Now that the August 8th deadline to submit PPP loan applications is behind us, it’s time to focus squarely on having these loans forgiven. The SBA and Treasury recently teamed up to release an FAQ covering some of the key questions pertaining to PPP forgiveness, so we want to quickly recap what we learned and talk about how it affects you and your PPP.
There are two forms available with which to apply for forgiveness: Form 3508 and Form 3508EZ. How do you decide which to use? Well, if you qualify to use the EZ form, go for it, as it will be simpler to complete.
Who qualifies to use the EZ form?
- Sole proprietors, independent contracts, and self-employed individuals who had no employees when they applied for the PPP and did not include any employee salaries when determining the size of their PPP.
Forgivable Payroll Costs
Payroll costs incurred during but paid after the covered period – Are these allowable as forgivable payroll expenses?
- Yes, as long as they are paid by the next regular payroll date following the covered period (in other words, you can’t “incur” payroll costs and then sit on them for months before paying them, you have to pay them in the ordinary course of business as you would with any other payroll).
Payroll costs incurred before but paid during the covered period – Are these allowable as forgivable payroll expenses?
Should payroll costs be calculated based on gross or net payroll?
Can forgivable payroll costs include bonuses, commissions, and other incentive pay?
What health insurance costs count as forgivable payroll costs?
- Any health insurance costs paid by the employer (not those paid by employees) count as long as they are for the applicable covered period and are paid during the covered period or by the next premium due date
- Health insurance that is prepaid for periods after the covered period do not count as forgivable payroll costs
What retirement benefits paid count as forgivable payroll costs?
- Like healthcare, only those costs paid for the covered period and by the employer will qualify. Future payments accelerated to be paid during the covered period do not qualify
Determining Owner Compensation Eligible for Forgiveness
Forgivable payroll expenses attributed to owner-employees and self-employed individuals is capped at $20,833 per person in total across all businesses in which they have an ownership stake. For businesses sticking with the original 8-week covered period, the per-person cap is $15,385.
From here, the details differ based on the business’s entity-type:
- C Corporations
- The forgivable payroll costs for owner-employees are capped at 2.5/12 of their 2019 gross wages (the 2.5/12 is not randomly selected – the amount of the PPP loan was based on 2.5x the average monthly payroll in 2019). In other words, an owner-employee cannot have forgivable payroll costs that exceed the amount of the PPP they received based on their own 2019 wages
- However, non-wage payroll costs such as state and local payroll taxes, health insurance, and retirement benefits (limited to 2.5/12 of the 2019 amounts), are not included when calculating the $20,833 cap, so the total forgiveness related to a single owner can exceed the $20,833 cap and the 2.5/12 limit
- S Corporations
- The rules for wages, payroll taxes, and retirement expenses are the same as for C-Corps
- Health insurance premiums for 2% of greater shareholders (or family members of these shareholders) are not eligible for forgiveness because, based on existing S Corp rules, these premiums are included in the shareholder’s gross wages
- Self-Employed Individuals (Schedule Cs)
- The forgivable amount is limited to 2.5/12 of the 2019 net profit (per Schedule C line 31)
- Payments for health insurance, retirement, and state/local taxes are not eligible as these are not reported on Schedule C
- General Partners in a Partnership
- The forgivable amount is limited to 2.5/12 of their 2019 net earnings from self-employment (K-1 box 14a minus section 179 expenses and unreimbursed partnership expenses that they deducted on their personal return) all multiplied by 0.9235
- This compensation is only forgivable if payments are made to partners during the covered period
- Payments for health insurance, retirement, and state/local taxes are not eligible
- Determine how you file your taxes (either as a C-Corp, S-Corp, Partnership, or Schedule C) and follow the relevant rules above
Determining Forgiveness of Nonpayroll Costs (Rent, Utilities)
Are nonpayroll costs incurred prior to the covered period but paid during the period eligible for forgiveness?
- For example, if your utility bill is for the month before you got your PPP but you paid it during the covered period, it qualifies for forgiveness
Are nonpayroll costs incurred during the covered period but paid after the covered period eligible for forgiveness?
- Yes, as long as they are paid by the next billing date (similar to the rules for payroll)
Determining Reductions of Loan Forgiveness
If you try to rehire a laid off employee but they decline, will that affect your forgiveness? What if you can’t hire a qualified replacement despite your best efforts?
- No, in both cases you can exclude this employee from the calculation of full-time equivalent (“FTE”) employees so your forgiveness will not be impacted
- You must be able to document that you were not able to rehire the employee or a qualified replacement, including a written offer to rehire the employee, a written record of the rejection, and a written record of efforts to hire another qualified person
- You must inform the state unemployment insurance office of the employees’ rejected rehire offer within 30 days of the offer
If the hourly wage of an hourly employee is reduced, does this trigger the wage reduction limitation or the FTE headcount reduction limitation?
- If the employee’s hourly rate is reduced by more than 25%, this will trigger the wage reduction limitation. The forgiveness reduction will be equal to the hourly rate decrease in excess of 25% multiplied by the number of hours the employee worked during the covered period
- If the employee’s hourly rate stays the same (or is reduced but by less than 25%), but their hours are cut, this would trigger the FTE headcount limitation but not the wage reduction limitation
There is both new information here as well as solid clarifications on many of the points that we’ve raised in previous articles. Whether we’re ready for it or not, the time to start calculating forgiveness is upon us. Fortunately, this round of FAQs was helpful in providing some of the clarity we’ll need to calculate forgiveness accurately and consistently.
Are you ready to apply for PPP forgiveness but aren’t sure you have the rules 100% down? Let us know, we can help you navigate this tricky but vital aspect of the PPP process.
This is a constantly changing and complicated topic, and you should always consult your tax advisor before taking any action.