Important Updates on Covid-19 Loan Forgiveness

September 1st, 2020, 12:00 AM

Rust Belt Law's Key Points for Borrowers from the latest Interim Final Rule (Released 8/24/20) and SBA Loan Forgiveness FAQs (Released 8/4/2020 and updated on 8/11/2020)


Our review of the SBA Loan Forgiveness FAQs (released on 8/4/2020 and updated on 8/11/2020) noted many clarifications from the Interim Final Rule issued on 6/26/2020 and the proposed Loan Forgiveness Applications released in mid-June. There were 14 key points that caught our attention in that update.   Those key points are detailed on pages 2-4 of this document. 

Another Interim Final Rule was released on 8/24/2020 with a few significant changes.  The 3 key points we identified in the 8/24/2020 Interim Final Rule are detailed on pages 5-6 of this document.

We understand that many banks have opened their forgiveness applications this month.   Like others acquainted with this process, we are recommending that you do not rush to apply. There is a great deal of speculation that the guidance will continue to evolve with future legislation. We recommend that you continue to update your documentation for ongoing updates like these below and have it ready in electronic form to apply quickly and be prepared for potential audit.  

Among the possible changes that have not been passed yet, there may be significant changes to the income tax implications of your PPP Loan, as well as possible reduced requirements for smaller loan amounts.  Because additional changes (which will be beneficial to borrowers) are expected, we suggest you wait to apply for PPP Loan forgiveness.

You can read the full FAQ and 8/24/2020 Interim Final Rule here:  

https://www.sba.gov/document/support-frequently-asked-questions-ppp-loan-forgiveness

https://www.sba.gov/sites/default/files/2020-08/PPP%20IFR%20-%20Ownership.pdf

14 Key Points from the SBA Loan Forgiveness FAQ

Clarifications to Loan Forgiveness Reductions:

1.  When excluding reductions in FTE employees, the borrower must be able to document in good faith the following: 

  •  an inability to rehire individuals who were employees of the borrower on February 15, 2020,
  •  an inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020,
    AND
  • the borrower must inform the applicable state unemployment insurance office of any employee's rejected rehire offer within 30 days of the employee's rejection of the offer. 

The documents that borrowers should maintain to show compliance with this exemption include the written offer to rehire an individual, a written record of the offer's rejection, and a written record of efforts to hire a similarly qualified individual.  A good example of a written offer to rehire is a dated letter on the company's letterhead.  A text message may also qualify as a written offer but is not as good as a dated letter.  Additionally, you may not be able to obtain your employee's signature indicating that they officially rejected the offer.  A memo to your personnel file may suffice.  Please contact us about your individual situation.

2.  The Wage Reduction calculation is clarified.  Under this calculation, the Borrower's forgiveness is reduced when an employee's salary or hourly rate has been reduced by more than 25% from the comparable period (the first quarter of 2020). The salary or hourly rate reduction in excess of 25% represents Borrower's forgiveness reduction. This is illustrated below.

Assume the following fact pattern:

Employee A at Company 123:

  • hourly employee at $20/hour during the first quarter of 2020
  • hourly employee at $20/hour during the Covered Period. 
  • works 25 hours/week in the Covered Period
  • worked 40 hours/week during the first quarter of 2020

In this scenario, there is no Wage Reduction penalty, as the wage remained the same.  However, the FTE for Employee A will drop to less than 1 as a result in the hour reduction, and that is where forgiveness could be reduced.  

As an alternative scenario, if Company 123 reduced that employee's wage from $20/hour to $14 per hour, they will be subject to the wage reduction penalty.  When there is a wage reduction penalty, the calculation utilizes the comparable period hours. The calculation multiplies the excess reduction amount ($20*25%=$5; $20-$14=$6; $6-$5=$1) by the average weekly hours during the first quarter of 2020 by the number of weeks in the covered period (8 or 24).  In this scenario, if the borrower chose a 24-week covered period, the reduction penalty would be (40 hours*24 weeks*$1=$960).

3.  The Wage Reduction calculation only includes decreases in salaries or hourly rate when analyzing against the comparable period.  In other words, decreases in compensation due to reduced overtime or reduced bonuses do not need to be included in the comparison.  

For example, if Employee B received a bonus in the first quarter, but did not in the covered period, this should not be factored into the calculation to determine if a wage reduction of 25% or more has occurred.

4.  A seasonal employer that elects to use a 12-week period between May 1, 2019 and September 15, 2019 to calculate its loan amount must use the same 12-week period as the reference period to calculate any reduction in the amount of loan forgiveness.

5.  The FTE Reduction Exceptions apply to all employees, not just those who would be listed in Table 1 of the Loan Forgiveness Application. As such, employees who made more than $100,000 and meet FTE Reduction Exception requirements, should be included in the FTE Reduction Exception line in Table 1 of the PPP Schedule A Worksheet, as there isn't one in Table 2.

Clarifications to Payroll Costs:

6.  Borrowers with a payroll schedule that is less frequent than bi-weekly (e.g. semi-monthly or 24 pay periods) must calculate partial pay periods based upon the dates of their Covered Period.  Borrowers that use a biweekly or more frequent payroll cycle and use the Covered Period or the Alternative Payroll Covered Period don't have to calculate partial pay periods.

7.  Gross amounts are to be used when calculating cash compensation.  Payroll costs have been clarified to include all forms of cash compensation paid to employees, including tips, commissions, bonuses, and hazard pay. The Answer to the FAQ is confusing.  Conservatively, we suggest including only tips paid by employers for tips lost because of the pandemic are eligible in payroll costs.

8.  Healthcare costs and retirement contributions paid or incurred by the employer during the Covered Period and Alternative Covered Period are eligible for forgiveness.   Those paid by the employee are not forgivable. Group health plan premiums paid or incurred during the Covered Period or Alternative Covered Period qualify as "payroll costs," as long as the premiums are paid during the applicable period or by the next premium due date after the end of the applicable period and are eligible for forgiveness. Accelerated payments and employee portions of healthcare costs and retirement contributions are not forgivable.

9.  If you own 2% or more of a business, your payroll costs will be capped at $20,883 per individual (or $15,385 if electing to use the 8-week Covered Period) in total across all businesses. Question 8 of the FAQ provides more details on the forgivable payroll costs for owner-employees by type of entity. Please review this for your individual situation using the link above.   

Clarifications to Non-Payroll Costs:

10.  Nonpayroll costs incurred prior to the Covered Period and paid during the Covered Period are eligible for loan forgiveness.  Nonpayroll costs incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.

11.  Payments for renewed leases and the interest payments on refinanced mortgages are eligible for forgiveness provided the original lease or mortgage existed prior to February 15, 2020.

12.  Utility bills are eligible for forgiveness in their entirety, including itemized charges. Utilities include service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.  See further clarification on the topic of transportation in item 13 below.

13.  Utilities include "payment for a service for the distribution of . . . transportation." The FAQ clarifies that this utility only refers to "transportation utility fees" assessed by state and local governments. Transportation utility fees are defined at the FAQ referenced site as "financing mechanism that treats the transportation system like a utility in which residents and businesses pay fees based on their use of the transportation system rather than taxes based on the value of property they occupy."  As such, other transportation expenses in the business (e.g. gasoline in delivery trucks) are not forgivable.

Clarifications to EIDL Advance Impact on PPP Loan Forgiveness:

14.  The FAQ confirms that the SBA will reduce the amount of PPP Loan Forgiveness by the amount of the EIDL Advance provided to the borrower. Any resulting PPP loan due to the EIDL Advance will be serviced by the lender. If the EIDL Advance received exceeds the amount of the PPP loan, there will be no PPP loan forgiveness for that borrower.

3 Key Points from the 8/24/2020 Interim Final Rule

Owner Compensation Forgiveness Rules:

1.  Clarified definition of an owner-employee. Owner-employees who own less than 5% of ownership stake in a C- or S-Corporation are now excluded from the owner-employee compensation rule that caps the payroll compensation for an owner-employee as they are not considered to have meaningful influence over decisions on how loan proceeds are allocated.

Forgiveness Limitations on Certain Non-Payroll Costs:

2.  Forgiveness limitations for non-payroll costs related to shared workspace. Forgivable non-payroll costs exclude amounts attributable to the business operation of a tenant or sub-tenant of the PPP borrower, and household expenses for home-based businesses.  

To clarify, the Interim Final Rule provides 4 examples:

  • A PPP borrower, who rents office space for $10,000 a month, but subleases out part of the space at $2,500 a month, is only eligible for $7,500 in loan forgiveness for that expense.
  • A PPP borrower owns their building and leases 25% of the fair market value of the building to another business. Only 75% of the mortgage interest on the mortgage of the building is eligible for forgiveness.
  • A PPP borrower shares a rented space with another business.  The amount of non-payroll expenses (rent and utilities) eligible for forgiveness for the PPP borrower is prorated in the same manner as on their 2019 tax filings.  If a new business in 2020, expected 2020 tax filing reporting determines the amount of eligible forgiveness.
  • A PPP borrower works out of his home. Nonpayroll costs that represent deductible covered expenses on his 2019 tax filings (or expected 2020 tax filings, if a new business) are eligible for forgiveness.

3.  Forgiveness limitations for related party non-payroll cost transactions. Rent payments to a related party are eligible for loan forgiveness if:

    • the amount represents no more than the amount of mortgage interest owned on the property during the Covered Period that is attributable to the space being rented by the borrower, AND
    • the lease and mortgage were entered into prior to February 15, 2020.

The Interim Final Rule explains that a "related party" relationship exists when there is ANY common ownership between the business and the property owner.  

When applying for forgiveness, the PPP borrower will need to provide its lender with the mortgage interest documentation to support the forgiveness amount being requested for the rent paid. 

If the PPP borrower has a mortgage with a related party for their location, mortgage interest payments to the related party are NOT eligible for forgiveness.

If you have any questions or concerns related to how these changes may affect your PPP loan forgiveness and would like our assistance, please call our office at 814-315-9255.

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