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PPP Loan Forgiveness Process As of May 5, 2020

PPP Loan Forgiveness Process As of May 5, 2020

The following information is provided as a courtesy based on available public information; however, it is not intended nor should it be used as a substitute for appropriate accounting and legal counsel specific to your individual situation. The Small Business Administration (SBA) has not yet issued its final guidance on loan “forgiveness.”

Freedom Bank successfully submitted to the Small Business Administration (SBA) over 415 applications totaling $105 million in Paycheck Protection Program (PPP) loans. Despite numerous implementation issues encountered by the SBA, including significant difficulties by banks in accessing their E-Tran system, Freedom Bank was able to submit all applications to the SBA to ensure clients and prospects obtain funding for their businesses during this period of unprecedented economic disruption.

Our team at Freedom worked around-the-clock to provide valuable assistance to small businesses in our community, many of whom are counting on these funds to survive. We have proven ourselves to be responsive to our clients’ needs, disciplined in our underwriting process, and innovative in finding technology solutions. We now continue this effort in providing guidance to our clients on how to navigate the process of seeking forgiveness on the loan.

You can submit a forgiveness application to Freedom Bank who will be servicing your loan. We will provide the application once finalized by the SBA. The application will require that you include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. We have provided an Excel spreadsheet that you can use to help calculate the estimated amount of your loan that is eligible to be forgiven (included with this document) based on current guidance.

You must certify that the documents are true and that you used the loan proceeds to keep employees and make eligible mortgage interest, rent, and utility payments. Freedom Bank must process the forgiveness application within 60 days of receipt.

Freedom Bank had launched an online application system on its website and a secure portal to process new applications from customers and prospects and will use this same technology to accept the required submission form and requisite support for SBA authorization of the loan forgiveness.

Your application for forgiveness on your loan must include:

  • Documentation verifying the number of employees on payroll and pay rates, including IRS payroll tax filings and state income, payroll and unemployment insurance filings.
  • Documentation verifying payments on covered mortgage obligations, lease obligations and utilities.
  • Certification from an authorized representative of your business or organization that the documentation provided is true and that the amount that is being forgiven was used per the program’s guidelines for use.

In addition to the borrower certification, to substantiate your request for loan forgiveness, if you have employees, you must submit Form 941 and state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records that best correspond to the covered period (with evidence of any retirement and health insurance contributions). Whether or not you have employees, you must submit evidence of business rent, business mortgage interest payments on real or personal property, or business utility payments during the covered period if you used loan proceeds for those purposes. The 2019 Form 1040 Schedule C that was provided at the time of the PPP loan application must be used to determine the amount of net profit allocated to the owner for the eight-week covered period.

You will owe money when your loan is due if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utilities payments over the eight (8) weeks after getting the loan. The eight-week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower.

You will also owe money if you do not maintain your staff and payroll:

  • Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount.
  • Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
  • Re-Hiring: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.

A business shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered eightweek period:

  • Payroll costs (excluding compensation over $100,000).
  • Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation).
  • Any payment on any covered rent obligation.
  • Any covered utility payment.

One of the above is labeled “costs” and three are labeled as “payments.” This should be interpreted as whatever is labeled “costs” should be treated as “costs incurred”, and whatever is listed as a “payment” should be treated as “payments made.” Therefore, “payroll costs” should be whatever is incurred during the eight (8) week period, and all the other “payments” are whatever payments are actually made in the eight (8) week period.

These “payments” are also all non-payroll costs, and therefore cannot exceed 25% of the loan forgiveness amount, which will prevent businesses from excessive behaviors such as prepaying 6 months of rent or utilities, etc. This interpretation also prevents prepaying wages or salary, or doing a large 401K match that covers more time than the eight (8) week period.

If you are in individual with self-employment income who files a Form 1040, Schedule C, the amount of loan forgiveness can be up to the full principal amount of the loan plus accrued interest. The actual amount of loan forgiveness will depend, in part, on the total amount spent over the covered period on:

  • Payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight (8) weeks, a maximum of $15,385 per individual), as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums);
  • Owner compensation replacement, calculated based on 2019 net profit, with forgiveness of such amounts limited to eight (8) weeks’ worth (8/52) of 2019 net profit, but excluding any qualified sick leave equivalent amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act (FFCRA) or qualified family leave equivalent amount for which a credit is claimed under section 7004 of FFCRA;
  • Payments of interest on mortgage obligations on real or personal property incurred before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business mortgage payments);
  • Rent payments on lease agreements in force before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business rent payments); and
  • Utility payments under service agreements dated before February 15, 2020 to the extent they are deductible on Form 1040 Schedule C (business utility payments).

A borrower’s PPP loan eligible forgiveness amount (pursuant to section 1106 of the CARES Act and subject to SBA’s implementation of final rules and guidance) will not be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer.

To qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.

You should know that the SBA will review individual PPP loan files. The SBA recently reminded all borrowers in an FAQ of an important certification required and made to obtain a PPP loan. To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming.

It is likely, that if a loan was approved and funded prior to the issuance of the recent guidance from the SBA, a borrower with other sources of operating credit has limited risk that there will be a determination that the borrower was ineligible for the PPP loan – although that risk is not non-existent. The application process required only that the borrower certify that “(current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” If a borrower can legitimately make this statement at the time that the borrower applied for the loan then the borrower should be able to substantiate the economic justification for the loan.

The issue as to whether a PPP loan was necessary is probably not going to arise unless and until a borrower seeks forgiveness of the loan. When borrowers with a PPP loan seek forgiveness after the funds have been expended, it is virtually certain that large loans will be scrutinized and carefully audited before a determination is made to forgive the loan. It should be noted that the SBA has a history of retroactively revisiting situations where the agency expended funds resulting in large losses to the SBA – generally, by honoring a bank’s request that the SBA honor its financial obligations with respect to an authorized loan. So, even after a loan has been forgiven it is not out of the question that the government may seek to claw back the funds made available to a borrower under the program. It is fully anticipated that borrowers receiving larger loans which seek loan forgiveness will almost certainly have the use of the loan proceeds carefully examined by the SBA.

The interim rules published by the U.S. Treasury and the SBA note that future guidance on the loan forgiveness will be forthcoming. We will provide periodic updates as we learn more including the forgiveness application once finalized by the SBA. In the interim, for more information about all aspect of the Payroll Protection Program, please refer to the U. S. Treasury FAQ page: https://home.treasury.gov/system/files/136/Paycheck-ProtectionProgram-Frequently-Asked-Questions.pdf

Frequently Asked Questions

Does the requirement that 75% of PPP proceeds be used on payroll costs to be eligible for forgiveness create a cliff effect?

PPP loans will be forgiven under Section 1106 of the Act to the extent the proceeds are used to fund payroll costs, interest on a covered mortgage obligation, covered rent obligations or covered utilities. However, the interim rule issued by the SBA on April 2, 2020 provides that:

  • “not more than 25 percent of the loan forgiveness amount may be attributable to nonpayroll costs” and
  • “at least 75 percent of the PPP loan proceeds shall be used for payroll costs.”

It is unclear whether these requirements in concert create a cliff effect, and if not, how the forgivable amount of the loan would be calculated if less than 75% of the proceeds were used for payroll costs.

Consider a business that receives a $100K PPP loan, and uses $50K on payroll costs, the remainder on qualifying rent expense. Since only 50% of the proceeds were used to fund payroll costs, is any of the loan forgivable? This would seem to be an unusually harsh result, especially considering the Congressional intent of the law. Further, reading the language that “not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs” on its own would suggest forgiveness is not an all-or-nothing proposition. Clients considering spending more than 25% of their PPP loan proceeds on non-payroll costs must be made aware of these issues.

Are expenses paid after June 30th eligible for the loan forgiveness program?

Section 1102 of the CARES Act provides that PPP loans are only available during the “covered period” of Feb. 15 – June 30, 2020, and during that time, may only be used to pay payroll costs, mortgage interest, rent, utilities, and interest on other debt during the “covered period”. Then, Section 1106 provides that only amounts spent during the “covered period” are eligible for forgiveness. But for these purposes, the covered period is separately defined as the eight (8) week period following the receipt of the loan proceeds.

The issue then arises as to what happens to a borrower who receives a PPP less than eight weeks before the June 30th deadline, but with the covered period for forgiveness ending at the end of July. Will payments made post-June 30th be eligible for forgiveness? To date, no guidance has been provided on this issue. Hopefully, either Treasury or the SBA will clarify this in the near term. However, clients that receive PPP loans after May 1st of this potential trap in the loan forgiveness program.

Do I have to pay qualified expenses during the eight-week period after I get the funds, or can I just accrue them?

  • The CARES Act notes that “costs incurred and payments made” within the eight-week period will be forgiven.
  • This language leaves the door open for different interpretations.
  • We are awaiting further guidance and clarity on the requirements to pay, and/or accrue qualified expenses.

Do I have to segregate my PPP funds?

While there is no formal requirement, we believe that it is a best practice to segregate the books and records in order to facilitate and simplify the tracking and documentation required for substantiate loan forgiveness. Although specific bank account segregation is not required, segregation in the company books and records in recommended.

Do PPP loans cover paid sick leave?

Yes. PPP loans covers payroll costs, including costs for employee vacation, parental, family, medical and sick leave. However, the CARES Act excludes qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127). Learn more about the paid sick leave refundable credit here.

How should miscellaneous payments (i.e. Retention bonuses, “combat pay” profit sharing, high performance, discretionary bonuses, etc.) be factored into the eight week period of forgiveness as it relates to the calculation?

There are no known rules limiting these types of payments.

For the portion of loan that can be forgiven under the CARES Act, can it be excluded from taxable income for the year?

Federal taxes are excludable, however, state is still unclear. It has not yet been addressed under the CARES Act is if the wages or expenses which allow for the forgiveness of the loan will be deductible. If they are, then this will become a permanent difference.

As a further resource, we also provide some additional FAQ as provided to us by the American Institute of CPAs (AICPA), the world’s largest member association representing the accounting profession.

When does the eight (8) week period begin to determine the amount of the forgiveness for the PPP loan?

The eight (8) week period begins on the date the lender makes the first disbursement of the loan. The lender must make the first disbursement of the loan no later than 10 calendar days from the date of the loan approval.

What are the acceptable uses of the PPP funds for businesses other than self-employed individuals?

Payroll costs, health care benefits, mortgage interest payments, rent, utility, interest payments on debt incurred prior to February 15, 2020, and/or refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.

What interest expense qualifies to count towards loan forgiveness?

  • Section 1102 of the CARES Act states that “interest expense related to covered mortgage obligation (related to real or personal property)” and “interest on any other debt obligations that were incurred before the covered period” are allowable uses of the PPP funds.
  • Section 1106 of the CARES Act, which details the items eligible for forgiveness, omits “interest on any other debt obligation” as an expense qualifying for forgiveness.
  • It appears Congress will allow a borrower to use the funds to pay interest on a nonmortgage debt during the covered period, but won’t allow a borrower to have that amount forgiven.
  • We all hope that there is more to come clarifying this inconsistency.

What is included in utilities?

The CARES Act defines utilities in Section 1106(a)(5) as electricity, gas, water, transportation, telephone or internet access for service which began prior to February 15, 2020. Further guidance released added gas used when driving a business vehicle. Other common utilities such as garbage collection or security monitoring may also be classified as a utility, but a business should confirm with the lending institution.

When determining the potential reduction of loan forgiveness due to workforce reductions, what method is used to determine employees?

The CARES Act uses the standard of “full-time equivalent employees” to determine whether loan forgiveness must be reduced in the measurement period.

What are the acceptable uses of the PPP funds for self-employed individuals?

  • Owner compensation replacement (calculated based on 8/52 of 2019 net profit from Form 1040 Schedule C)
  • Employee payroll costs (as defined by the interim rule)
  • Business mortgage interest payments on real/personal property
  • Business rent payments
  • Business utility payments
  • Interest payments on debt obligations incurred before February 15, 2020
  • Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020

Note that the individual must have claimed or be entitled to claim a deduction for the included expenses on 2019 Form 1040 Schedule C.

What amounts will be eligible for forgiveness for self-employed individuals?

The amount of the loan forgiveness will depend on the amount spent during the eight (8) week period on:

  • Payroll costs as defined by the interim rule (does not include benefits for owners)
  • Owner compensation replacement (limited to 8/52 of 2019 net profit and excluding any qualified sick or family leave equivalent amount for which a credit was claimed under FFCRA)
  • Interest payments on mortgage obligations for real/personal property incurred before February 15, 2020
  • Rent payments on lease agreements in force before February 15, 2020
  • Utility payments under service agreements dated before February 15, 2020

*Note that for interest, rent and utility payments, the amounts must be deductible on Form 1040 Schedule C.

Are employee federal withholdings and employer payroll taxes on wages for the eight (8) week period included in payroll costs?

The employee federal withholding is included in allowable payroll costs for the purposes of determining the amount to be forgiven. The employer federal payroll taxes (i.e. FICA and Medicare taxes) imposed on the gross payroll are not eligible payroll costs for the loan forgiveness calculation.

What are the restrictions on determining the amount of loan forgiveness for businesses other than self-employed individuals?

At least 75% of the loan proceeds must be used for payroll costs. If salaries decrease by more than 25% for any employee who made less than $100,000 annualized in 2019 OR if the number of FTEs decreases, the forgiveness amount will be reduced.

Do qualified sick and family leave wages which are eligible for a tax credit under the FFCRA count toward payroll costs for the purpose of the forgiveness portion?

For businesses that take this credit, the wages will be excluded from the determination of payroll costs.

What about if the business had employees who left for their own reasons? Or need to be fired due to performance issues? Is the loan forgiveness still reduced for those employees?

More guidance is needed on this issue. As the statute is written in the CARES Act, the forgiveness is tied to employee count comparisons and also specific employees and whether their pay was substantially reduced.

Can you increase pay for employees during the forgiveness period (for example, hazard pay, bonuses or other salary increases)?

A decrease in wages of more than 25% will decrease forgiveness and wages is capped at an annualized rate of $100,000 per employee. The current guidance does not prevent an increase in pay in the form of a short term pay increase, hazard pay or bonus.

Are payments to employees when they are not currently able to work (due to business being closed or for any other reason)?

The PPP was intended to keep businesses’ employees employed and paid. In order for the PPP loan to be forgiven, a minimum of 75% of the loan proceeds must be spent on payroll. Based on guidance provided currently, the covered eight (8) week period starts when the loan is funded. If a business is not open and the business’ PPP has been funded, employees will need be paid even if they are not able to work to ensure maximum forgiveness of the loan.

Are the expenses when determining forgiveness on a cash or an accrual basis?

More guidance is needed on this issue. The guidance provided discusses “payments”, but further clarification is needed.

Can rent or other obligations be prepaid?

To be forgiven, the CARES Act states costs must be incurred and paid during the covered period. Further guidance specifically addresses that prepayments of mortgage payments is not allowed.

Are these expenses tax deductible if the loan is ultimately forgiven?

More guidance is needed on the treatment of the expenses related to the forgiveness portion of the loans. Based on what is known at this time, there is no specific provision in the CARES Act that makes these expenses nondeductible. However, IRC Section 265 may apply which states that no deduction is allowed for expenses attributable to tax-exempt income. However, IRC Section 265 may apply which states that no deduction is allowed for expenses attributable to tax-exempt income.

Is the forgiveness of the loan taxable income?

No, the forgiveness of the loan does not constitute federal taxable income. States are providing guidance on state taxability that will be included in the AICPA state tax guidance chart.

Are payments to related parties (such as rent) included in amounts eligible to be used to determine forgiveness?

This has not been specifically addressed in guidance released as of April 29, 2020. Based upon guidance received to date, related party rents are allowed subject to the 25% limit for expenses other than payroll.

What documentation is required to be submitted to the lender for self-employed individuals to support loan forgiveness?

The following documentation is required:

  • certification that the documentation provided is true and correct and the amount for which forgiveness is required was used to retain employees, and make interest, rent and utility payments
  • If the self-employed individual has employees, Form 941 and state quarterly tax reporting forms or equivalent payroll processor records that correspond to the covered period
  • Evidence of business rent, mortgage interest payments or utility payments for loan proceeds used for these purposes
  • 2019 Form 1040 Schedule C

How should the forgiveness portion be recorded for financial statement purposes?

Visit the Coronavirus (COVID-19) audit and accounting resources page to find out more about the financial statement impact of the PPP loan forgiveness.


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