PPP Loan Frequently Asked Questions
Questions & Answers
We have been receiving great questions from our clients and blog readers regarding the Payment Protection Plan (PPP) loans. Carlin Culbertson, our Vice President, Assurance Services Group, has been providing guidance and consultation. With over 15 years in public accounting, Carlin has extensive auditing experience serving a wide variety of clients in various industries, including construction, manufacturing, mining, biotechnology and distribution.
We compiled these PPP loan questions and Carlin's responses into a webpage for easy reference. Check back as we will be adding more as they come in.
If I could only use one word to describe the PPP loan program, confusing would be at the top of my list. The way the forgiveness application reads for this specific safe harbor, you list the number of employees on the date you file the application (I’ll explain some possible issues with this below) or Dec. 31, 2020, whichever is earlier. So if you file after 12 weeks and have the same number of full-time equivalent employees on the application date as you did for the payroll period including Feb. 15, 2020, then this safe harbor would apply and there would be no penalty for a lower FTE count since you restored the positions as of the application date. In your example, if you hired everyone for two weeks, file the application at the end of that second week so the date of the application is when those people are employed. Then it would appear as the application is written that you would qualify for this specific safe harbor.
Keep in mind though that the longer your covered period and the more eligible expenses you incur, it is possible the reductions in headcount will have an less of an effect on you. See our blog post here that discusses further and also our PPP application examples showing a 24 week period with 80% of the employees laid off after 16 weeks.
Since it sounds like your loan was issued after June 5, you will have to use the 24 weeks before you can file for forgiveness unless the SBA provides an exception that self-employed individuals can file sooner (you can file once the funds are spent though which was in an SBA rule update - see our blog here about it). There are no payments due until after you file so having the longer time period shouldn’t be a problem, and it sounds like it will all be forgiven anyway. That being said, you can pay yourself over eight weeks if that is what you want to do. The 60% rule is AT LEAST 60% on payroll, so you can always spend more than that. Sounds like you would spend 100% of it on payroll so you should be fine. Keep in mind that you are limited to 2.5/12 of your 2019 net profit on your tax return, which is what they should have used to issue you the loan, so shouldn’t be a problem, but just FYI for what can be forgiven.
No you will not be penalized. In the law change that allowed the 24-weeks period, it also allowed for exceptions for headcount reductions and terminations for cause was one of those exceptions. You have to have the appropriate documentation on file, which hasn't been explicitly defined, but the documentation you have stating why they were terminated for cause is likely what the SBA would want to see if they ask for support.
You can use the days that were incurred during the eight weeks and paid by that next payroll date after the end of the eight weeks. For example, if the eight-week covered period ends on July 10 and the next pay date is July 17, then you could include the payroll through July 10 that was paid on that July 17 pay date, but couldn’t use the entire payroll since some of it earned after July 10. If your employees are paid in arrears, then that could impact this also. For example, say the July 17 payroll is for work done the week ending July 3 and July 10, so it is one week in arrears (this is common with hourly employees – they will work one or two weeks before getting paid to give payroll time to process their initial hours). Then, since that July 17 payroll was incurred/earned by employees before the end of the eight weeks on July 10, the entire amount can be included.
Thank you for your question and it is a tough one, especially since unemployment differs state by state. For unemployment eligibility, I would talk to your attorney or one that specializes in labor laws in your state. For the PPP rules, for self-employed individuals that file Schedule C (and other owner-employees), the limit for compensation-related forgiveness is 8/52 of 2019 net profit or $15,385 (whichever is lower) if you choose eight weeks or 2.5/12 of 2019 net profit or $20,833 (whichever is lower) if you choose 24 weeks. The rules don’t state that you have to divide anything by 24 and use that amount per week as far as we are aware. It just states you are limited to 2.5/12 of your 2019 net profit.
The PPP program states that at least 60% of the loan proceeds must be used to cover payroll costs. The current guidance does not explicitly prevent an increase in pay in the form of a short-term pay increase, hazard pay, or bonus, nor does it provide guidance on how much of an increase (if any) would be allowable. That being said, it may be difficult to justify the need for the loan to retain employees if you're able to pay all the employees the eight-week equivalent of a $100,000 annual salary. Our suggestion would be to pay employees what is reasonable for the ongoing operations of the business. This is also less of an issue now with the option for a longer covered period, which will allow you to extend the amount of time you use for your covered period up to 24 weeks.
Borrowers have the option of picking an eight-week or 24-week payroll period from one of two covered periods. Below are the allowable periods now, which allow you to use a period starting after you received the loan and get credit for a period ending after the selected period. Keep in mind with the longer amount of time to use the funds, this may not matter as much as it did when you only had 8-weeks.
“Covered Period” – the covered period which begins the day the PPP loan proceeds were received
“Alternative Payroll Covered Period” – if your payroll cycle is bi-weekly or more frequent, you may elect to use the covered period that begins on the first day of their first pay period following the day the PPP loan proceeds were received.
Payroll costs “paid” vs. “incurred” question – the instructions state that payroll costs incurred but not paid during the 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). Either way, it appears the covered period amount will end up being based on amounts actually paid either during the period or shortly thereafter.
The definition of payroll costs includes "payment of state or local tax assessed on the compensation of employees." Ohio workers' compensation premiums are not identified as a state or local tax on the compensation of employees. While wages are used as the basis of the premium calculation, it is considered an insurance premium payment to purchase insurance coverage. Per the law, the only insurance premiums allowed are the "payment required for the provisions of group health care benefits, including insurance premiums." Since these insurance premiums are not for that purpose, we would believe they would not be allowable. Also, if they were not allowed for the loan application process, they would not be allowed in the forgiveness process.
On August 24th the SBA and Treasury issued additional guidance on related party rent and lease payments. Until then, there was not clear guidance concerning related party payments. Read our blog for more information.
No, employer-paid life insurance premiums are not listed as eligible costs in determining loan forgiveness.
From the recent forgiveness applications, an allowable utility cost is defined as "business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before Feb. 15, 2020 (“business utility payments”)." The guidance does not specify this particular situation, however, it seems reasonable that those costs would be classified as utilities on the company's books since that is the nature of the expense and that employee's service likely began before Feb. 15, 2020. In the same application, it states required support for these costs to be submitted with the application is "Business utility payments: Copy of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks, or account statements verifying those eligible payments.", so you would need to be able to satisfy that supporting information requirement somehow – possibly by having your employees provide the February 2020 invoice along with the other invoices related to the reimbursements you are including for forgiveness and the cancelled check or proof of payment to the employee for that same amount to show you reimbursed them the invoice amount instead of paying the provider directly.
To our knowledge, there has been no discussion of allowing those expenses to be forgiven.
Gross payroll costs should be used. Keep in mind those gross numbers include amounts that may be withheld for employee retirement contributions and health insurance premiums, so be sure to exclude employee-paid amounts from those types of items when determining the amounts to include in the payroll costs total.
No, payroll costs do not include payments to independent contractors.
Based on current guidance, only costs (payroll costs and other eligible costs) incurred and paid during the covered period are eligible to be used in calculating PPP loan forgiveness. Knowing that a downturn is coming, would you have reduced your staffing, reduced pay, or taken some other measures affecting payroll without the PPP loan? If the answer to that is yes, then using the funds on payroll during the covered period to avoid those reductions (which would be to save funds for the eventual expected downturn) would mean eligibility for the loan would likely be satisfied based on the information available in this question. Additional information may change that assessment.
Assuming this is a question about how this would impact the average FTE reduction for forgiveness there is an exception for employees that voluntarily requested a reduction in hours so they don't count against you for that calculation – see application wording below. If this relates to the more than 25% wage reduction impact on forgiveness, the safe harbor calculation on the forgiveness application (which isn't different from the law, it just provides a step-by-step calculation that is clearer) compares the average hourly wage during Feb. 15, 2020, through April 26, 2020 (or as of specific end dates for safe harbor purposes), to the average hourly wage on Feb. 15, 2020. If the average during that period is the same as the Feb. 15, 2020, hourly wage, then there is no forgiveness penalty for that employee for reduced wages. From the application instructions – "FTE Reduction Exceptions: Indicate the FTE of (1) any positions for which the Borrower made a good-faith, written offer to rehire an individual who was an employee on February 15, 2020 and the Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020; (2) any positions for which the Borrower made a good-faith, written offer to restore any reduction in hours, at the same salary or wages, during the Covered Period or the Alternative Covered Period and the employee rejected the offer, and (3) any employees who during the Covered Period or the Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours...""
