Paycheck Protection Program Loan Forgiveness
Full details about the Paycheck Protection Program and loan forgiveness can be found below. In many instances, forgiveness could impact IRS taxes for loan recipients.
At publication date, and unless reopened, the PPP loan first and second draws are now closed to additional draws and the issue now becomes loan forgiveness and this chapter deals with forgiveness.
In announcement 2020-12 the IRS said that when all or a portion of the stated principal amount of a covered loan is forgiven because the recipient satisfies the forgiveness requirements under section 1106 of the CARES Act, an entity isn’t required to, “for federal income tax purposes only,” and should not, file a Form 1099-C information return with the IRS or provide a payee statement to the recipient as a result of the forgiveness.
First Draw PPP Loan Forgiveness Terms
First Draw PPP loans made to eligible borrowers qualify for full loan forgiveness if during the 8- to 24-week covered period following loan disbursement:
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Employee and compensation levels are maintained,
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The loan proceeds are spent on payroll costs and other eligible expenses, and
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At least 60% of the proceeds are spent on payroll costs.
Second Draw PPP Loan Forgiveness Terms
Second Draw PPP loans made to eligible borrowers qualify for full loan forgiveness if during the 8- to 24-week covered period following loan disbursement:
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Employee and compensation levels are maintained in the same manner as required for the First Draw PPP loan,
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The loan proceeds are spent on payroll costs and other eligible expenses, and
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At least 60% of the proceeds are spent on payroll costs (including additional group insurance payments, including vision, dental, disability and life insurance)
Payroll Costs
These include salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual or for 24 weeks, a maximum of $46,154), as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums).
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Owner compensation replacement – This is calculated based on up to $100,000 of 2019 net profit, with forgiveness of such amount limited a portion of 2019 net profit:
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For the 24-week period, use 2.5/12 x 2019 net profit or if less, $100,000.
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For the 8-week period use 8/52 of 2019 net profit or if less, $100,000.
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So, for the 8-week period, the maximum owner compensation to use is $15,385 (8/52 x 100,000), and for the 24-week period the maximum is $20,833 (2.5/12 x 100,000).
| Note: Excluded from payroll and owner compensation is any qualified sick leave equivalent amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act (FFCRA) (Public Law 116-127) or qualified family leave equivalent amount for which a credit is claimed under section 7004 of FFCRA. Also excluded from payroll expenses are wages taken into account in determining the Employee Retention Credit provided by (a) the CARES Act section 2301, as amended by sections 206 and 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020; (b) IRC section 3134, as enacted by the ARPA of 2021; and (c) section 303 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020. |
Non-Payroll Category
Applies to both first and second draw loans and limited to 40% of the loan proceeds.
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Rent payments on lease agreements in force before February 15, 2020, to the extent they are deductible business rent payments); and
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Utility payments under service agreements dated before February 15, 2020, to the extent they are deductible as business utility payments.
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Interest on any other debt obligations that were incurred before the covered period.
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Home Office Expenses (Supplemental Interim Final Rule SBA-2020-0044) - For a borrower working out of his or her home, the amount of nonpayroll costs that are eligible for loan forgiveness may include the share of covered expenses for the home office that were deductible on the borrower’s 2019 tax return, or if a new business, the borrower’s expected 2020 tax return. So, this would include the prorated portion of eligible mortgage interest, rent payments and utilities as defined above.
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Operational costs - Payment for any business software or cloud-computing service that facilitates business operations; product or service delivery; the processing, payment, or tracking of payroll expenses, human resources, sales, and billing functions; or accounting or tracking of supplies, inventory, records, and expenses.
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Property damage costs – Include costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation.,
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Supplier costs – Costs from existing contracts that are essential to the recipient’s operations, including the cost of perishable goods at any time.
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Protective materials and facility modifications – An operating or a capital expenditure made to facilitate the adaptation of an entity’s business activities to comply with requirements established or guidance issued by federal, state, and local governments during the period beginning on March 1, 2020, and ending on the date when the national emergency related to COVID-19 declared by the President expires.
Covered Period
The covered period is the period of time in which the loan funds must be used to pay covered expenses in order to qualify for forgiveness. With the passage of the Paycheck Protection Program Flexibility Act there are two optional covered periods, and the borrower can elect to use either one. For the first draw loans the covered period can be:
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A 24-week period beginning on the date of the loan disbursement (but not ending after 12/31/2020) or
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An 8-week beginning on the date of the loan disbursement (but not ending after 12/31/2020).
With the exception of the situation when the covered period is shortened because it must end by December 31, 2020, the borrower’s covered period cannot be any other length than 8 or 24 weeks.
For second draw loans the covered period can only be 8 or 24 weeks since a 24-week period will not extend past December 31, 2021.
Alternative Payroll Covered Period
In addition, there is an elective alternative payroll covered period (see form 3508 instructions), and as the name indicates, it only applies to the payroll expense and can be used in conjunction with either the 8- or 24-week periods. The purpose of the elective alternative payroll covered period is to allow borrowers with bi-weekly or a more frequent payroll to begin the payroll covered period on the date of their first payroll following the funds being disbursed. Caution: The alternative payroll covered period only applies to payroll costs, and other expenses are based upon either the 8- or 24-week period.
How and When to Apply for Loan Forgiveness
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A borrower can apply for forgiveness once all loan proceeds for which the borrower is requesting forgiveness have been used.
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Borrowers can apply for forgiveness any time up to the maturity date of the loan.
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If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender.
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CAUTION: A borrower must submit a loan forgiveness application for their First Draw PPP Loan before or simultaneously with the loan forgiveness application for the Second Draw PPP Loan, even if the calculated amount of forgiveness on the First Draw PPP Loan is zero.
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For a Second Draw PPP Loan more than $150,000, a loan forgiveness application for the First Draw PPP Loan must be submitted before or simultaneously with the loan forgiveness application for the Second Draw PPP Loan, even if the calculated amount of forgiveness on the First Draw PPP Loan is zero.
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If an application is being submitted for a First Draw PPP Loan approved on or before August 8, 2020, and the Borrower is required to submit an SBA Form 3508D disclosure of a controlling interest, that disclosure must be submitted to the lender not later than 30 days after submission of the loan forgiveness application.
Which Form to Use
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SBA Form 3508S (Rev 7/30/21) Forgiveness Application - is used to apply for forgiveness for both first and second draw loans provided the amount is $150,000 or less. It requires fewer calculations and less documentation for eligible borrowers. SBA Form 3508S does not require borrowers to show the calculations used to determine their loan forgiveness amount. However, the SBA may request information and documents to review those calculations as part of its loan review or audit processes. SBA Form 3508 or SBA Form 3508EZ, or lender’s equivalent, must be used if form 3508S can’t be used
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SBA Form 3508EZ (Rev 7/30/21) Forgiveness Application - A borrower can apply for forgiveness for a First or Second Draw Paycheck Protection Program (PPP) Loan using SBA Form 3508EZ if the PPP loan amount is more than $150,000 and the borrower can check at least one of the two boxes below.
[ ] The borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period compared to the most recent full quarter before the Covered Period. Employees means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay of $100,000 or more, AND
The borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020, and the end of the Covered Period. However, do count reductions that arose from an inability to rehire individuals who were employees on February 15, 2020, if the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020 (or, for a PPP loan made after December 27, 2020, the last day of the Covered Period). Also ignore reductions in an employee’s hours that the borrower offered to restore, and the employee refused.
[ ] The borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period compared to the most recent full quarter before the Covered Period. Employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay of $100,000 or more, AND
The borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 (or, for a PPP loan made after December 27, 2020, requirements established or guidance issued between March 1, 2020 and the last day of the Covered Period) by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.
The borrower must retain documentation verifying the eligible cash compensation and non-cash benefit payments from the Covered Period and for non-payroll expenses the existence of the obligations/services prior to February 15, 2020, and, for all categories, eligible payments from the Covered Period. The borrower should not submit the documents with the loan forgiveness application but must keep them in its files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of SBA, including representatives of its Office of Inspector General, to access such files upon request. The borrower must provide documentation independently to a lender to satisfy relevant Federal, State, local or other statutory or regulatory requirements or in connection with an SBA loan review or audit. (See page 5 of SBA Form 3508 for a list of documents that must retained.)
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SBA Form 3508 (Rev 7/30/21) - Forgiveness Application - If a borrower cannot qualify to use SBA Form 3508S or SBA Form 3508EZ then they must use SBA Form 3508.
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SBA Form 3508D (Rev 7/30/21) – Disclosure of Controlling Interests - The Economic Aid to Hard-Hit Small Businesses, Non-profits, and Venues Act requires borrowers that received First Draw PPP Loans before December 27, 2020, to disclose whether a Covered Individual directly or indirectly held a Controlling Interest in the borrower at the time the borrower’s loan application was submitted to the PPP lender.