Important PPP Loan Forgiveness Guidance Released

On June 22nd, additional guidance was released for the PPP loan program. The new guidance provides important information about owner and self-employed compensation as it relates to loan forgiveness along with exemptions that are available if you cannot return your staff to pre-COVID levels (as of 2/15/20). What follows are important points to know regarding PPP loan forgiveness:

  1. You can choose either the 8-week or 24-week covered period for PPP loan forgiveness. For most of our clients, the 24-week covered period will be the recommended period to choose since it allows more time to use the loan proceeds. However, if you can use the funds within 8 weeks, we recommend the shorter period instead.
  2. Owner-employees and self-employed individual’s payroll compensation regardless of entity type is capped at $15,385 (8-week covered period) or $20,833 (24-week covered period).

a. C-Corporation owners are capped at the “lesser of “either 2019 W2 compensation + employer retirement match + health insurance contributions at 2.5/12 or $20,833 for the 24-week covered period. For the 8-week covered period, it is capped at 8/52 of this 2019 compensation and benefits total or $15,385.

Example – You are a C-Corporation owner. You made $80,000 in W2 compensation, paid $12,00K towards your health insurance premiums, and received a $5,000 retirement match in 2019. You have chosen to use the 24-week covered period. Your “lesser of” amount to use for loan forgiveness for yourself would be $80,000 + $12,000 + $5,000 = 97,000 X 2.5 / 12 = $20,208. Since this is less than the $20,833 limit, $20,208 is what will be forgiven for owner compensation.

b. S-Corporation owners are capped at the “lesser of” either 2019 W2 compensation that includes health insurance + retirement match at 2.5/12 or $20,833 for the 24-week covered period. For the 8-week covered period, it is capped at 8/52 of this 2019 compensation and benefits total or $15,385.

c. Self-employed individuals (Schedule C or F filers) are capped at the “lesser of” either 2019 net profit at 2.5/12 or $20,833 for the 24-week covered period. For the 8-week covered period, it is capped at 8/52 of net profit or $15,385.

d. General Partners are capped at the “lesser of” 2019 net earnings from self-employment reduced by section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties multiplied by 92.35% at 2.5/12 or $20,833 for the 24-week covered period. For the 8-week covered period, it is capped at 8/52 of the self-employment earnings calculation.

*If your calculation is $100,000 or higher, you will automatically be capped at $20,833 or $15,385, depending on the covered period used regardless of your business entity.

  1. You will be able to apply for loan forgiveness after your funds are all used. This means you could apply for forgiveness during the covered period or shortly thereafter. You will not need to wait until 12/31/20 to file your loan forgiveness application. As soon as we have more guidance, we will let you know.
  2. There are two exemptions that could help if full time equivalent (FTE) employees in your practice on 12/31/20 will not equal the FTE level from 2/15/20.

a. Exemption 1 – You are unable to rehire individuals that were employed on 2/15/20, and you are unable to hire similar qualified employees for unfilled positions on or before 12/31/20.

Steps to take:

  • Document all of the following in writing:
    • A written offer to restore the reduced hours of the employee back to the same wage earned and hours worked by that employee in the last pay period prior to the reduction in hours.
    • A written record showing the offer was rejected.
    • A written record of efforts to hire a similarly qualified individual.
  • Inform your applicable state unemployment insurance office of any employee who rejects a rehire offer. It is important to report the employee within 30 days of the employee’s rejection of the offer. Here is the link to find where to report the employee:
  • Exemption 2 – You are unable to return to the same level of business activity that you were at as of 2/15/20 due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director or the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period 3/1/20 and ending 12/31/20 related to the maintenance of standards of sanitation, social distancing, or any other worker or customer safety requirement related to Covid-19. This includes any state or local regulations released including shutdown orders due to the guidance given from the three federal agencies.

Steps to take:

  • Document “why” your reduction in business activity during the covered period stems directly or indirectly from compliance with COVID Requirements or Guidance that ultimately affects the number of FTE needed.
  • Keep copies of applicable COVID Requirements or Guidance for each business location (e.g., shutdown orders or regulations given for safety measures that have ultimately affected your business volume).
  • Also, document any relevant financial records to back this up (e.g., appointment scheduling, production/collection reports, financial statements).
  1. Once you apply for loan forgiveness, your lender has 60 days to review the application and required documentation for approval. The lender will then send the application and documentation to the SBA. The SBA has 90 days to review and approve before your loan is deemed forgiven. Remember, the EIDL Grant will be subtracted out of the amount forgiven by the SBA upon review and you will owe this amount back to the lender.

We will continue to update you as more guidance is released. Please let us know if you have any questions on the PPP loan guidelines. We hope you continue to stay safe and healthy.

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