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60 Questions Answered on the PPP Loan and Forgiveness Program, including the new H.R. 7010 Law

On June 5th, H.R. 7010 was signed into law, creating several changes to the Paycheck Protection Program (PPP). So SCORE Rhode Island conducted a ReStart RI webinar highlighting the recent changes.  Here is a brief recap:

  1. The PPP loan covered period, which is the period used to calculate forgiveness, has been extended from 8 to 24 weeks.  The covered period starts on the date you receive your PPP loan proceeds and now ends 24 weeks later or on December 31, 2020, whichever comes first. This change will make it easier for small businesses to maximize their forgiveness amount.
     
  2. H.R. 7010 provides more exceptions to the FTE reduction adjustments. If a business can document its inability to rehire employees and/or hire replacements, there will be no FTE reduction adjustment required for those employees.  In addition, if you cannot return to the same levels of business activity as compared to February 15th and before, due to Covid-19 regulations from HSS (Department of Health and Human Services), CDC (Centers for Disease Control and Prevention) or OSHA (Occupational Safety and Health Administration), then there will be no FTE reduction adjustment required for those employees.
     
  3. H.R. 7010 also moves the date to avoid the salary/hourly wage reduction and FTEs reduction adjustments from June 30th to December 31st.  If by December 31st your business has restored your employees’ salary and hourly wage rates and FTEs levels to the same levels as before February 15th, you avoid those adjustments.
     
  4. H.R. 7010 changes the split between payroll and non-payroll costs from 75/25 to 60/40. 
     
  5. H.R. 7010 allows borrowers with loan forgiveness to defer their employer’s share of Social Security 2020 tax payments to two equal installments due in December 2021 and 2022.

In preparation for the webinar, panelists Bill Welsh, David Lucier and Bill Cunningham prepared a list of questions and answers regarding the PPP loan and forgiveness program and the Economic Injury Disaster Loan Emergency (EIDL) advance and loan programs.  We have indicated answers that have changed as a result of H.R. 7010 by marking them as “NEW”

The information provided in this blog does not constitute legal, tax or accounting advice, but is designed to provide a current understanding of the Paycheck Protection Plan loan and forgiveness program. You should rely on the guidance provided by the SBA and US Treasury Department, advice from you CPA or attorney, and instructions from your bank.  This blog has not been approved by SCORE or the SBA.

PPP Loan Forgiveness Application

General:

  1. To whom do I submit my PPP Loan Forgiveness Application? You should submit your PPP Loan Forgiveness Application to the bank that issued your PPP loan.
  2. NEW Is there a deadline for me to submit my PPP Loan Forgiveness Application? While there doesn’t appear to be a published deadline on the submission of your PPP loan forgiveness applications, borrowers will be required to start making payments of principal, interest and fees on the unforgiven portion of their PPP loan beginning on the date not earlier than 10 months after the last day of the covered period. This would indicate that borrowers should filed their forgiveness applications within 10 months after the last day of your covered period.
  3. Who reviews and approves my PPP Loan Forgiveness Application?  Your bank, which issued your PPP loan, will complete an initial review and then will submit your application to the SBA for a final review and approval of your PPP Loan Forgiveness Application.
  4. How long does my bank have to review and approve my PPP Loan Forgiveness Application? Your bank has 60 days to review and approve or deny your forgiveness application.  If approved, the bank must submit your forgiveness application to the SBA for final review and approval.
  5. How long does the SBA have to review and approve my PPP Loan Forgiveness Application?  The SBA has 90 days to review and approve or deny your PPP Loan Application.
  6. If my bank and the SBA can take up to 5 months to review and approve my PPP Loan Forgiveness Application, will the interest accrued related to the forgiveness portion of my PPP Loan Forgiveness Application be forgiven?  Yes. Interest will begin accruing from the date you received the loan proceeds.  Accrued interest related to the approved forgiveness portion of your PPP loan will be forgiven. 
  7. NEW If a portion of my PPP loan is not forgiven should I return the unforgiven amount immediately to my bank?  The minimum maturity date of the unforgiven amount of your PPP loan is 5 years.  Whether or not you prepay the unforgiven loan balance before five years is up to you.  It is important to remember that the PPP loan is a 1% loan.

Independent Contractors/Sole Proprietor:

  1. As a sole proprietor (independent contractor), how do I apply for loan forgiveness? You should complete the PPP Loan Forgiveness Application and the PPP Schedule A.  Add the amounts paid to the owner-employee or self-employed individuals or general partners—to Line 9 of the PPP Schedule A. 
     
  2. How do I document payments to myself during the covered period?  We recommend that you document payments made through checks or electronic payments payable to the owner-employee(s).
     
  3. If I have an LLC that has elected to be taxed as an S-Corp, should I follow rules for an LLC or an S-Corp? You should follow the rules of an S-Corp and pay your owner-employees through your payroll system.

Covered Payroll Expenses:

  1. Is there a cap on the annualized salary/cash compensation for employees? Yes.  The annualized cash compensation of each employee has a cap of $100,000.
  2. Is there a cap on owner-employee salary/cash compensation during the Covered Period?  Yes. Owner-employees are capped by the lessor of 15.38% of their 2019 employee cash compensation or $15,385 (8/52*$100,000).  In addition, employer’s retirement and health care contributions made on behalf of an owner-employee’s is limited to their 2019 employer’s contribution amounts.
  3. NEW What percentage of my total forgiveness has to be covered payroll costs? This was changed to 60%.
  4. Can the forgiveness amount include 100% of covered payroll costs?  Yes.
  5. If my employee is collecting partial unemployment and works for me part-time, can I include their payroll costs in my calculation? We believe that if your employment arrangement with the employee has not changed during covered period as compared to their pre-February 15th salary or hourly wage rate, the number of hours worked during the covered period is consistent with their hours in first quarter 2020, and their unemployment compensation is unrelated to your business, you should be able to include their cash compensation when calculating your forgiveness amount.  However, we recommend that you review this issue with your CPA and with your bank before submitting your forgiveness application.
  6. Can I include 401k employer-match payments in my calculation of covered payroll costs? Yes.
  7. Can I include bonuses paid to my employees in my calculation of covered payroll costs? Yes. However, your PPP loan application amount was based on 2.5 times your monthly payroll amount or 8 weeks of payroll.  Now that the covered period has been extended to 24 months, you may want to revisit your compensation strategy (for the covered period) to do what’s best for both your business and employees.
  8. If I laid-off employees and they didn’t accept my rehire offer, can I hire new employees and include them in my calculation of covered payroll costs? Yes.

Covered Non-Payroll Expenses:

  1. NEW What percentage of my total forgiveness can be non-payroll costs? You can use 40% of your total forgiveness amount for non-payroll costs.  If your PPP loan was $100,000 and your covered payroll costs during the covered period was $60,000, then you can use $40,000 for non-payroll costs.  However, if your covered payroll costs during covered period were only $30,000, then you can only use $20,000 for non-payroll costs. The balance, which isn’t forgiven, will remain an outstanding loan to be repaid based on the terms of the loan.
  2. What is included in non-payroll costs? Payments of interest on any business mortgage obligation on real or personal property, rent obligations on real or personal property or utility costs. The underlying obligation must be dated before February 15, 2020. 
  3. What is included in utility costs? Electricity, gas, water, transportation, telephone or internet access for which the service started before February 15, 2020.
  4. What is covered under transportation costs? We believe this includes allowable deductible expenses for business travel as defined by the IRS.

Covered Period:

  1. What does covered period mean? The covered period is when borrowers are generally eligible for forgiveness for covered payroll and non-payroll costs.
  2. NEW How long is the covered period? The covered period has been extended from 8 weeks to 24 weeks.
  3. When does the covered period start? The first day of the covered period is the date when the PPP loan proceeds are deposited into your bank account.
  4. NEW Can I still elect to use the old 8-week covered period? Yes. If you received your PPP loan proceeds before June 5th, you may elect to use the 8-week covered period.
  5. Is my PPP loan forgiveness non-taxable income? Yes.
  6. Are the covered expenses used to calculate my PPP loan forgiveness deductible expenses for tax purposes?  The IRS current position is that covered expenses that are used for forgiveness are not deductible expenses for tax purposes.
  7. What if my payroll period doesn’t start when I receive my PPP loan proceeds?  The SBA is allowing borrowers with a weekly or biweekly payroll schedule to elect the first day of their first pay period following the date they receive their PPP loan proceeds.

FTE Reduction Adjustment:

  1. What is an FTE? An FTE is an average full-time equivalency based on 40 hours. Example: if you have three employees—Jane who works 40 hours per week, Jose who works 20 hours per week, and Preston who works 20 hours per week.  Total FTEs equals 2 (40 + 20 +20) / 40.
  2. If I work 60 hours per week, does that mean I’m a 1.5 FTE?  No.  Weekly hours are capped at 40 hours per employee.  
  3. Do I calculate an FTE based on 30 hours or 40 hours? For purposes of calculating an FTE for the PPP loan forgiveness, you must use 40 hours.
  4. Is there an alternate way to calculate FTEs? Yes. The simplified method allows you to assign 1.0 for employees who work 40 hours or more, and 0.5 for employees who work fewer hours may be used at the election of the borrower.
  5. What if my FTE calculation differs from the number of employees that I listed on my PPP loan application?  That’s okay. The number of employees that was included on your PPP loan application was not an FTE calculation but a total of your fulltime and part-time employees.
  6. The number of my employees fluctuates during the year, what base period should I use? Borrowers have three options in selecting the chosen reference period:
    • February 15, 2019 to June 30, 2019
    • January 1, 2020 to February 29, 2020
    • Seasonal businesses: either of the two preceding periods for a consecutive 12-week period between May 1, 2019 and September 15, 2019.
  7. NEW What happens to my FTE calculation if I can’t rehire employees that I laid off? If a business is able to document the inability to rehire individuals who were employees on February 15, 2020 AND the inability to hire similarly qualified replacement employees, then the related FTE will not impact the amount of loan forgiveness. This adjustment is recorded on the PPP Schedule A Worksheet under FTE Reduction Exceptions.
  8. NEW What happens to my FTE calculation if I can’t find replacements employees? If a business is able to document the inability to rehire individuals who were employees on February 15, 2020 AND the inability to hire similarly qualified replacement employees, then the related FTE will not impact the amount of loan forgiveness. This adjustment is recorded on the PPP Schedule A Worksheet under FTE Reduction Exceptions.
  9. What happens if I can’t open my business due to government regulations? If a business is able to document the inability to return to the same level of business activity at before February 15, 2020 due to compliance requirements or guidance related to Covid-19 that was issued by HHS, CDC or OSHA, then the related FTE will not impact the amount of loan forgiveness. This adjustment is recorded on the PPP Schedule A Worksheet under FTE Reduction Exceptions.
  10. If my State government prohibits me from opening, does that impact my calculation of FTEs? We believe that unless State compliance requirements or guidance related to Covid-19 is based on HHS, CDC or OSHA compliance requirements or guidance, it should not be used to calculate your FTE exceptions.

Salary/Hourly Wage Reduction Adjustment:

  1. Can I give my employee a salary or hourly wage increase during the covered period?  Yes. For purposes of calculating your PPP loan forgiveness, there is a cap of $15,385 for the covered period for all employees.  For owner-employees, there is a cap based on the lessor of $15,385 or 15.38% of their 2019 cash compensation.
     
  2. Is the amount of forgiveness reduced if an employee’s salary or hourly wage rate is reduced by 25%?  No.
     
  3. Is the amount of forgiveness reduced if an employee’s salary or hourly wage rate is reduced by more than 25%?  Yes.
     
  4. NEW If an employee’s salary or hourly wage rate is restored by December 31, 2020 to first quarter 2020 levels, will that eliminate the salary/hourly wage reduction adjustment? Generally, Yes. There is a three-step calculation to determine the amount of the salary/hourly wage reduction adjustment that may impact your adjustment amount.

PPP Loan Application

  1. NEW What is the maturity date of my PPP loan that isn’t forgiven? The minimum maturity date of the unforgiven amount of your PPP loan is 5 years.
  2. NEW When do monthly principal and interest payments begin on my PPP loan? Borrowers will be required to start making payments of principal, interest and fees on the unforgiven portion of their PPP loan beginning on the date not earlier than 10 months after the last day of the covered period.
  3. NEW When do I need to pay my 2020 Federal payroll taxes? The employer’s share of Social Security 2020 tax payments can be deferred to two equal installments due in December 2021 and 2022.
  4. Can I apply for an additional PPP Loan? No.  At the current time, the Paycheck Protection Program allows only one loan per entity.
  5. As the owner of my business, am I considered an employee? Yes.
  6. Are there any fees or penalties associated with repaying my PPP loan early? No. 
  7. If the approved amount of my PPP loan application included only my monthly payroll amount, but excluded my partnership compensation, can I resubmit my PPP loan application? Yes. All PPP lenders are authorized to increase existing PPP loans to partnerships.
  8. Are there still available PPP loan funds?  Yes. Contact a SCORE Mentor and we will work with the SBA to connect you with a lending bank.

EIDL Advance

  1. I received $5,000 in my bank account, is that amount related to my EIDL advance or my EIDL loan? Generally, amounts between $1,000 and $10,000 deposited into your account by the SBA will be your EIDL advance.  You will be required to sign loan documents related to any EIDL loan before those funds are deposited into your account.
  2. Is the amount of my EIDL advance deducted from the PPP loan forgiveness amount? Yes. The EIDL advance will be deducted from the PPP forgiveness amount by the SBA.
  3. If my EIDL advance is greater than the total PPP loan forgiveness amount, do I have to repay the remaining portion of my EIDL advance? No.
  4. Is my EIDL advance non-taxable income? Yes.
  5. Do I have to repay my EIDL advance? No.

EIDL Loan

  1. What’s the difference between an EIDL advance and an EIDL loan? The EIDL advance is non-taxable income that is completely separate from an EIDL loan.  The EIDL advance will be deducted from the PPP loan forgiveness amount by the SBA, if applicable.  The EIDL loan is a SBA loan that must be repaid by the maturity period of up to 30 years.
  2. Can all or a portion of my EIDL Loan be forgiven? No.
  3. Can I have an EIDL Loan and a PPP Loan? Yes.
  4. Can my bank issue an EIDL loan?  No.  All EIDL loans are issued by the SBA.

The following are links to SBA and US Treasury Sources of Information on the PPP Loan and Forgiveness Program.  Please note that these documents have not been updated with the changes related to H.R. 7010 except when marked as NEW.

As always, SCORE volunteers are available to assist you. Feel free to reach out to your local SCORE chapter at www.score.org or call 401-226-0077.

For more than 50 years, SCORE has helped more than 11 million aspiring entrepreneurs and small business owners through mentoring and business workshops. More than 11,000 volunteer business mentors in more than 300 chapters serve their communities.

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About the Author(s)

 Bill  Cunningham

Bill Cunningham is a SCORE Rhode Island mentor and workshop instructor, focusing on business models, business planning, and QuickBooks Online. He is a CPA with more than 30 years of working in the television industry.

60 Questions Answered on the PPP Loan and Forgiveness Program, including the new H.R. 7010 Law