The U.S. Small Business Administration (SBA), in consultation with the U.S. Department of the Treasury (Treasury), recently released a series of Frequently Asked Questions (the Forgiveness FAQs) focusing on forgiveness of Paycheck Protection Program (PPP) loans. Borrowers and lenders are able to rely on the Forgiveness FAQs as the SBA’s formal interpretation of the forgiveness provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as modified by the Payroll Protection Program Flexibility Act of 2020 (Flexibility Act) and the series of interim final rules and other SBA-issued guidance regarding forgiveness.

Following the enactment of the Flexibility Act, there was widespread speculation that further legislative changes to the PPP – including proposals to give certain categories of borrowers automatic loan forgiveness, to enable certain borrowers to apply for a second PPP loan and to permit borrowers to deduct expenses paid for with PPP loans that were forgiven – may be imminent. However, the stalemate in congressional negotiations over the next round of stimulus has (at least as of this writing) proven to be intractable, and the PPP closed on August 8 with approximately $130 billion of funding still available. As a result, the SBA is no longer accepting applications for new loans and the focus of existing borrowers now turns entirely to qualifying for forgiveness. 

The Forgiveness FAQs generally reiterate guidance that was already covered in the SBA’s interim final rules (which we discussed here, here and here), but the questions are organized by topic and helpfully summarize guidance that had been dispersed among a variety of different rules. In addition, the responses do actually answer a couple of lingering questions that have not been directly addressed.

The most notable takeaways from the Forgiveness FAQs include:

• Pre-Covered Period Costs. The Forgiveness FAQs explicitly confirm that both covered payroll and covered non-payroll costs that were incurred before the Covered Period (or Alternative Payroll Covered Period, if applicable), but paid during the Covered Period (or Alternative Payroll Covered Period, if applicable), are eligible for loan forgiveness. Examples in the SBA’s interim final rules on loan forgiveness clearly indicated that non-payroll costs incurred before the Covered Period would be eligible for forgiveness if paid during the Covered Period. And while it was indirectly suggested in earlier guidance, the Forgiveness FAQs are the first direct acknowledgment that payroll costs incurred before the Covered Period are similarly eligible for forgiveness if paid during the Covered Period (or Alternative Payroll Covered Period). For example, assume that a borrower’s Covered Period begins on June 1 and ends on July 26 and the borrower has a bi-monthly (twice a month) payroll cycle. The borrower’s final payroll cycle before the Covered Period began on May 16 and ended on May 31. If the borrower makes the corresponding payroll payment for the May 16-May 31 payroll cycle on June 1, these payroll costs are eligible for forgiveness because they are paid during the Covered Period (even though not incurred during the Covered Period). Similarly, if the same borrower pays its May electricity bill during the Covered Period, the borrower may seek forgiveness for that amount because it was paid during the Covered Period.
• Deferral of First Payments. As long as a borrower submits its forgiveness application within 10 months of the end of the Covered Period, the borrower does not need to make any payments until the forgiveness amount is remitted to the lender by the SBA. Interest on the PPP loan accrues during the period between disbursement of the loan and remittance of the forgiveness amount; however, the borrower is not required to pay the accrued interest if the loan is fully forgiven (and both the principal that is forgiven and the related accrued interest are excluded from taxable gross income under the CARES Act). If the loan is not forgiven in full, interest is due on any portion of the loan that is not forgiven.
• Gross vs. Net Compensation. For purposes of calculating cash compensation included as payroll costs, a borrower should use the gross amount before deductions for items such as taxes and employee benefits payments, rather than the net amount paid to employees. This is consistent with the measurement of payroll costs that the borrower used to determine its maximum loan amount when initially applying for a PPP loan.
• Eligible Cash Compensation. The definition of payroll costs for forgiveness purposes is the same as used to determine a borrower’s maximum PPP loan amount. Accordingly, cash compensation paid to employees that can be counted towards forgivable payroll costs includes all forms, including salary, wages, tips, commissions, bonuses and hazard pay. The forgivable cash compensation per employee is limited to $100,000 on an annualized basis.
• Owner Compensation Cap. Prior SBA guidance has established that the amount of compensation that can be paid to owners who work at their business and included as forgivable payroll costs cannot exceed a maximum of either $20,833 (in the case of a 24-week Covered Period) or $15,385 (in the case of a borrower that received a PPP loan before June 5, 2020 and elects to use an 8-week Covered Period) across all of the owner’s businesses that received a PPP loan. But, the exact limitation depends on the business type. The owner compensation cap rules have produced a considerable amount of confusion among that class of borrowers, largely because they were applied to different business types in disparate interim final rules without acknowledgement that the scope of the businesses subject to the cap was being expanded beyond prior rules. The Forgiveness FAQs generally do not modify any of the SBA’s earlier rules, but nevertheless offer a helpful consolidated comparison of how the owner compensation cap applies in each type of entity.
  • C-Corporation: An owner-employee of a C-corporation can receive cash compensation up to 2.5/12 of the individual’s 2019 cash compensation. In addition, the Forgiveness FAQs confirm that a borrower can include payments for employer state and local taxes paid by the borrower and assessed on the owner’s compensation and payments for the amount paid by the borrower for employer contributions to employee health insurance and payments for employer retirement contributions to the owner’s employee retirement plan capped at 2.5/12 of 2019 employer retirement contribution as forgivable payroll costs. Moreover, those non-cash compensation payroll costs do not count toward the $20,833 or $15,385 limit per individual. The Forgiveness FAQs, however, do not address the longstanding question of what level of ownership is required to be considered an owner-employee. Accordingly, in the absence of further clarification from the SBA, it appears there is no threshold level of ownership and that an employee of a C-corporation (or S-corporation for that matter) that owns any amount of equity of the borrower – even a de minimis, non-controlling interest – would be considered an owner-employee subject to this compensation cap.   
  • S-Corporation: An owner-employee of an S-corporation can receive cash compensation up to 2.5/12 of the individual’s 2019 cash compensation. Borrowers can also include employer state and local taxes paid by the borrower and employer retirement contributions to their employee retirement plans up to the amount of 2.5/12 of the 2019 employer retirement contribution. In contrast to C-corporations, however, employer contributions for health insurance are not eligible for forgiveness for S-corporation employees with at least a 2% ownership interest.[1] Eligible non-cash compensation payroll costs (e.g., taxes and retirement contributions) do not count towards the $20,833 or $15,385 limit per individual. As noted above, there does not appear to be a threshold level of ownership to qualify as an owner-employee of an S-corporation.
  • Self-Employed Schedule C or Schedule F Filers: Compensation of self-employed individuals (including sole proprietors and independent contractors) that are eligible for loan forgiveness is limited to 2.5/12 of 2019 net profits as reported on IRS Form 1040 Schedule C, Line 31. Separate payments for health insurance, retirement or state or local taxes are not eligible for loan forgiveness.
  • General Partners: Compensation of general partners eligible for loan forgiveness is limited to 2.5/12 of 2019 net earnings from self-employment that is subject to self-employment tax, which is computed from 2019 IRS Form 1065 Schedule K-1, Box 14a (reduced by Section 179 expense deduction, unreimbursed partnership expenses and depletion claimed on oil and gas properties) multiplied by 0.9235. Compensation is only eligible for loan forgiveness if payment is made during the Covered Period (or Alternative Payroll Covered Period). Separate payments for health insurance, retirement or state or local taxes are not eligible for loan forgiveness.
  • LLC Owners: LLC owners should follow the above approach that applies to how the LLC was organized for tax filing purposes in 2019.
• Eligible Group Healthcare Benefits. Employer expenses for group healthcare benefits for employees qualify as payroll costs that are eligible for forgiveness. However, such payroll costs do not include (i) expenses paid by employees or (ii) expenses accelerated from periods outside the Covered Period (or Alternative Payroll Covered Period). Note that payroll costs related to owner-employee healthcare benefits are subject to the limits discussed above.
• Eligible Retirement Benefits. Employer contributions for employee retirement benefits that are paid or incurred during the Covered Period (or Alternative Payroll Covered Period) generally qualify as forgivable payroll costs. But as with expenses for group healthcare, contributions for retirement benefits that are accelerated from periods outside the Covered Period (or Alternative Payroll Covered Period) are not eligible for forgiveness.
• Interest on Unsecured Credit. Interest payments on business mortgages of real or personal property (such as an auto loan) are eligible for loan forgiveness. Conversely, interest payments on unsecured debt are not eligible for forgiveness (although such payments are permitted, non-forgivable uses of PPP funds).
• Renewed Lease or Refinanced Mortgage. Qualifying payments on leases and mortgage loans that existed prior to February 15, 2020 and were either renewed or refinanced after February 15, 2020 are eligible for loan forgiveness. The Forgiveness FAQs confirm that a renewed lease or refinanced mortgage is deemed to be an extension of an obligation that was in force as of February 15, 2020.
• Transportation Utility Payments. The CARES Act includes “transportation” fees alongside electricity, gas, water and telephone as examples of covered utility payments that are eligible for forgiveness, but there had previously been no explanation as to what this category was intended to mean. The Forgiveness FAQs finally explain that “transportation” utility fees are those charged by state and local governments to fund roadway maintenance.
• Salary Hourly Wage Reduction. For purposes of calculating the reduction in loan forgiveness due to employee pay reductions during the Covered Period (or Alternative Payroll Covered Period), the borrower should only take into consideration decreases in base salary or wages. The Forgiveness FAQs therefore appear to confirm that reductions in other forms of cash compensation, such as bonuses, do not affect the forgiveness reduction determination.
• Loan Forgiveness Documentation. PPP lenders can accept scanned copies of forgiveness applications and all required supporting documents. E-signatures and e-consents that comply with the Electronic Signatures in Global and National Commerce Act are acceptable in lieu of in-person wet ink signatures.

[1] The Forgiveness FAQs note that those amounts are included in cash compensation under family attribution rules of 26 U.S.C. 318.

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