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Paycheck Protection Program Loan Forgiveness FAQ

On August 10th, Tompkins Financial hosted a PPP Overview and Loan Forgiveness Application Process webinar. As our professionals emphasized during the live event, the Small Business Administration (SBA) and U.S. Treasury continue to release additional guidance further clarifying the loan forgiveness aspects of the PPP. This FAQ is current through August 13, 2020. Please speak with your internal and external advisors before acting on any information contained below.

About the PPP Loan and Loan Forgiveness

The term - or period - of the PPP loan is stated in your promissory note. A PPP loan term is either two or five years from the date of your note. If your loan was made on or after June 5, 2020, then your loan term is five years. The loan will accrue interest at an annual rate of 1%.
 
No payment is due during the deferral period, which ends on the earlier of:
  • The date when the SBA remits any forgiveness amount to us or determines that the loan is not eligible for forgiveness or;
  • 10 months after the last date of the covered period.
If your loan is forgiven, any interest accrued during the deferral period is eligible for forgiveness.
 
After the deferral period, any balance that is not forgiven (including any accrued interest on the unforgiven portion) will become a term loan with monthly payments due up to the maturity date and with an annual interest rate of 1%. There is no penalty for loan pre-payment.
 
Please refer to the SBA site for more details on the covered period, the term of the loan and other loan forgiveness details.

To make it easier for some businesses to apply for PPP loan forgiveness, the SBA published a new PPP EZ Loan Forgiveness Application Form 3508EZ for borrowers who meet certain requirements. 

The SBA’s “EZ” form allows certain borrowers to use a streamlined forgiveness application, including reduced documentation requirements. 

Borrowers can apply for forgiveness using this form if one of the following is applicable:

  • You are a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of your PPP loan application, and you did not include any employee salaries in the computation of average monthly payroll.
  • You did not reduce annual salary or hourly wages of any employee by more than 25% AND did not reduce the number of full-time equivalent (FTE) employees (or the average paid hours of employees.)
  • You did not reduce annual salary or hourly wages of any employee by more than 25% AND were unable to operate at pre-COVID-19 levels of business activity during the covered period due to compliance with government standards of sanitation, social distancing, or any other safety requirement related to COVID-19.

Borrowers who do not meet the requirements for using Form 3508EZ will apply using the updated PPP Loan Forgiveness Application Form 3508.

 
 
 
 
 
 
 
 

PPP loans, in whole or in part, are eligible for loan forgiveness if funds were used for certain eligible business expenses. If part of the loan is not forgiven, as the borrower you are responsible for repaying the amount not forgiven plus any accrued interest.

 
 
 
 
 
 
 
 
 
 

Eligible expenses (payroll and nonpayroll)

To qualify for loan forgiveness, the funds must be used for eligible costs incurred or paid during a 24-week (168 day) covered period (ending December 31, 2020, at the latest); if you received your loan before June 5, 2020, then you can choose an 8-week (56 day) or 24-week (168 day) covered period.

Costs include:

  • Eligible payroll costs, including compensation to owners and employee benefits;
  • Interest payments on business mortgage obligations on real or personal property, where the mortgage originated before February 15, 2020, (but not any payment of principal or prepayment of interest).
  • Business rent or lease payments for real or personal property, where the rent or lease agreement was in force before February 15, 2020;
  • Business utility payments for a service such as electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020;

At least 60% of your total forgivable amount must be used for allowable payroll costs, and a maximum of 40% can be used for allowable nonpayroll costs.

Eligible payroll costs include the following - if paid or incurred during the covered period or the alternative payroll covered period:

  • Gross salary, gross wages, gross tips, gross commissions, paid leave (vacation, family, medical or sick leave, not including leave covered by the Families First Coronavirus Response Act), and allowances for dismissal or separation;
  • Payments for employer contributions for employee health insurance, including employer contributions to a self-insured, employer-sponsored group health plan, but excluding any pre-tax or after-tax contributions by employees;
  • Payments for employer contributions to employee retirement plans, excluding any pre-tax or after-tax contributions by employees;
  • Payments for employer state and local taxes assessed on employee compensation (such as state unemployment insurance tax), excluding any taxes withheld from employee earnings;

Payroll costs may include bonus and hazard pay, and they may include salaries paid to furloughed employees.

Note this limitation: For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed a pro-rated annual salary of $100,000. 

 

This means the most you can claim for cash compensation is $46,153 for any individual employee during the 24-week covered period selected (or $15,385 if you select the 8-week period).

Payroll costs must be for employees whose principal place of residence is in the United States. Payments to independent contractors are also not eligible. 

Owner-employees and self-employed individuals are eligible for loan forgiveness based on their compensation. For self-employed individuals filing 1040 Schedule C, you are capped based on 2019 net profit. For general partners, you are capped by the amount of your 2019 net earnings from self-employment (reduced by certain adjustments) multiplied by 0.9235.

For borrowers with a 24-week covered period, the maximum amount of loan forgiveness you can claim as compensation per individual owner or partner is the lower of 2.5 months of compensation earned in 2019 or $20,833, which is the 2.5-month equivalent of $100,000 per year. If you choose an 8-week covered period, the maximum is set at $15,385, which is the 8-week equivalent of $100,000.

Owner-employees and self-employed individuals are eligible for loan forgiveness based on their compensation. For self-employed individuals filing 1040 Schedule C, you are capped based on 2019 net profit. For general partners, you are capped by the amount of your 2019 net earnings from self-employment (reduced by certain adjustments) multiplied by 0.9235.

For borrowers with a 24-week covered period, the maximum amount of loan forgiveness you can claim as compensation per individual owner or partner is the lower of 2.5 months of compensation earned in 2019 or $20,833, which is the 2.5-month equivalent of $100,000 per year. If you choose an 8-week covered period, the maximum is set at $15,385, which is the 8-week equivalent of $100,000.

As of August 4, 2020, in Frequently Asked Questions (FAQs) on PPP Loan Forgiveness, the SBA said, no. Payments of interest on business mortgages on real or personal property (such as an auto loan) are eligible for loan forgiveness. Interest on unsecured credit is not eligible for loan forgiveness because the loan is not secured by real or personal property. Although interest on unsecured credit incurred before February 15, 2020 is a permissible use of PPP loan proceeds, this expense is not eligible for forgiveness.

 
 
 
 
 
 

To qualify for loan forgiveness, the funds must be used for eligible costs incurred or paid during a 24-week (168 day) covered period (ending December 31, 2020, at the latest); if you received your loan before June 5, 2020, then you can choose an 8-week (56 day) or 24-week (168 day) covered period. 

You can seek forgiveness for payroll costs for the covered period based on either of the following, at your election:

  • Covered period: The period that begins on the date you received the PPP loan proceeds; or
  • Alternative payroll covered period: If you have a biweekly or more frequent payroll schedule, the period that begins on the first day of the first pay period after you received the PPP loan proceeds.

Payroll costs for the covered period must be paid or incurred during the period to be eligible. If payroll costs are incurred during the last pay period within the covered period selected but paid after the end of the covered period selected (but on or before the next regular payroll date), these payroll costs will still be eligible for forgiveness. (For example, this may happen when your pay cycle ended on the payday of Friday, October 2, but the covered period selected ended on October 1.)

Yes, you must exclude the following:

  • Compensation to an employee whose principal place of residence is outside of the United States;
  • Compensation to an independent contractor (1099). Independent contractors do not count as employees for PPP;
  • Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (FFCRA) (Public Law 116–127)

Also, the compensation of any individual employee is capped at an annual salary of $100,000. 

For borrowers with a 24-week covered period, the maximum amount of loan forgiveness you can claim as compensation per individual owner or partner is the lower of 2.5 months of compensation earned in 2019 or $20,833, which is the 2.5-month equivalent of $100,000 per year. If you elect an 8-week covered period, the maximum is set at $15,385, which is the 8-week equivalent of $100,000. 

Remember, to be eligible for 100% loan forgiveness, at least 60% of the PPP loan must be used for eligible payroll costs.

Eligible nonpayroll costs include:

  • Interest payments on business mortgage obligations on real or personal property, where the mortgage originated before February 15, 2020, (but not any payment of principal or prepayment of interest.).
  • Business rent or lease payments for real or personal property, where the rent or lease agreement was in force before February 15, 2020;
  • Business utility payments for a service such as electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

To be eligible, nonpayroll costs must be paid during the covered period, or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period. (For nonpayroll costs, you must use the covered period and not the alternative covered period.)

For covered mortgage obligations, prepayments of interest and principal payments are not eligible for forgiveness.

Nonpayroll costs cannot exceed 40% of the loan forgiveness amount.

For a self-employed, independent contractor or sole proprietor, you must have claimed - or be entitled to claim - a deduction for these nonpayroll expenses on your 2019 Form 1040 Schedule C to claim them as expenses eligible for loan forgiveness.

Business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

 
 
 
 
 
 
 

Potential reductions in loan forgiveness and details on Safe Harbor

Forgiveness is based in part on maintaining employees and maintaining wages paid, or rehiring and reinstating employee wage levels, if previously reduced. To maximize forgiveness, you may choose to rehire and restore wages sooner to increase eligible payroll costs that fall into the covered period. 

If you had a reduction in full-time equivalency (FTE) or wage level, your forgiveness amount may be reduced. You may be exempt from these reductions if you restored FTE and wage levels no later than December 31, 2020. These two types of reductions and exemptions, including Safe Harbors are explained in the Safe Harbor FAQ.

You may also be exempt from these reductions if you can document that you are not able to rehire employees or hire replacement employees for unfilled positions or cannot return to normal business activities because of COVID related safety requirements.

Full-time equivalency (FTE) employee means an employee who works 40 hours or more, on average, each week. For part-time employees who work less than 40 hours, calculate their FTE as a proportion of 40 hours. For example, if an employee worked 32 hours per week on average, the employee should be counted as 0.8 FTE. Alternatively, SBA offers a simplified method that assigns all part-time employee as 0.5 if that is preferable.

Only employees whose place of residence is in the United States should be included.

When counting FTE reductions, you will not be penalized for: 

  • A position for which you made a good-faith, written offer to rehire an employee during the covered period selected and the offer was rejected – subject to certain requirements;
  • An employee who was fired for cause, voluntarily resigned, or voluntarily requested a reduction of their hours, during the covered period selected;
  • A documented inability to rehire particular employees or hire replacement employees for unfilled positions;
  • A documented inability to return to normal business activities because of COVID related safety requirements.

 In these cases, loan forgiveness will not be reduced.

The Safe Harbor exempts or protects you from the reduction in loan forgiveness due to decrease in FTE employee levels. You are exempt from the reduction in loan forgiveness if both of the following conditions are met:

  • You reduced FTE employee levels between February 15, 2020, and ending April 26, 2020; and 
  • You then restored FTE employee levels by no later than December 31, 2020.

You may also be exempt from these reductions if you can document that you are not able to rehire employees or hire replacement employees for unfilled positions or cannot return to normal business activities because of COVID related safety requirements.

If an employee was fired for cause, voluntarily resigned, or voluntarily requested a reduction of hours, you may count that employee at the same FTE level as before.

No. If certain employee salaries and wages were reduced between February 15, 2020 and April 26, 2020, (the Safe Harbor period), but those reductions were eliminated by December 31, 2020, you are exempt from any reduction in loan forgiveness due to those reductions in salaries and wages.

 
 
 
 
 

Loan forgiveness may be reduced if the number of average weekly FTE employees during the covered period (or the alternative payroll covered period) was less than during the FTE reduction reference period selected.  

You can select a reference period of either: 

  • February 15, 2019 to June 30, 2019; or 
  • January 1, 2020 to February 29, 2020; or 
  • For seasonal employers, either of the preceding periods or a consecutive 12-week period between May 1, 2019 and September 15, 2019.

The borrower is exempt from such a reduction if the FTE Reduction Safe Harbor applies. Safe Harbors are explained in the Safe Harbor FAQ.

You may be exempt from these reductions if you restored FTE no later than December 31, 2020.

You may also be exempt from these reductions if you can document that you are not able to rehire employees or hire replacement employees for unfilled positions or cannot return to normal business activities because of COVID related safety requirements.

In general, your loan forgiveness is reduced by the same percentage as the percentage reduction in FTE employees. This is calculated by comparing the average weekly FTE employees during the covered period (or the alternative payroll covered period) with the FTE reduction reference period selected. 

For example, if you had 10.0 FTE employees during the FTE reduction reference period and this declined to 8.0 FTE employees during the covered period, the percentage of FTE employees declined by 20%, and therefore only 80% of otherwise eligible expenses will be forgiven.

You are exempt from such a reduction if the FTE Reduction Safe Harbor applies. Safe Harbors are explained in the Safe Harbor FAQ.

You may be exempt from these reductions if you restored FTE no later than December 31, 2020. These types of reductions and exemptions, including Safe Harbors are explained in the Safe Harbor FAQ.

You may also be exempt from these reductions if you can document that you are not able to rehire employees or hire replacement employees for unfilled positions or cannot return to normal business activities because of COVID related safety requirements.

No. If you offered to rehire or offered to restore the employee’s hours at the same salary or wages, you will not have an FTE reduction for that employee.

In calculating your PPP loan forgiveness amount, you may exclude any reduction in FTE employee headcount attributable to a particular employee if:

  • You made a good faith, written offer to rehire or restore hours (as applicable) during the covered period or alternative payroll covered period;
  • The offer was for the same salary or wages and the same number of hours;
  • The offer was rejected;
  • You maintain records documenting the offer and rejection; and
  • You inform the state unemployment insurance office of the rejected offer within 30 days.

You may also be exempt from these reductions if you can document that you are not able to rehire employees or hire replacement employees for unfilled positions or cannot return to normal business activities because of COVID related safety requirements.

Loan forgiveness may be reduced when there was a reduction in an employee’s salary or wages from January 1, 2020 to March 31, 2020, (the salary reduction reference period) more than 25%, unless an exception applies. There is a Salary/Hourly Wage Reduction Safe Harbor if you restored salary/wage levels by December 31, 2020.

For each person employed during the covered period selected, start with the employee’s average annual salary or hourly wage during the covered period selected, and calculate whether that employee had a reduction more than 25% compared to the salary reduction reference period. Do not count the salary reduction for employees who were already counted in the FTE reduction.

This salary reduction penalty does not apply for any employee who was paid more than an annualized equivalent of $100,000 in any pay period in 2019. 

If the average annual salary or hourly wage for each employee working during the covered period selected was at least 75% of their average annual salary or hourly wage in the salary reduction reference period, there is no salary/hourly wage reduction.

 
 
 
 
 
 
 

Preparing for the PPP loan application process

If your PPP loan is through Tompkins VIST Bank, please do not try to submit a PPP loan forgiveness application downloaded from the SBA site. All forgiveness applications for Tompkins VIST Bank PPP loans must be submitted using the Tompkins VIST Bank PPP loan forgiveness online application.

There are slightly different documentation requirements between the Regular 3508 Form and 3508EZ.

Regular Form 3508

The PPP loan forgiveness application includes the PPP loan forgiveness calculation form and Schedule A, which you will need to complete. You will also be required to submit documentation, including:

Payroll documentation verifying eligible payments, consisting of the following:

  • Bank account statements or third-party payroll service provider reports;
  • Tax forms including IRS Payroll tax filings (typically Form 941) and state quarterly business and individual wage reporting and unemployment insurance tax filings;
  • Payment receipts, cancelled checks, or account statements documenting employer benefits contributions.

FTE documentation showing the number of FTE employees for the FTE reduction reference period selected.

Nonpayroll documentation verifying the existence of obligations/services prior to February 15, 2020, and eligible payments, consisting of the following:

  • Business mortgage interest payments: account statements or amortization schedules and receipts or cancelled checks;
  • Business rent or lease payments: account statements or current lease and receipts or cancelled checks;
  • Business utility payments: account statements or invoices and receipts or cancelled checks.

While the bank may have some of these documents on file, the SBA requires you, as the borrower, to supply the documents to validate your expenses. 

Form 3508EZ 

The documents required with the 3508EZ are the same as listed above except for the following differences:

  • Form 3508EZ does not have a Schedule A.
  • The FTE report is not required.