PPP FAQ — Eligibility, Application, Loan Forgiveness + More

As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the government and Small Business Administration (SBA) made billions available to small businesses for emergency funding via Paycheck Protection Program (PPP) loans. Some of the rules regarding the PPP program were updated with the Paycheck Protection Program Flexibility (PPPF) Act. The largest incentive is that 100% of this loan could be forgiven.

With several iterations of PPP guidance from the Department of the Treasury and the SBA, we’ve compiled answers to commonly asked questions.

Please note that Aldrich is providing updated information as it becomes available. Due to the nature of the emerging and rapidly evolving information from government and non-government relief programs, some requirements and offerings may change before they are listed here. Please consult with your Aldrich Advisor for the most current details.

Jump to:

• General Loan Items
• Forgiveness
• Payroll Costs
• Business Owners + Self-Employed
• Nonpayroll Costs

When do I have to start making payments on my PPP loan?

Borrowers do not have to make any loan payments until the SBA makes a final determination on the forgiveness amount. This assumes the borrower submits the loan forgiveness documentation within ten months of the end of the Covered Period.

The lender is required to notify the borrower of the due date of the first loan payment if any are needed.

How long do I have to spend the PPP funds?

For loans received before the PPPF Act enactment on June 5, 2020, businesses have the option to spread the funding across a 24-week period or use the original eight-week period. For new loans after enactment, the covered period will be 24 weeks. In either case, the covered period cannot extend later than December 31, 2020.

How long do I have to repay my PPP loan?

For loans received on or after June 5, 2020, the term will be for a minimum period of five years for any amounts not forgiven. Loans funded before June 5, 2020 must negotiate with their bank to extend the term from the original two-year period to the newer five-year period. Looking at the original loan document will help confirm the term of the loan received if a borrower is unsure.

Does my PPP loan accrue interest?

Interest will accrue from the original disbursement date to the payment date on any portion of the loan not forgiven. So, if a loan is fully forgiven, no interest will be due on the loan. If a loan is paid back, either partially or wholly, then there will be interest on the amount paid back.

What is a good-faith certification?

The SBA and Department of Treasury determined that the safe harbor threshold for making a good-faith certification is $2 million. If the borrower received less than the $2 million, the borrower will be deemed as having demonstrated the necessity of the loan without any further review or any certification. The good-faith certification requires borrowers with over a $2 million loan to provide additional information that the loan was required. As of November, it appears that the SBA will require an additional form to provide this information.

What’s an Alternative Payroll Covered Period?

The forgiveness instructions permit borrowers with bi-weekly or more frequent payroll schedules to elect an Alternative Payroll Covered Period. Under this method, payroll costs are determined by using the eight-week (or 24-week) period that begins on the first day of the first pay period following the disbursement of PPP proceeds in lieu of the actual loan disbursement date. This may permit borrowers to more easily align payroll and reporting during the eight-week (or 24-week) period and provides an opportunity to include the payroll for employees rehired between the date of disbursement and the first date of the eligible payroll period. The Alternative Payroll Covered Period applies only to payroll costs; therefore, non-payroll costs must use the standard Covered Period beginning with the date of disbursement.

For both the normal Covered Period and Alternative Payroll Covered Period, the payroll needs to be incurred or paid during the period.

When should a business apply for loan forgiveness?

Borrowers have ten months after the last day of their covered period to apply for loan forgiveness. A borrower may apply early for loan forgiveness under the new guidance, but doing so removes a safe-harbor provision that allows borrowers to restore wages by December 31, 2020 and avoid reduced forgiveness amounts. Borrowers may want to discuss the timing of the loan forgiveness application with their tax advisor to determine if there are any tax benefits for deferring the application until the following tax year.

Does receiving a PPP loan affect taxable income for the borrower?

As of December 27, 2020, all PPP-funded expenses are tax-deductible. Previously, the IRS released Revenue Ruling 2020-27 stating that PPP expenses were not deductible on borrowers’ 2020 tax returns because PPP loans are, in spirit, reimbursement of costs and meant to be completely forgiven. Based on the wording in the new bill, the IRS has now issued Revenue Ruling 2021-02 which makes the original ruling moot.

Some states, such as California, have previously determined that such deductions would remain non-deductible at the state level, regardless of any guidance coming from Congress that we now have. Other states may follow suit.

Am I eligible for full loan forgiveness?

For full loan forgiveness eligibility, a business must maintain employee headcount AND compensation levels and the loan amount on eligible expenses

To determine headcount — compare average number Full Time Employees (FTEs) per month between February 15, 2019 and June 30, 2019 or alternatively January 1, 2020 to February 29, 2020.

FTEs are calculated on a 40 hour a week basis with each person capped as one person — relevant for employees who worked overtime. The guidance does provide a simplified calculation to count any employees working on average 40 hours or more as 1.0 FTE and anyone else as 0.5 FTE. The number of FTEs should be calculated the same way for all parts of the application.

To determine compensation level — each employee’s wages compared with the most recent full quarter cannot have dropped more than 25%. Employees with wages over $100K are ignored for this purpose.

If a borrower has had a reduction in headcount or salary, the borrower may benefit from listing on the Forgiveness Application all eligible costs spent during their Covered Period, even if amounts spent are above the amount of the loan.

What items affect the amount of the loan that is forgivable?

If the headcount or compensation level was reduced between February 15, 2020 and April 25, 2020 but is re-established by June 30, there will be no reduction in the loan forgiveness amount. Or if using a 24-week period, by December 31, 2020.

If the borrower received an Economic Injury and Disaster (EIDL) loan and used the proceeds for payroll costs, the PPP loan must be used to refinance the EIDL loan, and proceeds from any cash grant received up to $10,000 on the EIDL loan will be deducted from the loan forgiveness portion amount on the PPL.

After the Covered Period ends, the Borrower will need to submit a request to the lender who is servicing the loan to request forgiveness. The request will include all documents supporting the spending of the funds, number of full-time employees, and compensation levels. The lender will have 60 days to decide on forgiveness.

Can I use the EZ application to apply for loan forgiveness?

The EZ application can be used by borrowers in the following circumstances:

• Self-employed borrowers with no employees
• Employers who have not reduced salaries or wages by more than 25% and maintained FTE headcount
• Employers who have not reduced salaries or wages by more than 25% but due to reductions in business activity resulting from health directives related to COVID-19 were unable to maintain FTE headcount

How should I document payroll costs?

For documentation of payroll costs, the bank account statements or payroll provider reports along with IRS forms for the period can be used. Canceled checks and account statements can be used for health insurance and retirement payments.

What if the borrower has reduced staff or compensation due to COVID-19?

A safe harbor provides that where borrowers reduced their full-time equivalent (FTE) employee level between February 15, 2020 and April 26, 2020, but restore their FTE employee level by June 30, 2020 to the level of FTE employees they had for the payroll period that covered February 15, the loan forgiveness reduction based on FTE count will not apply. Salary or hourly wage reductions of over 25% will still limit forgiveness. For 24-week loans, the date is extended to December 31, 2020.

How much of the loan needs to have been spent on payroll costs?

Originally, 75 percent of the PPP loan funds had to be used to maintain payroll to receive loan forgiveness. The PPPFA, however, amended that ratio to 60 percent.

Can a business defer the employer share of Social Security taxes if received a PPP loan?

PPP loan recipients are eligible to defer the employer’s share of Social Security taxes otherwise due on March 27, 2020 through December 31, 2020 (50% deferrable to December 31, 2021 and balance to December 31, 2022). Deferring the payment of the Social Security taxes may affect the tax-deductibility of those taxes for the 2020 tax year. Consult with your tax advisor for additional guidance.

If I’m self-employed or am an owner-employee, can I use PPP funds to restore my own compensation?

Owner-employees and self-employed payroll replacement is capped across all businesses that an individual has an ownership stake. The cap can be allocated across the businesses in any way that they choose. A normal employee’s wages that are eligible for forgiveness are capped at an annualized rate of no more than $100,000 for cash compensation per year. This cap is a little more involved for the owner-employees and self-employed. Below are additional guidelines on how to calculate the $100,000 cap per entity type.

C Corporation owner-employees: compensation is limited to 2.5/12 of 2019 cash compensation. Retirement contributions are limited to 2.5/12 of 2019 retirement contributions. Eligible taxes and health insurance are eligible with no limits.

S Corporation owner-employees: compensation is limited to 2.5/12 of 2019 cash compensation. Retirement contributions are limited to 2.5/12 of 2019 retirement contributions. Eligible taxes are allowed with no limits. Health insurance, for owners of at least two percent of the company, is not eligible for forgiveness separately and should be included as part of the cash compensation limits.

Partners/Members in Partnerships: compensation is limited to 2.5/12 of 2019 net earnings subject to SE tax. This is computed from 2019 Schedule K-1 Box 14a, reduced by box 12 for Section 179 deduction, and reduced by unreimbursed expenses on form 1040 SE multiplied by 0.9235. No separate health insurance, retirement payments, or eligible taxes can be included.

Are nonpayroll costs eligible for forgiveness?

Nonpayroll costs incurred before the Covered Period but paid during the Covered Period are eligible for forgiveness. For all non-payroll expenses, borrowers will need to provide proof that the agreement/services existed as of February 15, 2020 as well as proof of payment during the covered period. Generally, canceled checks or statements from outside providers showing payments are sufficient for proof of payment.

Proof of agreement being in place before February 15, 2020 can be substantiated by providing invoices or agreements as of that date. Utility bills that have a cut-off after the covered period but are for service during the covered period. A portion of the utility bill for service up to the covered period will be eligible.

Can I use PPP funds to pay off other loans?

Interest on unsecured credit is not eligible for forgiveness, but interest on the secured debt is eligible for forgiveness if it was in place before February 15, 2020. The PPP loan should not be used to payoff the principal of other loans.

What if my debt is refinanced or lease renewed after February 15, 2020, are the expenses still eligible?

Payments on renewed leases or interest on refinanced debt are eligible for forgiveness if the original lease or mortgage was in place prior to February 15, 2020.

Can my eligible rent expenses be paid to a related party?

Rental expenses paid to related entities generally do not qualify for forgiveness.

The entire Aldrich team is monitoring the PPP and SBA updates closely. We’ll be updating our PPP Resource Center diligently to keep you apprised of new requirements and guidance as they are released. If you have any questions about loan forgiveness for your business, reach out to your Aldrich Advisor.

This article was written with the most current information as of January 15, 2021. Please check back for future updates.