The impact of COVID-19 on Colorado businesses were abrupt and caught many off guard. The combination of stay at home orders, forced business closures, and concern about virus transmission changed the business landscape seemingly overnight. This left many businesses with no choice but to sharply reduce expenses including employee layoffs and terminations. To maintain solvency new sources of working capital were needed requiring businesses to pick from an assortment of state and federal loan programs. The most popular due to its favorable terms including a unique forgiveness provision is the Paycheck Protection Program (PPP). In fact, it was reported that as of July 31, 2020, over 107,000 loans totaling over $10.3B have been issued to Colorado businesses. Now that many borrowers have reached the end of the 8-week covered period, the focus has shifted to receiving the maximum forgiveness amount possible. While there has been a flurry of updates on the topic, the SBA issued the PPP Loan Forgiveness FAQs on August 4, 2020, which provide insights into qualifying expenses, forgiveness reduction calculations, and more. To help clients, prospects, and others, Hanson & Co has provided a summary of key updates below.
PPP Loan Forgiveness FAQs
- Which loan forgiveness application should sole proprietors, independent contractors, or self-employed individuals with no employees complete? Sole proprietors, independent contractors, and self-employed individuals who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form automatically qualify to use the Loan Forgiveness Application Form 3508EZ or lender equivalent and should complete that application.
- Are payroll costs that were incurred before the Covered Period but paid during the Covered Period eligible for loan forgiveness? Yes
- How is the amount of owner compensation that is eligible for loan forgiveness determined? The amount of compensation of owners who work at their business that is eligible for forgiveness depends on the business type and whether the borrower is using an eight-week or 24-week Covered Period. The amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at $20,833 per individual in total across all businesses. For borrowers that received a PPP loan before June 5, 2020 and elect to use an eight-week Covered Period, this cap is $15,385. If their total compensation across businesses that receive a PPP loan exceeds the cap, owners can choose how to allocate the capped amount across different businesses.
- Are only salaries or wages covered by loan forgiveness, or can a borrower pay lost tips, lost commissions, bonuses, or other forms of incentive pay and have such costs qualify for loan forgiveness? Payroll costs include all forms of cash compensation paid to employees, including tips, commissions, bonuses, and hazard pay. Note that forgivable cash compensation per employee is limited to $100,000 on an annualized basis.
- Are nonpayroll costs incurred prior to the Covered Period, but paid during the Covered Period, eligible for loan forgiveness? Yes, eligible business mortgage interest costs, eligible business rent or lease costs, and eligible business utility costs incurred prior to the Covered Period and paid during the Covered Period are eligible for loan forgiveness.
- Will a borrower be subject to a reduction to its forgiveness amount due to a reduction in FTE employees during the Covered Period if the borrower offered to rehire one or more laid-off employees but the employees declined? In calculating its loan forgiveness amount, a borrower may exclude any reduction in FTE employees if the borrower is able to document in good faith the following: (1) an inability to rehire individuals who were employees on February 15, 2020, and (2) an inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020. Borrowers are required to 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.
- For purposes of calculating the loan forgiveness reduction required for salary/hourly wage reductions more than 25% for certain employees, are all forms of compensation included or only salaries and wages? For purposes of calculating reductions in the loan forgiveness amount, the borrower should only take into account decreases in salaries or wages.
The answers to these questions provide important guidance and new insight into how forgiveness will be determined. One such example is the details around wage reduction calculations greater than 25%. Previously it was thought that reductions included bonuses and other compensation, but the guidance makes it clear reductions should be calculated using only wages/salaries. This is an important point of clarification helpful to borrowers.
The recent update provides important reminders and new insights into how loan forgiveness should be calculated. Since the SBA will begin accepting forgiveness applications from lenders on August 10th, now is the time to focus on your loan forgiveness application. If you have questions about the information outlined above or need assistance with a PPP loan issue, Hanson & Co can help. For additional information call us at 303-388-1010 or click here to contact us. We look forward to speaking with you soon.