Q&A - PPP Loan Forgiveness

+ What is the definition of Payroll Costs for loan forgiveness? For example, are all of the following included: state taxes associated to payroll included, payroll processing fees, federal taxes based on wages?

Per the SBA Interim Rule, payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation. Employee wages are eligible at their gross amount (i.e. an employee earns $500 and federal taxes are $50, so the net pay is $450. The gross amount of $500 is eligible for forgiveness. Payroll processing fees are not specifically included as a payroll cost.

+ If you hire new staff in addition to existing employees will you be able to count that payroll as well?

Yes, the payroll for new staff is counted towards forgiveness to the extent it was paid or incurred in the covered period.

+ Are part time workers included in the calculation of forgiveness? What about rent payment, how much of that can we use?

Payroll paid to part-time employees is eligible for forgiveness if paid or incurred during the covered period. The Flexibility Act and subsequent SBA guidance clarified that 60% of the forgiveness amount must be payroll costs and up to 40% of the forgiveness amount can be other qualified expenses, which includes business mortgage interest, business rent or lease payment and business utilities payments.

+ Are 1099 payments included in the payroll forgiveness?

No, 1099 payments cannot be included as payroll costs.

+ What about employer payroll taxes, does qualify as payroll expense or payroll per employee?

Federal payroll taxes do not count. Therefore, you do not count any of the employer portion of FICA and Medicare taxes.

+ Did the 75% payroll threshold get lowered to 60%?

The Flexibility Act changed the percentage of forgiveness that has to be payroll costs from 75% of the forgiveness amount to 60%.

+ What if your payroll amounts increased during the qualifying period?

An increase in payroll amounts is ok during the covered period as any increase would be considered compensation to an employee, subject to the $100,000 cap ($15,385 using the 8 week period).

+ If you received PPP funds in May and ran your payroll for March and April utilizing the funds is this covered?

In general, payroll costs paid or incurred during the eight consecutive week (56 days) covered period are eligible for forgiveness. Borrowers may seek forgiveness for payroll costs for the eight weeks beginning on either:

1. The date of disbursement of the borrower's PPP loan proceeds from the Lender (i.e., the start of the covered period); or
2. the first day of the first payroll cycle in the covered period (the “alternative payroll covered period”).

Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction. Payroll costs incurred during the borrower's last pay period of the covered period or the alternative payroll covered period are eligible for forgiveness if paid on or before the next regular payroll date; otherwise, payroll costs must be paid during the covered period (or alternative payroll covered period) to be eligible for forgiveness.

+ How much of the $100,000 per employee threshold can be forgiven during the 8 week period? (For example, is only $15,385 allowed to be forgiven? Calculated as $100,000 / 52 weeks x 8 week) Or can you pay an employee an absolute value of $100,000 during the 8 week period to one employee and all of it will be forgiven?

The amount paid during the 8 week covered period is capped at $15,385. We are waiting guidance to determine if this amount will increase based on the increase of the covered period from 8 to 24 weeks.

+ Assuming the President signs the recently passed legislation from Congress, and the proceeds of the PPP loan must be spent within 24 weeks, does that mean payroll costs can be included ONLY for 8 weeks over that period of time? Or are 24 weeks of payroll eligible for forgiveness?

The Flexibility Act extended the covered period from 8 to 24 weeks, so payroll paid or incurred during the 24 week covered period is eligible for forgiveness. A business that had a loan granted prior to the enactment of the Act (June 5, 2020), can elect the 8 week period.

+ I can’t get employees to come back to work, and now have to work shifts, do owners hours count towards hours/payroll and FTE?

An employee is any member of your company that receives compensation through your payroll. So as an owner, if you receive compensation through your payroll, your hours and payroll would count as an employee.

+ Companies initially enrolled applied for the PPP under the premise that 75% of the loan could be applicable to payroll. Is that still the case?

At least 60% of the amount of forgiveness has to be made up of payroll costs. But there is no upper limit, so 100% of the amount eligible for forgiveness can be payroll costs.

+ If a company received the PPP funding in May, but ran payroll for the periods of March and April using the PPP funding, what should next steps be? Do those funds have to be refunded? If yes, how so? The company has had no income beginning mid-March 2020

If the March and April payroll was paid during the covered period (i.e. in the 8 or 24 weeks after receiving the PPP loan), based on the fact that the payroll was paid during the covered period, it would be eligible for forgiveness.

+ On the portal, there is a line that asks about # of employees on date of application and number on the day of the forgiveness application. For us is that the same number – we have not laid anyone off or reduced salaries. But do we include Owner/General partners in that number or ONLY W-2 employees?

If you have the same number of employees as you had at the time of the loan application, I would put that same number on the lines referenced.

+ PPP Funds were received in May, however, was used to pay payroll beginning mid-march. Do those funds have to be returned to the bank? If yes, how do you return those funds to the bank?

Borrowers are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the 24-week (168-day) or 8-week (56-day) Covered Period (or Alternative Payroll Covered Period) (“payroll costs”). Payroll costs are considered paid on the day that paychecks are distributed or the Borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period).

+ I hear that funds can be used for payroll beginning at 60% but also up to 100% of the funds can be allocated to payroll. Is this true?

Yes, up to 100% of the PPP loan can be used for eligible payroll costs.

+ What of non-profits where some salaries are covered by grants/contracts? How does that affect forgiveness?

There is no definitive answer to this question at this time. Many government grants prohibit “double dipping”, i.e. you cannot be reimbursed for the same cost twice, however there is no guidance on how this pertains to a PPP loan.

+ What about retail stores--we do not need as many employees in order to operate the store safely and also we won’t have as many customers?

The Flexibility Act allows for an exemption to the full-time equivalent employee reduction as noted in (7)(B) below. If the borrower can document that it meets the criteria below, then it would not have to reduce loan forgiveness for a decline in full-time equivalent employees.

‘‘(7) EXEMPTION BASED ON EMPLOYEE AVAILABILITY.—During the period beginning on February 26 , 2020, and ending on December 31, 2020, the amount of loan forgiveness under this section shall be determined without regard to a proportional reduction in the number of full-time equivalent employees if an eligible recipient, in good faith— ‘

‘(A) is able to document‘‘

• an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and
• an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or ‘‘(B) is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of 18 the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.

+ Only 3 employees out of 8 were able to work remotely. What happens in the case that the company could not reopen? What I could do is pay myself (payroll) for the last 3 months, will that be forgiven?

There would most likely be a decrease in the amount of loan forgiveness due to the reduction in average full-time equivalent employees. However, there are safe harbors available within the rules that may be applicable.

+ We received our loan on 5/4. Our normal payroll runs the last business day of the month. We had our first disbursement of the loan for payroll on 5/29. We were planning to run the next payroll early to fall within the 8 week (6/26 instead of 6/30). Now that the covered period has been extended, is it better to wait to run payroll on our normal date of 6/30?

Payroll costs that are incurred in the covered period, but paid on or before the next regular payroll date, are eligible for forgiveness. So there would not be a need to accelerate payroll. In addition, with the covered period being extended to 24 weeks, you may want to use that as your covered period.

+ If I finish spending the PPP funds and no longer need the employees, when do I let go the employees and still get forgiveness?

If employees are let go during the covered period, this will reduce the number of average full-time equivalent employees that is used in the calculation to determine whether there is a reduction in FTE’s and in turn a reduction in loan forgiveness. However, there is a safe harbor provision in the Flexibility Act

+ If you put PPP funds in a separate account, and have payroll service debit the separate account would you recommend that we deposit the employer FICA and FUTA and officer's health back to the separate PPP account?

If that is the easiest way to track it for you, then that seems like it would make sense.

+Do all the forgivable expense payments have to be made in the 8 week period? Is it cash or accrual basis?

Forgivable expenses must be paid or incurred during the covered period. Example: A borrower’s covered period begins on June 1 and ends on July 26. The borrower pays its May and June electricity bill during the covered period and pays its July electricity bill on August 10, which is the next regular billing date. The borrower may seek loan forgiveness for its May and June electricity bills, because they were paid during the covered period. In addition, the borrower may seek loan forgiveness for the portion of its July electricity bill through July 26 (the end of the covered period), because it was incurred during the covered period and paid on the next regular billing date.

+ For a business vehicle - is principal and interest forgivable or only interest?

Only the interest on the loan would be forgivable.

+ What happens if you were able to arrange to postpone your mortgage payment with your other bank, (not Ponce)?

Business mortgage interest is forgivable. However, in order to be eligible for forgiveness the mortgage interest must have been

1. Paid during the covered period; or
2. 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.

+ The COVID 19 Pandemic caused the shutdown of some businesses in mid-March of 2020. Is that period (the months of March and April) covered under the PPP? If not, why?

The period during which eligible expenses are paid or incurred is known as the covered period. The covered period begins when the PPP loan funds are disbursed to the business.

+ I’m a sole proprietor who started my business in August 2019. I know that loan amounts for the self-employed are calculated by 2.5/12 of the net income in 1040 Schedule C. Because I started my business in August 2019 (I was an employee for a different company prior to this), and my business was in operation for only 5 months in 2019, my loan amount was calculated with 2.5/5 instead. Will I be able to get my forgiveness calculated based on this amount? Everywhere I read, it only states 8/52 of the net income to be forgiven. It shouldn’t apply to me, but I’m worried since it will mean I’ll need to return most of the loan.

The forgiveness amount for a Schedule C filer with no employees is calculated based on Line 31 of Schedule C for 2019. The amount on line 31 would be divided by twelve months and then multiplied by 2.5 months and that would result in the amount of forgiveness, with a cap of $20,833.

+ Are we allowed to allocate loan funds to our 401K costs?

For non-owner employees, the total amount paid by the Borrower during the covered period for employer contributions to employee retirement plans, excluding any pre-tax or after-tax contributions by employees, is eligible for forgiveness.

+ In regards to taxes: Can we allocate PPP loan to our 2019 company federal taxes which was paid in 2020?

Paying your federal taxes is not a permitted use of PPP funds.

+ Are we allowed to allocate loan funds to our Bonus?

Compensation paid during the covered period is eligible for forgiveness and a bonus is considered compensation.

+ Our annual gross payroll in 2019 was $1,620,716.00 and our weekly payroll was $31,167.00 1. If we do the math; $31,167.00 * 8 weeks our total will be $249,336.00 which is close to our PPP Loan amount. Is there any reason why we should have an issue with using our payroll amount towards our PPP loan? Are there any regulations or requirements we should know about?

Employee compensation is capped at $15,385 if an 8-week covered period is selected and $46,154 if a 24-week covered period is selected if you have employees who earn more than $100,000. Using the 24-week covered period, based solely on the facts above and assuming that you have few, if any, employees that make more than $100,000 a year, it is reasonable to assume that you will be able to use all of your PPP funds on payroll during the 24-week period.

+ I am a Sole Proprietor and my PPP Loan of $20,833.33 was funded on June 10, 2020. I understand that under the 24 week Covered Period, if I meet all the criteria, I will have 100% of the loan forgiven. What happens if the $20,833.33 is spent in less than 24 weeks, for example 20 weeks? Do I still receive 100% forgiveness or is it prorated so that only 83.3% forgiven? I will be using PPP Loan Forgiveness Application Form 3508EZ.

The amount of forgiveness is based on 2019 compensation, so if you use a 24 week period, the eligible amount for forgiveness will be 2.5 months of 2019 compensation capped at $20,833. It does not matter if you used the funds in a shorter period than 24 weeks.

+ I’m confused about forgiveness amounts. We pay employees monthly. If we select the 24 weeks option (6 months) – is forgiveness 6 months of their salary or will that be reduced to only 24 weeks. For example, $50,000 salary – 6 months forgiveness is $25,000. But 24 weeks is $23,076.92. Which number controls?

It would be compensation paid or incurred during the covered period, which if using 24-weeks is 24-weeks or 168 days, and not 6 months.

+ Similar question for monthly office rent. If monthly rent is $10,000, is the forgiveness amount for 6 months $60,000 or 24 weeks which is 55,384.62?

It would be office rent paid or incurred during the covered period, which if using 24-weeks is 24-weeks or 168 days, and not 6 months. Office rent must be paid during the 24 weeks or incurred during the 24 weeks and paid on or before the next regular billing date, even if the billing date is after the 24 week period.

+ What is included in utilities? Office telephone and internet, copier lease. What about cell phones and auto leases? What happens if my lease renews in the middle of the 24 week period (eg for copier?)

Covered utility payments consist of business payments for a service for the distribution of electricity, gas, water, telephone, transportation, or internet access for which service began before February 15, 2020, so office telephones, internet service and cell phones would be eligible if used in the business. . Business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020 are eligible for forgiveness, so payments on an auto lease or a copier lease would be eligible for forgiveness if they met this criteria.

+ We paid some staff affected by Covid-19 during the 8-week period. Do we need to exclude these pays from the Payroll cost of the PPP program?

Compensation paid to employees during the covered period is eligible for forgiveness.

+ We paid a freelancer out of the funds but did not declare her as an employee when we applied for the loan. Will her payments be eligible for forgiveness?

If this individual is paid as an independent contractor, the costs paid to the individual will not be eligible for forgiveness.

+ We will include the amount paid at net or gross?

For example, if you paid an employee $4,000 and withheld $500 of federal taxes, so the net pay to the employee is $3,500, you would include the gross amount of $4,000 as compensation eligible for forgiveness.

+ Do the costs have to be made directly from the funds received or can money previously on account be used?

The costs don’t need to come directly from the funds received (i.e. you can add the funds into a checking account that had funds in it previously and write checks from that account).

+ What happens if you replace a staff with another person who wants a salary less than 75% of the original salary?

The salary reduction rule is only applicable to employees who were employed in 2019, so assuming this new staff was hired in 2020, the salary reduction rule would not be applicable to the new staff.

+ What are the penalties if the PPP isn't used for payroll and 100% of the PPP was used for other expenses? Or is there no penalties but the whole amount would just be an unforgiven loan at 1% for 5 years?

Assuming the other expenses referred to above are qualified expenses under the program, if no amount was used for payroll, none of the loan would be forgiven and the entire amount plus interest would have to be repaid. However, if none of the other expenses were qualified expenses under the program, there could be additional consequences as outlined in the following certification that is made on the original application: The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments, as specified under the Paycheck Protection Program Rule; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable, such as for charges of fraud.

+ How does PPP work if your business was unable to open due to government guidelines? Business was conducted at a reduced rate remotely, however, the same number of employees was not needed.

You may qualify for the safe harbor provision noted below, which would allow a business to not have to reduce forgiveness due to a reduction in full-time equivalent employees.. “If you were unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.”

+ To what cap are corporation owner/president subject to?

If the corporation owner/president is considered an owner-employee, they will be subject to $15,385 cap if the 8-week period is chosen and $20,833 if the 24-week period is chosen.

+ I already have a PPP loan and the money will be used up in 8 weeks. Can I apply for another PPP loan since the new law on June 5th allows for 24 week disbursement?

No, you can only apply for one PPP loan.

+ If you are waiting on the 24 weeks period, when should we be summiting the application? After the 24weeks, like week 25-26, or before the 24 weeks?

The answer depends on when you believe you have maximized your forgiveness. If it takes 24 weeks to maximize forgiveness, then you would wait until after 24 weeks to apply for forgiveness. You have 10 months to apply before you will be required to make principal and interest payments on the loans, however, I don’t see any benefit in waiting if your loan is going to be 100% forgiven.