Interim Final Rule on Loan Forgiveness
June 18, 2020 – Additional updates have been made to this program. Click here for additional information.
May 27, 2020
On Friday, May 22, 2020, the Small Business Administration published an Interim Final Rule (IFR) relating to the Paycheck Protection Program (PPP). The rule summarizes key loan forgiveness provisions of the Paycheck Protection Program and clarifies areas where The Coronavirus Aid, Relief, and Economic Security Act (CARES) was either unclear or in the eyes of the SBA needed to treat certain items with more clarity or specificity. A link to this ruling may be found here: https://home.treasury.gov/system/files/136/PPP-IFR-Loan-Forgiveness.pdf
Key Provisions or Clarifications in the Interim Final Ruling on Loan Forgiveness
Below we will focus only on those items we deem new, clarified, and key for our clients and in no way does the below purport to be an exhaustive list. Please review this item in conjunction with our post on the Loan Forgiveness Application which can be found here.
Alternative Payroll Cycle and Accrual of Payroll Expenses
The loan forgiveness application, SBA Form 3508, introduced the alternative payroll covered period. This is a new assessment period that allows certain employers who pay biweekly or more often, to align payroll expenses more consistently with the intention of the loan program. This modified period would allow borrowers to elect to account for eligible forgivable payroll costs during an 8-week period that aligns with the first day of the payroll period immediately following receipt of PPP loan proceeds. This allowed pay beyond the first 8-weeks to be covered so long as paid by the next payroll date. The new IFR implements this new concept.
Additionally, the IFR goes one step further and provides for those using the standard covered period to include incurred payroll. The payroll costs incurred during the covered period that are not paid during the covered period can be pro-rated and included in the covered period, so long as they are paid by the next pay cycle.
Additional Pay Considerations
Bonuses, hazard pay and pay increases will be eligible for loan forgiveness consideration. Borrowers will still be required to consider the rules around pay not exceeding annualized income of $100,000 or $15,385 during the covered period.
Self-Employed Individual’s Owner Compensation Replacement
Self-Employed individual’s compensation is referred to as the owner compensation replacement. It is based on the owner’s 2019 net profit from Schedule C (limited to $100,000) times 8/52 for the eight-week period. This IFR clarified that healthcare and retirement expenses are not eligible for consideration in forgiveness.
General Partners Compensation
General partners compensation eligible for forgiveness consideration will be a calculation of 2019 net earnings, net of any section 179 expenses, unreimbursed partnership expenses, and depletion from oil and gas properties, the sum of which is then multiplied by 0.9235 (1-FICA rates). This compensation will then be limited to 8/52 for the eight-week period, up to $15,385. Further clarified is that no forgiveness will be considered for healthcare or retirement expenses.
Pay is still limited to $15,385 for owner-employees during the covered period. Unique to this group is that compensation available for forgiveness will be limited to the lesser of the $15,385 or 2019 pay. When considering what an owner-employer is paid, retirement and healthcare expenses might or might not be includible. If an owner-employee was paid less than $100,000 in annualized income, then the individual’s retirement and healthcare expense can be considered up to the limitation of $100,000 in annualized income, or $15,385 for the eight-week period. There is no guidance yet on who is an “owner-employee”. We can only assume anyone with any interest in a C or S Corporation will fall into this group.
Nonpayroll costs such as rent, utilities, and interest on business mortgage on real or personal property (such as company vehicles or equipment) are eligible for forgiveness if paid during the covered period or incurred during the covered period. If nonpayroll costs are incurred during the covered period, they must be paid on or before the next regular billing date, even if this billing date is after the covered period. The accrued portion would need to be prorated for the portion that applies to the covered period.
Advance payments of business mortgage interest will not be allowed.
Married to FAQ 40 here, in section 5a of this IFR the SBA clarifies loan forgiveness related to attempted rehires. Most of the wording is similar and no surprise from what the SBA already published. However, there is one noteworthy change. The IFR states that the borrower will inform the applicable state unemployment insurance office of the employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer. The IFR notes that the SBA website will supply more information on how to report this on the loan application. We would encourage borrowers to regularly check the SBA website to learn how to properly document this on the loan application.
Similar to this item, in section 5h of the IFR for those employees fired for cause, voluntarily resigning, or voluntarily requesting a reduction in schedule the borrower will not have loan forgiveness amounts reduced under these circumstances so long as documentation supporting these amounts is maintained. For the calculation of these individuals, they should be counted at the same Full Time Equivalent (FTE) level prior to the FTE reduction event for purposes of loan forgiveness.
There are information and examples included on loan forgiveness reductions for FTE and wage reduction considerations. See those within the IFR sections 5b-5e. This information was discussed in previous posts here.
Interestingly, section 5f states that borrowers should only consider the salary/wage reduction if there is not an FTE reduction for the same individual. For instance, if an employee is paid $10/hour and worked 40 hours prior to the FTE reduction event, is subsequently reduced to 20 hours, assuming all else holds constant, this employee is now 0.5 FTE vs. 1 FTE. This employee would not need to have his wage reduction calculated or considered as his FTE reduction would affect the loan forgiveness amount. The rule makes it clear the intent is not to doubly penalize borrowers in this way.
Another IFR that relates to the lender’s loan review procedures and process was also published on Friday, May 22, 2020. You can find additional information here.
Our Management Consulting team is willing and eager to assist you by advising on documentation best practices, modifying your chart of accounts and calculating initial projections. Our Management Consulting Team can be reached using the following email: firstname.lastname@example.org. As you are planning over this critical eight-week period, we strongly encourage you to request our assistance. These calculations for potential loan forgiveness amounts are complex and items will be worked on a first come first served basis, upon receipt of an executed engagement letter and requested items.
As your trusted advisors, we are committed to keeping you well-informed with any new legislation passed by Congress or other authorities as well as any new pronouncements by the Department of Treasury that may affect you. Please do not hesitate to reach out to KHA with any additional questions you may have.
This article and the sources referenced herein are provided for informational purposes only. KHA Accountants, PLLC, its partners and others do not provide any assurance as to the accuracy of these items or the information included therein. As such, KHA Accountants, PLLC cannot be held liable for any information derived from referenced sources. This by no means is a recommendation to obtain a loan or attempt to apply for a loan. There are many unknowns at this time regarding what other stimulus (grants or other loan options) that may become available with pending and future bills, executive orders, or emergency declarations to follow, that may become laws. Consult your legal and business advisors prior to making financing decisions. This is intended for illustrative and discussion purposes only.