The government has released several updates to its Paycheck Protection Program (PPP) loan forgiveness guidance over the last few weeks. These recent updates further clarify the types and amounts of qualified expenses included in a borrower’s tentative forgiveness calculation.
Generally, a borrower choosing either an 8-week (if eligible) or 24-week covered period sums their eligible expenditures paid and/or incurred during the covered period to arrive at a tentative forgiveness amount. This tentative amount can be subject to further limitations related to cuts to employee’s pay and average full-time equivalency count. We’ve outlined a brief summary of the new updates to help guide you through the PPP loan forgiveness process.
Eligible Costs: Paid and Incurred
On a PPP Loan Forgiveness Frequently Asked Questions page, the government confirms that payroll costs incurred before a borrower’s covered period, but paid during the covered period, qualify as eligible expenditures. For example, the government states a borrower with a covered period beginning on April 20 can include payroll paid on April 24 as an eligible expenditure, even though the payroll was incurred for the pay period before the covered period began. However, employer contributions for retirement benefits do not count as eligible expenditures if they are “accelerated from periods outside” the borrower’s covered period or alternative covered period.
Eligible non-payroll costs incurred before the start of the borrower’s covered period but paid during the covered period also count as eligible expenditures. In an example, the government states a borrower with a covered period beginning on April 20 can count an electric bill paid on May 4 as an eligible expenditure for service incurred before the covered period.
Finally, both eligible payroll and non-payroll costs incurred during a borrower’s covered period but paid after the end of the covered period on the next regularly scheduled date count as eligible expenditures (but only the incurred portion).
Payroll Costs: Owners
The same FAQ confirms that owner-employees and self-employed individuals are subject to additional restrictions. For borrowers using a 24-week covered period, owner-employees and self-employed individuals’ compensation is capped at the lesser of $20,833 or 2.5-months of 2019 compensation. For borrowers using an 8-week covered period, the cap is the lesser of $15,385 or the 8-week equivalent of applicable compensation in 2019.
There are additional owner-employee rules for specific entity types, which are outlined below.
Owner-employees with less than a 5% ownership stake in a C- or S-corporation are not subject to the owner-employee compensation rules.
One reminder: these rules do not restrict the amount of compensation a borrower can pay to an owner-employee. Instead, they only cap the amount of expenditures that are included in the forgiveness calculation.
Subleasing and Related Party Rents
Follow up PPP loan forgiveness guidance states that the amount of eligible rent expense cannot include any amount attributable to the business operations of a tenant or subtenant. For instance, a borrower with a $10,000 monthly rent payment who subleases a portion of the rented space for $2,500 can only include $7,500 as an eligible rental expenditure.
In this same guidance, the government provides restrictive rules for related party rental situations where a business pays rents to a related property owner. According to the government, “[a]ny ownership in common between the business and the property owner is a related party for these purposes.” If there are related parties, the government states, “the amount of loan forgiveness requested for rent or lease payments to a related party is no more than the amount of mortgage interest owed on the property during the Covered Period that is attributable to the space being rented by the business.”
In their explanation, the government argues that “PPP loans are intended to help businesses cover certain nonpayroll obligations that are owed to third parties, not payments to a business’s owner that occur because of how the business is structured.” Additionally, the restriction that the lease and mortgage must be in effect prior to February 15, 2020, still exists. The guidance is silent regarding the rule’s application if the property is not subject to a mortgage, perhaps implying the eligible rent expenditures would be $0.
The recently released updates may have a material impact on eligible borrowers choosing the 8-week covered period because borrowers do not have additional time to generate more eligible expenditures. Borrowers using the 24-week covered period may find these updates less burdensome. And proposed legislation, once enacted, may change this whole program once again by simplifying the forgiveness stage. Our team can help you make sense of the PPP loan forgiveness process.
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