The Small Business Administration (“SBA”) published forms and instructions for loan forgiveness on May 15. The loan forgiveness application and instructions provide additional details on the calculation of loan forgiveness. Generally, these details expand the flexibility of the calculation.
Calculation of Wage Portion of Payroll Costs
One of the open questions on PPP loan forgiveness was whether the SBA would calculate loan forgiveness based on employee pay dates (cash basis) or based on the time period when employees earned the wages (accrual basis). The surprising answer is both. Borrowers can include wages that are paid during the eight-week period and wages that are incurred during the eight-week period (but cannot count the same wages twice). This effectively means that the borrower can count more that eight-weeks of wages. However, it is important to note that only eight weeks of wages for an owner-employee or self-employed individual can be counted.
Assume that X is an S Corporation with two owner-employees and one employee who is not an owner. X pays its wages bi-weekly basis. Owner 2 receives $4,000 per pay period. Owner 1 and the employee receive $3,000 per pay period. X received its PPP loan on May 1, 2020. X’s eight-week period is from May 1 to June 25. May 1, 2020 was also a pay date. The pay of the employee is $3,000 on May 1, May 15, May 29, and June 12 for a total of $12,000. In addition, the employee has earned $2,700 in wages for June 15 through June 25 that will not be paid until June 26. The total wages counting toward the loan forgiveness for the employee is $14,700.
X can only count eight weeks of wages for the owner-employees. Owner 1 has the same pay and earnings as the employee. However, X can only count $12,000 of wages for Owner 1.
Owner 2 has $16,000 of earnings for the eight-week period. However, X can only count $15,385 in wages toward the debt forgiveness because of the annualized $100,000 cap on wages.
In total, X can count $42,085 in wages toward the loan forgiveness.
Limited Flexibility on Eight Week Period
If a borrower uses biweekly or more frequent payroll schedule, that borrower an elect an alternate eight-week period for calculating the payroll costs. The alternative eight-week period begins the first day of the first pay period following the funding of the PPP loan. If the employer always pays on the last day of the payroll period, then one effect of the alternative eight-week period is that the wages included in the calculation will match the wages paid in the period (i.e. the wage calculation will match the cash method). However, some employers may receive additional debt forgiveness if they pay on a delayed basis or if they increase their payroll as they go through the eight-week period.
Assume the same facts as Example 1 except that X does not pay its owners wages. X’s eight-week alternative period for payroll purposes is May 4 through June 28. The total forgiveness for the employee is $12,000. The $2,700 reduction from the standard eight-week period is because of the loss of the accrued wages for the employee after the last pay date.
Assume the same facts as Example 2 except that X pays its payroll one week following its payroll cutoff period. Thus, X pays the payroll earned through May 1 on May 8.
Using the standard eight-week period, X would include the payroll paid on May 8, May 22, June 5, and June 19 for a total of $12,000. In addition, the employee earned wages from June 15 through June 25 for $2,700. The total wages included for the employee is $14,700.
If X chose the alternative eight-week period, the same payroll dates would be included in the calculation. However, the employee would earn one extra day’s wages before the expiration of the eight-week period so that ten days wages would be earned after the last payroll. The employee’s wages for the debt forgiveness calculation would increase to 12,000.
Assume the same facts as Example 2 except that the first pay date during the eight-week is on May 8 and covers wages through that date. In addition, X hires employee 2 on June 8 at $3,000 per pay period.
Using the standard eight-week period. Employee 1 receives $3,000 on May 8, May 22, June 5, and June 19 for a total of $12,000. In addition, Employee 1 earns four days of wages from June 22 through June 25 for $1,200. X can count $13,200 in wages for employee 1 toward the debt forgiveness.
Employee 2 receives $3,000 on June 19 and earns four days of wages from June 22 through June 25. X can count $4,200 in wages for employee 2. X can apply a total of $17,400 in wages toward the loan forgiveness.
If X chooses the alternative eight-week period, the eight-week period is from May 9 through July 2. X counts the payrolls paid May 22, June 5, June 19, and July 2 for employee 1 for a total of $12,000. Employee 2 receives $3,000 in wages on June 19 and July 2 for a total of $6,000. In total X can count $18,000 of wages toward the loan forgiveness.
Equipment Rent Is Included in Lease Payments
SBA clarified in the instructions that the lease payment include both leases for personal property and real property. Previously, there was a lack of clarity on whether personal property rent would apply toward the loan forgiveness.
Self-Employed Individuals Do Not Need to file the 2019 Return Before Claiming Forgiveness
To claim forgiveness based on the self-employment income on the 2019 return, individuals must have that self-employment income calculated. However, the forms suggest that the 2019 return does not necessarily need to be filed before applying for forgiveness. The forms require certification that the tax documents submitted to the lender are consistent with those that the borrower has submitted or will submit to the IRS and/or the state. This suggests that there is no requirement to file the forms with the IRS before applying for debt forgiveness.
One example where this is important is that if a self-employed individual has the information to complete the accounting for their business but is still waiting on other tax information such as K-1s. That individual can complete the Schedule C and Schedule SE but wait to complete the return until the additional information is available.
The Number of FTEs is Based on a 40-hour Work Week
Most commenters believed that the SBA would use a 30-hour work week to calculate the number of full time equivalent employees. The instructions specify a 40-hour work week instead.
Record Retention Requirements
The borrower must keep copies of all records necessary to support the initial loan application and the loan forgiveness amount for six years after the date the loan is forgiven or repaid in full.
Non-Payroll Costs Can Also Be Included in the Calculation if They Are Paid or Incurred
All costs included in the calculation can be included if they were paid or incurred during the eight-week period. However, non-payroll costs that are incurred must be paid by the next billing cycle for inclusion. This means that it is possible to include more than eight-weeks of these expenses in the calculation.
More Guidance is Yet to Come
The SBA intends to issue additional guidance on the forgiveness calculation. The SBA keeps making numerous substantive changes to the program so watch for updates.
If you have any questions about PPP loans and this development, reach out to us at 303-989-7600.