Knowledge and Insights

Update to Our PPP Loan Forgiveness Implementation Guide

The PPP Loan Program Evolution Continues

As suspected back in May when Mercadien published its Paycheck Protection Program (PPP) Loan Forgiveness Implementation Guide, many rules have evolved and changed for both borrowers and lenders.  It has been several weeks since we published the original version of this guide.  Over these last several weeks, we have gathered the necessary information and studied the most recent guidance to publish this update, but certainly did not want to do it too soon otherwise we would find ourselves having to put out yet another “update” in the future.  While we acknowledge that further clarification may be on the horizon, we are finally in receipt of  loan forgiveness applications that were revised on June 16, 2020, an EZ version of the application for certain borrowers, and the Paycheck Protection Program Flexibility Act (PPPFA) together with amendments or updates to other Treasury and SBA guidance.

The PPPFA of 2020 was signed into law by President Trump on June 5, 2020.  This Act changed key provisions of the PPP including provisions related to maturity of PPP loans, deferral of the PPP loan payments, and forgiveness calculations for the loans.  This update picks up where we left off on May 8 and highlights the changes and clarifications that you need to understand in order to maximize the amount of forgiveness you are entitled to against the PPP loan.

Brief History – Owners of numerous small businesses, including those who are self-employed, applied for potentially forgivable loans under the Paycheck Protection Program (PPP) created as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act. This program was designed to incentivize employers to maintain payroll and employee headcount throughout the COVID-19 crisis.  Specifically, the three goals were to keep workforce off unemployment or reduce unemployment by June 30, support the economy, and retain or reclaim workforce to be “at the ready” for returning to operations.  In our original Forgiveness Implementation Guide, we laid out guidance to answer the 4 key questions business owners must address to be able to maximize PPP loan forgiveness.  We continue to stress that cash flow management is the key business best practice while tackling the forgiveness planning.

What has Changed Within the 4 Key Questions?

Question #1 – Have we spent the funds on eligible expenses only?

In addressing this question, you need to determine what you can pay for (Covered Costs), and when you have to pay for it (Covered Period).  Let’s start with “when”.

How long do we have to spend the loan? The PPPFA now allows businesses to use the proceeds of the PPP loan on allowable expenses through December 31, 2020, the “Covered Period” under Section 1102 of the Cares ACT. So, in theory, regardless of whether you are applying for forgiveness, you can continue to use the loan proceeds through the end of 2020.  However, if you intend to apply for full forgiveness, you need to spend the loan in the 24-week period from the date the funding is deposited into your bank account.

What kind of expenses and costs can I spend the money on?   Previously, we told you that you could spend the loan proceeds on payroll costs, rent, utilities and mortgage interest or interest on loans that were in effect on or before 2/15/2020. This has not changed. Payroll costs include:

  • Compensation – includes wages, salaries, commissions, bonuses, combat/hazard pay, and paid time off (but only PTO that is not considered FFCRA compensation where you will submit for a credit against your employer share of FICA and Medicare taxes). So there are no changes to the definition of compensation considered to be covered payroll costs, however, there are changes to the maximum amounts of compensation allowed for the loan forgiveness calculations as follows:
      • Compensation is determined on an employee by employee basis and while you can pay compensation to your employees at whatever level you choose, the compensation that counts towards the forgiveness calculation may not exceed an amount to any employee that when annualized in the spending period, exceeds $100,000. (See spending period below.)
      • Owners of S and C corporations – the maximum compensation is the lesser of the W-2 amount for 2019 at 8/52 for an 8-week covered period, the W-2 amount for 2019 at 2.5/12 for a 24 week covered period or $100,000 ($15,385 for the 8-week covered period or $20,833 for the 24-week covered period).
  • Healthcare costs – Continue to be forgivable costs however benefits for owners of S Corporations, C Corporations, self-employed sole proprietors and partners cannot be part of the forgiveness calculations.
  • Retirement benefits – Continue to be forgivable costs however benefits for owners of S Corporations, C Corporations, self-employed sole proprietors and partners cannot be part of the forgiveness calculations.
  • Employer share of state and local payroll tax costs – no changes
  • Self-employment income (Schedule C for a sole proprietor or K-1 self-employment income of a partner is considered compensation – the maximum amount of compensation allowed is the same as described above for owners of S and C corporations, but the 2019 Schedule C income (or partnership K-1 income subject to self-employment income) is used.

Costs & Loan Forgiveness – In order to qualify for full loan forgiveness, you must spend the funds in a specified timeframe, on specified costs, and a specific percentage of the loan must be spent on payroll costs.

New Rules to Covered Period – The “Covered Period” in CARES Act Forgiveness Section 1106 describes the timeframe for how long you have to spend the money in order to maximize loan forgiveness. You now have 24 weeks from the date that your loan is funded to spend the proceeds on allowable costs through December 31, 2020. Previously, you had 8 weeks to spend the money, which had to be spent by June 30, 2020. As you will see later in the forgiveness discussion, if you received your loan prior to June 5, 2020, you can choose to use an 8-week forgiveness period or the 24-week forgiveness period.

New Rule for Payroll Costs – The total payroll costs must account for 60% of loan proceeds spent; previously they had to account for 75% of the loan proceeds spent.

Point of Clarification – The latest interim final rules and frequently asked questions make it clear that you cannot increase owner’s compensation in order to spend the loan proceeds on payroll related expenses.  Without the limitations on C and S corporation owners, it would be possible to raise their salary to meet the 75% (now 60%) loan spending threshold without paying your other employees.  In essence, S and C corp. shareholders now have the same limits that self-employed owners and partners have.

Annualized Compensation – As noted above, the maximum amount of compensation that you can consider towards the forgiveness amount is $100,000; it is imperative to note that this is $100,000 on an annualized basis.

New Rules to Payroll Costs Annualized – Due to the $100,000 compensation cap, you will need to calculate the maximum amount you can consider as each individual’s compensation based on their regular payroll cycle.  This excludes self- employed individuals, partners, and business owners which have a limited “owner compensation replacement cap”.

Read the full guide here –

Disclaimer: This advisory resource is for general information purposes only. It does not constitute business or tax advice and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought. It is possible that if additional information from the SBA, Treasury Department and/or your lender is forthcoming, our observations and comments noted herein could be materially different. This guide was originally published on May 8, 2020, and updated on July 16, 2020, therefore its contents may be subject to change.