent a lot of time and anyone who has produced written technical material knows the time demands and we are all grateful for his contribution.

    1. The covered period by default is now 24-weeks. The amendment added CARES ACT Sec. 1106(l) which allows you, if you received your PPP loan before the amendment (6/6/2020), to elect to use an 8-week period. I would think the SBA when it updates the loan forgiveness application, will have some checkbox or the like to indicate you are electing an 8-week period.

  3. I have invested a lot of time looking for this sort of details on other blog sites. I desire that I had actually discovered your own quicker. You provided more detail than any kind of other blog site I have seen. Thanks for your efforts as well as I wish to read various other articles on this subject from you soon.

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