Paycheck Protection Program Update: Don’t Forget the Forgiveness!

May 22, 2020

Last Updated: May 21, 2020

The Paycheck Protection Program (PPP) was created on March 27, 2020 when President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Since that time, the Small Business Administration (SBA) has issued 13 Interim Final Rules and published 48 frequently asked questions. On May 15, 2020, SBA released its PPP forgiveness application form (Form 3508, Paycheck Protection Program Loan Forgiveness Application). While additional forgiveness guidance from SBA is forthcoming, Form 3508 does answer a number of questions PPP borrowers have been asking from the outset.

We’ve updated our PPP Loan Forgiveness Q&A List based on the most recent SBA guidance. Please note this list includes questions we and many of our clients have raised; it is not intended as an exhaustive list. Further, special situations such as seasonal businesses, industry-specific provisions, and Schedule C filers are intentionally omitted from this list.

  PPP Loan Forgiveness Q&A List 1
Question Answer
1. How much of our PPP loan may be forgiven? Up to 100% of a PPP loan may be forgiven if required conditions are met.
2. Can both PPP loan principal and accrued interest be forgiven, or just the principal portion? According to SBA’s 1st Interim Final Rule on the PPP, the amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest.
3. How do we apply for loan forgiveness under the PPP? Forgiveness requests are to be submitted to the lender that is servicing the loan using SBA Form 3508.
4. By what date must we submit our loan forgiveness application? At this time there is no deadline for submitting SBA Form 3508.
5. How do we determine the amount of loan forgiveness to apply for? PPP loan forgiveness is based on the borrower’s forgivable costs over an eight-week (56-day) period commencing on the date the lender makes the first disbursement to the borrower (hereafter, the “eight-week period”).2
6. What types of costs qualify as forgivable costs? Forgivable costs fall into two broad categories: (i) forgivable payroll costs and (ii) forgivable non-payroll costs.
7. What are forgivable payroll costs? Forgivable payroll costs generally consist of: (i) gross wages, subject to an annualized $100,000 cap (i.e., $15,385 for the 8-week period); (ii) employer-paid health benefits; (iii) employer-paid retirement benefits; and (iv) employer-paid state and local payroll taxes.
8. Do forgivable payroll costs include amounts for business owners? Yes. The gross wages of business owners is included in forgivable payroll costs.3 Note that in addition to the $15,385 cap described above, business owner gross wages cannot exceed the 8-week equivalent of their 2019 compensation.
9. What are forgivable non-payroll costs? Forgivable non-payroll costs include: (i) interest on real and personal property mortgage obligations incurred before 2/15/20; (ii) rent payments on real and personal property leases in force before 2/15/20; and (iii) utility payments under service agreements that began before 2/15/20.
10. Are forgivable costs measured on an accrual basis or cash basis? Form 3508 indicates that costs incurred during the 8-week period but paid in the normal course subsequent to the 8-week period are includable as forgivable costs. Otherwise, current guidance on this topic is not entirely clear. We expect this question to be answered with clarity in forthcoming SBA guidance.
11. Does sick leave for which a credit is allowed under the FFCRA require special handling? Qualified sick and family leave wages for which a credit is allowed under the FFCRA is excluded from forgivable payroll costs.
12. Are there any factors that might cause the amount of forgiveness to be limited? Yes. PPP loan forgiveness may be limited if: (i) employee salaries are reduced (the “salary reduction rule”); (ii) employee headcount levels are not maintained (the “headcount reduction rule”); or (iii) payroll costs represent less than 75% of total forgivable costs.
13. How does the salary reduction rule work? The salary reduction rule applies only to employees who were compensated at an annualized rate of less than or equal to $100,000 in 2019. It reduces the amount of loan forgiveness (on a dollar-for-dollar basis) that would otherwise be available to the extent individual salary or wage levels decrease by more than 25% during the eight-week period, as compared to the period 1/1/20 to 3/31/20.4
14. How does the headcount reduction rule work? The headcount reduction rule reduces the amount of loan forgiveness that would otherwise be available based upon the quotient of x ÷ y, where: x = the average number of FTEs 5 per week during the eight-week period; and y = (i) the average number of FTEs per week during the period beginning 2/15/19 and ending 6/30/19 or (ii) the average number of FTEs per week during the period 1/1/20 and ending 2/29/20.6
15. How are FTEs calculated for purposes of the headcount reduction rule? To determine the FTE value for an employee, take the average number of hours paid per week, divide by 40, and round the total to the nearest tenth (capped at 1.0). A simplified calculation may be used, where employees who work 40 hours or more per week are assigned a value of 1.0, and employees who work fewer than 40 hours per week are assigned a value of 0.5.
16. What can my business do if we already reduced headcount or salaries? Borrowers can cure any reduction in FTEs or compensation that occurred between 2/15/20 and 4/26/20 if they do it by 6/30/20.
17. How does the 75% rule work? The 75% rule establishes a limitation on the amount of forgiveness based on forgivable payroll costs. Specifically, PPP loan forgiveness cannot exceed the quotient of x ÷ y, where x = forgivable payroll costs, and y = 75%. For example if forgivable payroll costs during the 8-week period were $750,000, then PPP loan forgiveness could not exceed $1,000,000 (i.e., $750,000 ÷ 75% = $1,000,000)7
18. What supporting documentation will we need to submit with our forgiveness application? Borrowers should be prepared to submit documentation such as third-party payroll service provider reports, payroll tax filings, bank account statements, cancelled checks, invoices, and leases. A complete list of the documents a borrower must submit, as well as documents that must be maintained but don’t need to be submitted, is included with Form 3508.8
19. Is there anything else that needs to be submitted with our application for forgiveness? Yes. Form 3508 includes a list of representations and certifications that must be signed by the borrower’s representative.
20. When will we know if our application for loan forgiveness is approved? Lenders will make decisions on loan forgiveness within 60 days of receipt of the application.
21. Is forgiveness treated as income for federal income tax reporting purposes? No. PPP loan forgiveness is tax-free to borrowers.
22. Does PPP loan forgiveness affect the tax deductibility of the associated forgivable costs? Yes. According to IRS Notice 2020-32, “no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (March 27, 2020) and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.” 9
23. What happens if a portion of our PPP loan is not forgiven? Any loan amounts not forgiven must be repaid over a two-year term with interest at 1.00% per annum. Payments are deferred for six months following the loan disbursement date, during which time interest will continue to accrue.
24. If my business is approved for loan forgiveness, how should it be treated in our financials? Stay tuned for additional guidance from Aronson on this topic…

Please keep in mind that fact patterns will vary from entity to entity and gaps in guidance remain. As a threshold matter and in light of heightened SBA scrutiny, be sure to:

  • keep PPP loan proceeds segregated;
  • track the usage of PPP loan proceeds carefully;
  • plan out your 8-week period;
  • maintain appropriate supporting documentation; and
  • protect confidential data.

Are you suffering from PPP fatigue? If you need assistance with the PPP forgiveness process and scenario modeling, we’re here to help. Contact us today at 301.231.6200 or visit the COVID-19 Advisory page on our website for more information.

[1] Aronson LLC is not, by means of this publication, rendering professional advice or services, and you should not take any action based on this information without first seeking professional advice tailored to your specific needs and circumstances.

[2] PPP borrowers with a bi-weekly (or more frequent) payroll schedule may elect to align the start of their eight-week covered period with the first day of their first pay period following their loan disbursement date. This alternative eight-week period applies only to forgivable payroll costs and not to forgivable non-payroll costs.

[3] Partnerships and LLCs filing as partnerships would include the self-employment income of active partners as a gross wages equivalent. How the health and retirement benefits for those individuals will be treated is not yet clear.

[4] Owner-employees are not included in this calculation.

[5] Whereas PPP loan eligibility is tied to headcount, the forgiveness provisions (i.e., the headcount reduction rule) are expressed in terms of FTEs.

[6] Owner-employees are not included in this calculation.

[7] Based on the wording of prior guidance, some had speculated that the 75% rule could result in no (i.e. $0) PPP loan forgiveness, if less than 75% of a borrower’s loan proceeds were used to pay forgivable payroll costs during the eight-week period. With the release of Form 3508 and its instructions, it is clear this will not be the case.

[8] Borrowers must retain this and other PPP-related documentation for six years after the date the loan is forgiven or repaid in full and must also allow authorized SBA representatives to access such files upon request.

[9] Legislation with the intent of overturning IRS Notice 2020-32 has been proposed.