PPP Loan Forgiveness Process – Part 1 What can the loan be used for?

PPP Loan Forgiveness

By Steven Whitehill, Anchor Business Advisors

To apply for forgiveness of your Paycheck Protection Program (PPP) loan, the SBA develop a form to be completed. Form 3508 – “SBA Loan Forgiveness Application”. You, as the Borrower, must complete. It is an eleven-page document (including instructions). It should be note like most things government, this form will likely change in the near term. Once completed, along with supporting documentation, you will submit the 3508 to your Lender (or the Lender that is servicing your loan). Borrowers may also be required to complete this application electronically through their Lender. It is very likely that the lenders will ask you to do an electronic submission. It is also very likely that it may deviate from the form 3508. The electronic submission may be easier or more difficult to complete.

All this being said, the information you will need to complete the forgiveness application will be based this 11-page application. I will go through the form in some detail over several blogs and update them, as necessary. The actual SBA 3508 Form can be found by clicking on the form number.

Before we go into the form itself it is important to understand what you got paid on. You received a loan based on 10 weeks of payroll, typically for 2019. The first thing to know is that on any income on which payroll taxes were not paid we are not included in payroll for the loan calculation. So, what is payroll? There are several components to it:

  1. 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). This gross payroll before any taxes. Payroll costs includes all cash compensation paid to employees, subject to the $100,000 annual compensation per employee limitation. Be careful the word cash here has a broader meaning, while it does include cash, the green stuff, it also mean checks and other fungible payments but only to the extent you pay payroll taxes on the amount you paid to your employees. Keep in mind that 1099 “employees” are not employees and were/are not included in this calculation. They could get PPP loans/funds on amounts they paid payroll taxes on by filing themselves.
  2. To the Cash compensation you were able to add:
    • employer contributions to defined-benefit or defined-contribution retirement plans;
    • payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and
    • payment of state and local taxes assessed on compensation of employees.

The loan calculation excludes compensation in excess of $100,000 annually and applies only to cash compensation, not to non-cash benefits define above. Thus, you could receive significant additional loan amounts.

 

Consider this example:

Gross compensation     224,000
(+) Payments for the provision of group health care benefits (enter EMPLOYER share only; do not include amounts withheld from employees which are already in gross compensation above)
(+) Payments for retirement benefits (enter EMPLOYER share only; do not include amounts withheld from employees which are already included in gross compensation above)       56,000
(+) State/Local Taxes on Employee Compensation (i.e. state unemployment tax; enter EMPLOYER share only)         1,743
(-) Taxes imposed or withheld Under Chapters 21, 22 or 24 of IRS Code                –
(-) Compensation of employee residing outside of the United States                –
(-) Qualified sick leave wages for which a credit is allowed under section 7001                –
(-) Qualified family leave wages for which a credit is allowed under section 7003                –
(-) Compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the period     124,000
Total     157,743
Average Monthly       13,145
Multiplier            2.50
Calculated Loan Amount       32,863
Plus Outstanding of an SBA Disaster Relief Loan (EIDL)                –
Maximum Loan Amount       32,863

As an interesting side the government gave you more money the you have received if you divided the annual gross compensation/payroll by 52 and multiplied that amount by 10. In this case that amount would have been $30,335.

So that is how you got to the amount your received in the PPP loan. Now what can you spend the Money on? Spending PPP funds on the right things:

Spend at least 75% of the funds on payroll costs & at most spend the remaining 25% of the funds on approved expenses.

Appropriate Payroll Expenses:

  • Salaries
  • Wages
  • Vacation pay
  • Parental and family leave
  • Employer medical or other group benefits
  • Sick leave
  • Employer retirement benefits
  • Bonuses, commissions, or hazard pay

Think of it this way, you need to spend the payroll portion on the same things you were given the loan for. Keep in mind that for most of you, the amount you will need to spend on payroll is 80%. The idea behind PPP was to pay your employees for 8 weeks. However, you were paid for 10 weeks of payroll. The additional 2 of the weeks could be spent on other expenses. So, 8 weeks/10 weeks or 80% needs to spend on payroll. The 75% rule is there because there is recognition that you may not be able to rehire all employees and even under certain conditions pay them less. This rule is complicated by the way they gave you money vs the way you spend it. They gave you a loan 2.5 time the average monthly salary, but what you can spend is based on dividing the annual salary by 52. So if you have Salary/Payroll of $100,000 annually your loan amount would be 8,333,33 or 2,083.33 per week. However, the loan forgiveness is based on $100,000 divided by 52 or 1,923.08 per week. Notice the amount you would payout is less then what you got. More on that later.

What can you spend the 25% of the funds on?

  • Mortgage interest
  • Rent
  • Utilities

So, what are utilities? These are described by the SBA as phone, internet, gas, water, electricity, Sewage, Transportation, etc. Note this would also include Cell Phone costs. It is important that these service contract agreements predate February 15, 2020.

The SBA has yet to release guidance on which expenses are included under the category of “transportation.” Current understanding of the guidelines is that the same principles will apply to PPP forgiveness as they do for tax filing. This would mean you have two options for tracking expenses that you could choose from to maximize your forgiveness:

  • Standard mileage rate entails tracking your miles driven for business purposes and then multiplying it by the standard mileage rate (set at $0.575 per mile for 2020).
  • Actual expense method entails tracking all costs of operating the vehicle in the eight-week period. Examples include costs like gas, oil, and repairs.

Rent expense is a qualified expense for PPP funds. It is important to note that the expense must be both incurred and paid during the 8-week period, so any prior rent due would not be a qualified expense. It is also important to note that the rent allowed is based off a signed lease agreement in effect prior to February 15, 2020. So, are car or equipment lease amounts eligible for forgiveness? According to the CARES Act, only rent under a “covered rent obligation” is eligible for forgiveness. A covered rent obligation means rent obligated under a leasing agreement in force before Feb 15, 2020. This suggests that payments on a car or equipment lease may be permitted, but we need more definitive guidance. Clearly, without a pre-02/15/2020 “lease” in effect, the rent attributable to any lease will not qualify for forgiveness.

Further, The Paycheck Protection Payment Forgiveness Application (SBA Form 3508 05/20) states that personal property leases can be included in non-payroll expenses. Even if forbearance was granted by the leasing company, the amount incurred during your eight-week period should be paid.

The following are forgivable expenses under 25% of qualifying non-payroll expenses:

  • Lease payments for Copiers/MFPs and Printers
  • Lease payments for laptops, desktops, servers, and firewalls.
  • Lease payments for employee cars, delivery vans, and trucks.
  • Lease payments for forklifts.

All of the above are personal property leases and are considered forgivable under the conditions in the PPP loans.

In general, it is important to note that the expense must be both incurred and paid during the 8-week period.

Interest on mortgage obligations and loans secured by any business personal property are qualified expenses as long as these loans were incurred before February 15, 2020.

Please note, only the interest on qualified debt obligations can be used for forgiveness, not principal. Further, most own their buildings in a separate legal entity and for that reason, a building mortgage would likely not qualify here, but would rather be satisfied under the rent provision. If the building is owned in the operating entity (i.e. dental practice), then the mortgage interest is qualified.

In addition to mortgage interest, business acquisition loans, equipment loans and build-out loans would also qualify as long as they are secured by the business personal property and were incurred prior to February 15, 2020.

For tracking purposes, it is advised to pay interest and principal separately during this 8-week period to make sure this can be easily identified.

In the next installment we will get into completing the SBA Form 3508.

The following is extract from an MBAF CPAs and Advisors post.

Payroll & Non-Payroll Costs – Allowable vs Forgivable

PPP loan proceeds can be used to cover the following “Allowable” expenses and the corresponding “Forgivable” expenses during the 8-week period starting from the date the loan was funded. Non-payroll expenses eligible for forgiveness have to be under contracts, mortgages, and leases in effect as of February 15, 2020.

 

Expense Category – Payroll Costs Allowable Forgivable
Salary, wages, tips, paid leave, and commissions less than $100k annually YES YES
Salary, wages, tips, paid leave, and commissions more than $100k annually NO NO
Bonuses* YES YES
Payments made to independent contractors NO NO
Compensation paid to non-US employees NO NO
Vacation, parental, family, medical, and sick leave not credited under Families First Coronavirus Response Act (“FFCRA”) YES YES
Group health care benefits paid by employer YES YES
Group health care benefits paid by self-employed or partnership NO NO
Workers compensation premiums NO NO
Retirement 401(k) employer match YES YES
Defined-benefit plan employer contribution YES YES
Defined-contribution plan employer contribution YES YES
Contribution to a SEP/KEOGH paid by self-employed or partnership NO NO
Federal unemployment tax NO NO
Employer-paid federal employment taxes (i.e., SS and Medicare) NO NO
Employer-paid state disability insurance (in applicable states) YES YES
State unemployment insurance YES YES
Expense Category – Payroll Costs Allowable Forgivable
Salary, wages, tips, paid leave, and commissions less than $100k annually YES YES
Salary, wages, tips, paid leave, and commissions more than $100k annually NO NO
Bonuses* YES YES
Payments made to independent contractors NO NO
Compensation paid to non-US employees NO NO
Vacation, parental, family, medical, and sick leave not credited under Families First Coronavirus Response Act (“FFCRA”) YES YES
Group health care benefits paid by employer YES YES
Group health care benefits paid by self-employed or partnership NO NO
Workers compensation premiums NO NO
Retirement 401(k) employer match YES YES
Defined-benefit plan employer contribution YES YES
Defined-contribution plan employer contribution YES YES
Contribution to a SEP/KEOGH paid by self-employed or partnership NO NO
Federal unemployment tax NO NO
Employer-paid federal employment taxes (i.e., SS and Medicare) NO NO
Employer-paid state disability insurance (in applicable states) YES YES
State unemployment insurance YES YES
Expense Category – Non-Payroll Costs Allowable Forgivable
Mortgage interest payments YES YES
Rent payments YES YES
Utility payments YES YES
Interest payments other debt obligations YES NO
Electricity YES YES
Gas YES YES
Water YES YES
Internet YES YES
Telephone YES YES
Transportation* YES YES
Equipment lease* YES YES
Cell phone YES YES
Cloud Computing NO NO
IT Expenses NO NO

*Needs further guidance from the SBA.