PPP Loan Forgiveness Q&A: What CFOs Need to Know Now

In short:

• The PPPFA added flexibility — and some confusion — to the original PPP loan program.
• Recipients may now use up to 40% of their loans for rent or mortgage, utilities and interest on secured debt.
• Tax implications vary based on the type of business. Schedule C or F filers are capped by the amount of their owner compensation replacement, calculated on 2019 net profit.

Companies that applied for and received government loans to cope with the financial hit from coronavirus have questions: Will we qualify for forgiveness? How do we classify the loans on financial statements? What’s the PPPFA?

We address the classification question here. For the others, Brainyard reached out to attorney Christina Moore , a partner at Atlanta-based law firm Taylor English Duma LLP who has been monitoring the evolving rules around the Small Business Administration Paycheck Protection Program (PPP).

Moore points out that there are still funds — about $129 billion — left in the PPP loan program, including some loans that were returned, and the deadline to apply for a loan has been extended to August 8 .

Companies can apply at the SBA PPP website .

Brainyard: First, what updates from a legal POV are there to the PPP forgiveness program? It’s changed a few times, correct?

Christina Moore: It has changed a few times. The Paycheck Protection Program Flexibility Act , or PPPFA, provided the most substantive changes. Specifically, the PPPFA:

• Extends the “covered period” in which borrowers are eligible to use PPP funds and receive forgiveness for both permitted payroll and non-payroll costs from eight weeks to the earlier of 24 weeks from the date of funding or Dec. 31, 2020;
• Expressly states and extends the safe harbor period from June 30 to Dec. 31. This provision allows borrowers to avoid reductions in loan forgiveness due to temporarily laying off employees as long as the borrower restores its FTE headcount to the average weekly FTE count during one of two periods: Feb. 15, 2019 to June 30, 2019 or Jan. 1, 2020 to Feb. 29, 2020; and
• Expressly confirms and expands the safe harbor for borrowers to exclude FTE reductions made after Feb. 15, 2020, as long as the borrower made a good-faith, written offer to rehire an employee during the 24-week period and was unable to hire similarly qualified employees for unfilled positions on or before Dec. 31, 2020.

The PPPFA also provides a safe harbor for any reductions in workforce after Feb. 15, 2020, as long as those reductions were:

• Due to compliance with requirements established or guidance issued by the Secretary of Health & Human Services, the CDC or the Occupational Safety & Health Administration beginning March 1, 2020 and extending until Dec. 31, 2020; or
• Related to maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement related to COVID-19.

Finally, the PPPFA changed the use requirement of PPP loan proceeds to be at least 60% for payroll costs, and up to 40% for permitted non-payroll costs, including rent, utilities and interest on secured debt. And, for new applicants/borrowers, the PPPFA changed the term of PPP loans from two years to five years.

Existing borrowers can receive an extended term if they negotiate that with their lenders.

BY: PPP was meant to stabilize payroll and avoid layoffs. What metrics must a business that received a loan meet, and what documentation is required?

CM: Yes, the PPP was intended to stabilize payroll and avoid layoffs initially. As the pandemic duration continued, and with the enactment of the PPPFA, however, the PPP is now more intended to stabilize businesses, to ensure their long-term survival.

This change in purpose was evident with the changes set forth in the PPPFA. The metrics a business that receives a loan must meet to achieve forgiveness are generally as follows: Use of loan proceedings during a 24-week period; use of proceeds split at least 60% for payroll and no more than 40% for non-payroll costs; no reduction in headcount unless the reduction can be captured (and documented) within one of the safe harbors for headcount; and no more than a 25% reduction in any specific person’s compensation, unless the borrower eliminates the reduction by Dec. 31, 2020.

BY: Are the rules different for small versus midsize and larger companies?

CM: No. The rules are the same for all borrowers of a PPP loan. Larger companies, which likely received larger PPP loans, will likely be subject to higher scrutiny, via the SBA audit process, but the same rules apply.

BY: How does the government define “payroll costs” for purposes of loan forgiveness?

CM: Payroll costs include salary, wages and tips; up to $100,000 of annualized pay per employee (for 24 weeks, a maximum of $46,154 per individual, or for 8 weeks, a maximum of $15,385 per individual); and covered benefits for employees — but not owners — including healthcare expenses, retirement contributions and state taxes imposed on employee payroll paid by the employer, such as unemployment insurance premiums.

BY: Are there any other expenses that can be forgiven, such as an owner paying herself a salary or business expenses?

CM: Any owner compensation would be considered payroll costs. In addition to payroll costs, the other expenses that can be forgiven are real or personal property mortgage interest, real or personal property rent obligations and utilities.

BY: What are the steps a business needs to take to access loan forgiveness, and is there a deadline?

CM: Businesses will need to apply directly with their SBA lenders for forgiveness of a PPP loan. A borrower has 10 months from the end of its covered period — 24 weeks from disbursement of the funds — to apply for forgiveness.

BY: Are there tax implications to forgiveness?

CM: The IRS has taken the position that expenses paid with forgivable PPP loan proceeds cannot be claimed as tax deductions on the 2020 tax returns filed for a business.

BY: Are there areas in which you think confusion might arise?

CM: Yes, confusion may arise in four areas:

• The safe harbors related to head count,
• How to calculate if any employee’s compensation has been reduced by more than 25%,
• Caps related to owner-employees/self-employed people, and
• What to do if you are denied forgiveness.

In regard to the last item, if your SBA lender or the SBA determines you are not eligible for forgiveness in whole or in part, it will advise you of such determination. Currently, there is no interim rule addressing how a borrower can appeal a negative forgiveness decision. If a business owner runs into this and thinks the determination is in error, she should contact her counsel or financial adviser.

BY: What didn’t we ask that finance leads should know?

CM: First, and again related to areas of potential confusion, owner-employees and self-employed payroll compensation forgiveness is capped at a different amount compared with regular employees.

As noted above, regular FTEs are capped at $100,000 of annualized pay per employee. Owner-employees and self-employed compensation is capped for eight weeks at 2019 compensation rates (approximately 15.38% of 2019 compensation) or $15,385, whichever is less. Or, if using the 24-week covered period, 2.5 months’ worth of 2019 compensation (approximately 20.83% of 2019 compensation) or $20,833, whichever is less.

C-corp owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf. S-corp owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement contributions made on their behalf, but employer health insurance contributions cannot be separately added.

Schedule C or F filers are capped by the amount of their owner compensation replacement, calculated on 2019 net profit. General partners are capped by the amount of their 2019 net earnings (reduced by claimed deductions, unreimbursed partnership expenses and depletion from oil and gas properties) multiplied by 0.9235.

You cannot include retirement and health insurance contributions for self-employed (schedule C or F filers) and general partners.

BY: What happens after I file a PPP forgiveness application, and when will my loan be forgiven?

CM: After you file your PPP forgiveness application, your SBA lender has 60 days from receipt to issue a decision to the SBA on your claimed amount of forgiveness. The SBA will remit the appropriate forgiveness amount to the SBA lender not later than 90 days after the lender issues its decision to the SBA.

You can then expect your SBA lender to issue documentation that your loan is “paid in full.”