PPP Update – New SBA FAQsAugust 16, 2020 | Category: Asset Protection, Corporate and Taxation, Estate Planning and Probate, News
After more than a month of silence, on the part of the SBA, they issued new FAQs on August 4, which provided some additional guidance and clarification, most of which was not borrower friendly! Below are the highlights from the new FAQs. Following the highlights is a deeper dive into specific issues addressed, relative to forgiveness for health insurance and retirement benefits and owner compensation, whether owners of a C Corporation, S Corporation, Partnership, as well as for those self-employed.
The highlights are as follows:
1. Scanned Copies, E-Signatures and E-Consents allowed to be used. This is intended to simplify the documentation requirement part of the forgiveness application, especially in light of the ongoing pandemic.
2. Interest is only owed on portion of loan that is not forgiven, and payments are not required to be made until SBA remits the forgiveness amount to the lender. It is expected that banks will have 90 days to review forgiveness application and, thereafter, the SBA will have 120 days to determine forgiveness and submit the proceeds subject to forgiveness to the bank.
3. Forgiveness not permitted for healthcare and retirement benefits accelerated from periods outside of the Covered Period.
4. Owner compensation limitation ($20,833, based on a 24-week forgiveness period) applies cumulatively across all businesses. This is a significant limitation as, previously, borrowers who were owners of various businesses were of the belief that the owner compensation limitation applied on a per business/entity basis!
5. Health insurance costs for 2% or more shareholders in an S-Corporation and their family members is not counted towards forgiveness. Less than 2% shareholders should be able to include health insurance costs.
6. Forgiveness for an owner’s retirement plan contributions are limited to 20.833% of the 2019 contribution amount. Previously, the only indication of such a limitation was in the SBA E-Z Forgiveness Application. As a result, many of us following previous SBA guidance thought this was merely an error, on their part. Now we know it was not! As a result, many business owners, with 2019 large retirement contributions, who made such contributions during the covered period, in expectation of same increasing their loan forgiveness, will only be able to include a small portion of such contributions for such purposes!
7. Compensation for partners in a partnership is only eligible for loan forgiveness if payments to partners are actually made during the Covered Period and is not automatically based on K-1 income.
8. Forgiveness permitted for rent paid under recently renewed leases and interest paid on refinanced mortgages if relationship was in place prior to February 15.ighlights from the August 4, 2020 SBA FAQs are as follows:
Highlights from the August 4, 2020 SBA FAQs are as follows:
Question: What expenses for group health care benefits will be considered payroll costs that are eligible for loan forgiveness?
Answer: Employer expenses for employee group health care benefits that are paid or incurred by the borrower during the Covered Period or the Alternative Payroll Covered Period are payroll costs eligible for loan forgiveness. However, payroll costs do not include expenses for group health care benefits paid by employees (or beneficiaries of the plan) either pre-tax or after tax, such as the employee share of their health care premium. Forgiveness is not provided for expenses for group health benefits accelerated from periods outside the Covered Period or Alternative Payroll Covered Period. If a borrower has an insured group health plan, insurance premiums paid or incurred during the Covered Period or Alternative Payroll Covered Period qualify as “payroll costs,” as long as the premiums are paid during the applicable period or by the next premium due date after the end of the applicable period. As noted, only the portion of the premiums paid by the borrower for coverage during the applicable Covered Period or alternative Payroll Covered Period is included, not any portion paid by employees or beneficiaries or any portion paid for coverage for periods outside the applicable period.
Question: What contributions for retirement benefits will be considered payroll costs that are eligible for loan forgiveness?
Answer: Generally, employer contributions for employee retirement benefits that are paid or incurred by the borrower during the Covered Period or Alternative Payroll Covered Period qualify as “payroll costs” eligible for loan forgiveness. The employer contributions for retirement benefits included in the loan forgiveness amount as payroll costs cannot include any retirement contributions deducted from employees’ pay or otherwise paid by employees. Forgiveness is not provided for employer contributions for retirement benefits accelerated from periods outside the Covered Period or Alternative Covered Period.
Question: How is the amount of owner compensation that is eligible for loan forgiveness determined?
Answer: The amount of compensation of owners who work at their business that is eligible for forgiveness depends on the business type and whether the borrower is using an eight-week or 24-week Covered Period. In addition to the specific caps described below, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at $20,833 per individual in total across all businesses in which he or she has an ownership stake. For borrowers that received a PPP loan before June 5, 2020 and elect to use an eight-week Covered Period, this cap is $15,385. If their total compensation across businesses that receive a PPP loan exceeds the cap, owners can choose how to allocate the capped amount across different businesses. The examples below are for a borrower using a 24-week Covered Period.
C Corporations: The employee cash compensation of a C-corporation owner-employee, defined as an owner who is also an employee (including where the owner is the only employee), is eligible for loan forgiveness up to the amount of 2.5/12 of his or her 2019 employee cash compensation, with cash compensation defined as it is for all other employees. Borrowers are also eligible for loan forgiveness for payments for employer state and local taxes paid by the borrowers and assessed on their compensation, for the amount paid by the borrower for employer contributions for their employee health insurance, and for employer retirement contributions to their employee retirement plans capped at the amount of 2.5/12 of the 2019 employer retirement contribution.
S Corporations: The employee cash compensation of an S-corporation owner-employee, defined as an owner who is also an employee, is eligible for loan forgiveness up to the amount of 2.5/12 of their 2019 employee cash compensation, with cash compensation defined as it is for all other employees. Borrowers are also eligible for loan forgiveness for payments for employer state and local taxes paid by the borrowers and assessed on their compensation, and for employer retirement contributions to their employee retirement plans capped at the amount of 2.5/12 of their 2019 employer retirement contribution. Employer contributions for health insurance are not eligible for additional forgiveness for S-corporation employees with at least a 2% stake in the business, including for employees who are family members of an at least 2% owner under the family attribution rules of 26 U.S.C. 318, because those contributions are included in cash compensation.
Self-employed Schedule C (or Schedule F) filers: The compensation of self-employed Schedule C (or Schedule F) individuals, including sole proprietors, self-employed individuals, and independent contractors, that is eligible for loan forgiveness is limited to 2.5/12 of 2019 net profit as reported on IRS Form 1040 Schedule C line 31 (or 2.5/12 of 2019 net farm profit, as reported on IRS Form 1040 Schedule F line 34). Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness; health insurance and retirement expenses are paid out of their net self-employment income. If the borrower did not submit its 2019 IRS Form 1040 Schedule C (or F) to the Lender when the borrower initially applied for the loan, it must be included with the borrower’s forgiveness application.
General Partners: The compensation of general partners that is eligible for loan forgiveness is limited to 2.5/12 of their 2019 net earnings from self-employment that is subject to self-employment tax, which is computed from 2019 IRS Form 1065 Schedule K-1 box 14a (reduced by box 12 section 179 expense deduction, unreimbursed partnership expenses deducted on their IRS Form 1040 Schedule SE, and depletion claimed on oil and gas properties) multiplied by 0.9235. Compensation is only eligible for loan forgiveness if the payments to partners are made during the Covered Period or Alternative Payroll Covered Period. Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness. If the partnership did not submit its 2019 IRS Form 1065 K-1s when initially applying for the loan, it must be included with the partnership’s forgiveness application.
LLC owners: LLC owners must follow the instructions that apply to how their business was organized for tax filing purposes for tax year 2019, or if a new business, the expected tax filing situation for 2020.