SBA Makes Further Changes To PPP Rules In August 4th FAQs

On August 4th, the SBA released further guidance on PPP program questions after consultation with the Department of Treasury. The guidance was provided to supplement the PPP Interim Final Rules that were reviewed by my article posted here.

These FAQs provide further disappointment for small business owners who would otherwise be able to receive forgiveness for what they pay themselves for services rendered, but do not prevent compensation paid to related parties, such as a spouse, to be counted.

We will be further dissecting and analyzing these pronouncements, and will schedule and present a 30-minute webinar on this in the near future. You can email info@gassmanpa.com to be registered for the webinar or a free replay by simply putting “FAQ Webinar” in the RE: line.

Compensation Limitation For Owners Applies Cumulatively Across All Businesses

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These rules provide that the maximum amount of compensation that can be counted towards forgiveness for an individual with any ownership interest in an S corporation, C corporation, partnership or sole proprietorship (Schedule C business) cannot exceed the lesser of $20,833 or 20.833% of their 2019 compensation, and this cap applies cumulatively to all companies that the owner/employee is paid by. The allocation of this will be as selected by the borrower companies.

This puts significant pressure on small businesses to have at least 60% of loan amounts spent on combined payroll of both owners and non-owner employees, and is a significant limitation that was not contemplated in the original CARES Act.

The $20,833 / 20.833% presumes a “Covered Period” of 10.6 weeks or more. A borrower that elects to use an 8 week Covered Period will be limited to the lesser of $15,385 or 15.385%.

Health Insurance and Retirement Plan Expenses Are Not Included in the Compensation Cap for Owner-Employees, But Are Subject to Additional Limitations

These new rules clarify that health insurance costs will not be added to compensation for S corporation employees that own at least 2% in the business, and that health insurance costs paid for family members of such 2% or more owner/employees will not be counted. It appears that health insurance costs for owner-employees of S corporations who own less than 2% can be counted in addition to the compensation. S corporations are also eligible for loan forgiveness for unemployment and state income taxes (“employer state and local taxes…assessed on their compensation”), “and for employer retirement contributions…capped at the amount of 20.833% of their 2019 employer retirement contributions.”

C corporations can receive forgiveness on the employee shareholder’s compensation based upon the same 20.833% rule, and can also include state unemployment and income taxes (all state and local taxes assessed on compensation), and all corporate contributions for their employee health insurance.

C corporation forgiveness for employer retirement contributions will also be limited to 20.833% of 2019 employer retirement contribution.

In a separate section the FAQs indicate that “forgiveness is not provided for employer contributions for retirement benefits [and group health benefits] accelerated from periods outside the Covered Period or Alternative Covered Period.”

It is not clear what is meant by “accelerated from” and this may mean that retirement plan contributions made during the Covered Period that are attributable to retirement plan obligations accrued between January 1, 2019 and the last day of the Covered Period can be forgiven if paid during that time period, but that prepayments of retirement plan contributions outside of the Covered Period will not count.

Transportation Costs Gets a Definition

The FAQs address the definition of “Covered Utility Payments” and what is meant by the language “Payment for a service of the distribution of …transportation” by indicating that “transportation” refers to “transportation utility fees assessed by state and local governments.” This apparently means that transportation of anything other than utilities will not count as a forgivable expense, although “gas” is included as a utility and previous pronouncements have indicated that expenses for “gas you use driving your business vehicle” could be forgiven.

Guidance on Calculation for Reduction of Loan Forgiveness if Wages/Salary of an Employee is Reduced by More than 25%

The FAQs also address what will be counted in determining whether there has been more than a 25% reduction in an employee’s hourly or salary wages, which is important because a reduction exceeding the 25% threshold causes complete loss of forgiveness for such excess amount.

Benefits will not be considered for this purpose, because the borrower “could only take into account decreases in salary or wages.” It is unclear if tips paid to restaurant employees will be considered in the calculation for reduction of employee wages, so that a restaurant owner may have to make up for lost tips in order to avoid a more than 25% reduction in total wages.

Interest Accrues But Not Owed on Portion of Loan that is Forgiven

The FAQs make clear that while interest accrues from the date that the loan is received, the borrower will only be responsible for paying the accrued interest on loan amounts that are not eventually forgiven. The FAQs specifically provide that “if the loan is fully forgiven then the borrower is not responsible for any payments,” and that “the borrower is responsible for paying the accrued interest on any amount of the loan that is not forgiven.”

Special thanks to Brandon Ketron, CPA, J.D., LL.M. (and Ph.D. in PPP) for explaining much of this to me on short notice today.

Also, thanks to our readers who send us questions and suggestions for improvement of our work in this area.

Our law clerks prepared the following chart, which we will refine as we further study and interpret these rules.

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