WHAT NOW? – ISSUES TO CONSIDER WHEN APPLYING FOR PPP LOAN FORGIVENESS
If you received a PPP loan, any loan amount properly expended over an eight-week period from disbursement date of the loan may qualify for full forgiveness, including the principal and interest.
Below is a list of Q&As to assist you in planning for the forgiveness application process:
1. HOW CAN BORROWERS APPLY FOR FORGIVENESS?
Forgiveness application is posted on the SBA website and may be access by clicking here.
2. WHEN SHOULD BORROWERS FILE THE FORGIVENESS APPLICATION?
Borrowers should contact their respective PPP lenders to determine when each lender is accepting the forgiveness applications. Regardless, Applicants should prepare to file the forgiveness applications eight-weeks after they received the PPP loan in their accounts.
3. WHAT CERTIFICATIONS DO BORROWERS HAVE TO MAKE IN THE FORGIVENESS APPLICATION?
There are a number of certifications listed on the second page of the forgiveness application. Borrowers must carefully certify this application because the certifications are provided under the penalty of perjury and may carry criminal and civil penalties.
Some of the noteworthy certifications are listed below:
To the extent feasible, I will purchase only American-made equipment and products.
Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.
The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments, as specified under the Paycheck Protection Program Rule; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable, such as for charges of fraud. (Emphasis added)
The Applicant will provide to the Lender documentation verifying the number of full-time equivalent employees on the Applicant’s payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight-week period following this loan.
During the period beginning on February 15, 2020 and ending on December 31, 2020, the Applicant has not and will not receive another loan under the Paycheck Protection Program.
4. WHAT PENALTIES MAY BORROWERS FACE IF THEY OBTAIN THE PPP LOAN OR APPLY FOR FORGIVENESS FRAUDULENTLY?
Knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under:
18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000;
Under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and,
If submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.
5. DOES THE CARES ACT GUARANTEE FORGIVENESS OF THE PAYCHECKS PROTECTION PROGRAM LOANS?
Loans guaranteed under the Paycheck Protection Program (PPP) will be 100 percent guaranteed by SBA, and under Section 1106 of the Act the full principal amount of the loans may qualify for forgiveness.
The Paycheck Protection Program and loan forgiveness are intended to provide economic relief to small businesses nationwide adversely impacted under the Coronavirus Disease 2019 (COVID-19) Emergency Declaration (COVID-19 Emergency Declaration) issued by the President on March 13, 2020.
6. WHAT IS THE INTEREST RATE AND MATURITY DATE ON A PPP LOAN?
Interest rate on the loan is 100 basis points or one (1%) percent.
The maturity is two (2) years.
Although the Act provides that the loan will have a maximum maturity of 10 years from when the borrower applies for loan forgiveness, the SBA and Secretary of Treasury have determined a two-year term of the loan. This short term is determined in part because the Administration believes the economic disruption caused by the coronavirus is expected to abate well before the two-year maturity date.
7. WHEN DO BORROWERS HAVE TO BEGIN PAYING INTEREST AND PRINCIPAL PAYMENTS?
The Administration has deferred payment of any interest of principal on the PPP loans for six (6) months following the date of disbursement.
However, interest will continue to accrue on PPP loans during this six-month deferment.
8. IS THE PPP FORGIVEN IN WHOLE OR IN PART?
The loan (and any accrued interest) may be forgiven in whole or in part depending on the manner in which the loan proceeds were used.
9. WHAT COSTS/AMOUNTS ARE INCLUDED IN CALCULATING FORGIVENESS OF THE PPP LOAN?
The actual amount of loan forgiveness will depend, in part, on the total amount of the following costs expended over the eight-week period (“covered period”) from loan funds disbursement:
Payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual), 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);
Owner compensation replacement, calculated based on 2019 net profit, with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit, but excluding 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;
Payments of interest on mortgage obligations on real or personal property incurred before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business mortgage payments);
Rent payments on lease agreements in force before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business rent payments); and
Utility payments under service agreements dated before February 15, 2020 to the extent they are deductible on Form 1040 Schedule C (business utility payments).
10. CAN BORROWERS APPLY THE LOAN TO QUALIFIED COSTS INCURRED PRIOR TO THE DATE OF LOAN DISBURSEMENT?
No. To be eligible for forgiveness, all qualified costs must be incurred within the eight-week period following the date of the loan.
11. WHAT PERCENT OF THE PPP LOAN MAY BE PAID TOWARDS NON-PAYROLL COSTS?
Not more than 25 percent of the loan forgiveness amount may be attributable to qualified non-payroll costs.
12. HOW CAN PPP LOANS BE USED, GENERALLY (See Q. 9 for exceptions)?
The proceeds of a PPP loan are to be used for:
Payroll costs (as defined in the Act and below);
Mortgage interest payments (but not mortgage prepayments or principal payments);
Rent payments;
Utility payments;
Interest payments on any other debt obligations that were incurred before February 15, 2020.
13. HOW CAN PPP LOANS BE USED BY INDIVIDUALS WITH INCOME FROM SELF-EMPLOYMENT WHO FILE 2019 FORM 1040, SCHEDULE C?
The proceeds of a PPP loan are to be used for the following:
At least 75 percent of the PPP loan shall be used for payroll costs (includes refinanced EIDL amount),
Owner compensation replacement calculated based on 2019 net profit as described in the Act and SBA guidance,
Employee payroll costs (as defined below) for employees whose principal place of residence is in the United States, if you have employees,
Mortgage interest payments (but not mortgage prepayments or principal payments) on any business mortgage obligation on real or personal property (e.g., the interest on your mortgage for the warehouse you purchased to store business equipment or the interest on an auto loan for a vehicle you use to perform your business),
business rent payments (e.g., the warehouse where you store business equipment or the vehicle you use to perform your business), and,
business utility payments (e.g., the cost of electricity in the warehouse you rent or gas you use driving your business vehicle).
To be considered permissible uses during the eight-week period following the first disbursement of the loan (the “covered period”), borrowers must have claimed or be entitled to claim a deduction for such expenses (as enumerated above in this question) on borrowers’ 2019 Form 1040 Schedule C.
Interest payments on any other debt obligations that were incurred before February 15, 2020.
14. MUST BORROWERS REFINANCE EIDL LOANS INTO PPP?
Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020:
If you received an SBA EIDL loan from January 31, 2020 through April 3, 2020, you can apply for a PPP loan.
If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan.
If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan.
Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.
15. HOW IS THE FORGIVENESS CALCULATED FOR THE EIDL REFINANCE INTO THE PPP?
For purposes of determining the percentage of use of proceeds for payroll costs (i.e., 75% used for eligible payroll costs), the amount of any EIDL refinanced will be included.
For purposes of loan forgiveness, however, the borrower will have to document the proceeds used for payroll costs in order to determine the amount of forgiveness.
16. WHAT QUALIFIES AS PAYROLL COSTS?
Employer payroll costs consist of:
compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation;
cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips);
payment for vacation, parental, family, medical, or sick leave;
allowance for separation or dismissal;
payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement;
payment of state and local taxes assessed on compensation of employees.
Independent contractor or sole proprietor payroll costs consist only of:
wage, commissions, income, or net earnings from self-employment or similar compensation.
17. DO INDEPENDENT CONTRACTORS COUNT AS EMPLOYEES FOR PURPOSES OF PPP LOAN FORGIVENESS?
No. independent contractors have the ability to apply for a PPP loan on their own, so they do not count for purposes of a borrower’s PPP loan forgiveness.
18. WHAT ARE EXPRESSLY EXCLUDED FROM DEFINITION OF PAYROLL COSTS?
The Act expressly excludes:
Any compensation of an employee whose principal place of residence is outside of the United States;
The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary;
Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and
Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127).
For self-employed individuals who have filed or will file a 2019 Form 1040 Schedule C, the regulations exclude:
Expenses incurred between January 1, 2020 and February 14, 2020 because of the lack of verifiable documentation on expenses in this period;
SBA will issue additional guidance for those individuals with self-employment income who: (i) were not in operation in 2019 but who were in operation on February 15, 2020, and (ii) will file a Form 1040 Schedule C for 2020.
19. WHAT HAPPENS IF THE BORROWER MISUSED THE PPP LOAN?
If a borrower uses PPP funds for unauthorized purpose, SBA will direct the borrower to repay those amounts.
If the borrower knowingly uses the funds for unauthorized purpose, the borrower will be subject to additional liability such as charges for fraud.
20. WHAT IF ONE OF THE SHAREHOLDERS, MEMBERS, OR PARTNERS USES PPP FUNDS FOR UNAUTHORIZED PURPOSE?
If one of the shareholders, members, or partners misuse PPP funds, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.
21. CAN LENDERS RELY ON BORROWER DOCUMENTATION FOR LOAN FORGIVENESS?
Yes. The lender does not need to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs.
22. WHAT AMOUNT OF PPP SHALL BE ELIGIBLE FOR FORGIVENESS?
Up to the full principal amount of the loan plus accrued interest may be subject to forgiveness.
23. WHAT DOCUMENTATION WILL BORROWERS BE REQUIRED TO SUBMIT TO LENDERS WITH A REQUEST FOR LOAN FORGIVENESS?
Borrowers must submit the following documents along with their loan forgiveness request:
Certification of Section 1106(e)(3) of the Act
Evidence of business rent
Evidence of business mortgage interest payments on real or personal property
Evidence of business utility payments.
For businesses which have employees:
Form 941 and state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records for the covered period (eight weeks after disbursement of PPP loan).
For sole-proprietors and self-employed filing Form 1040 Schedule C:
The same 2019 Form 1040 Schedule C that was used to determine net profits allocated to owner for the eight-week covered period shall be relied upon to determine amount of forgiveness.
24. ARE PPP FORGIVEN AMOUNTS CONSIDERED TAXABLE AS A “DISCHARGE OF INDEBTEDNESS” IN THE GROSS INCOME?
No. Section 1106(i) of the Act, excludes from gross income of a recipient any category of income that may arise from covered loan forgiveness, regardless of whether such income would be (1) properly characterized as income form the discharge of indebtedness under section 61(a)(11) of the Code, or (2) otherwise includible in gross income under section 61 of the Code. (See, IRS Notice 2020-32, dated, April 30, 2020).
25. CAN BORROWERS DEDUCT THE COSTS OR PORTION OF THE COSTS WHICH HAVE ALREADY BEEN FORGIVEN FROM THEIR GROSS INCOME?
No. To the extent any amount is excluded from gross income by discharge of the borrower’s debt by forgiveness, the borrower may not deduct the forgiven costs against its gross income.
Senate Bill S. 3612 was introduced in Senate on May 5, 2020, “to clarify … that receipt of coronavirus assistance does not affect the tax treatment of ordinary business expenses.” Some news outlets have interpreted that this bill intends to allow borrowers to deduct the forgiven amount from their income even when such forgiven amounts are not part of their gross income. The bill remains in the Senate Finance Committee as of May 12, 2020. Additional guidance may be required from IRS and the legislature in determining whether the forgiven amounts may also be used as qualified business expenses which can be deducted from gross income.
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About the Author: Reza Ghafoorian, MD, JD is the founder and Principal attorney at G2Z Law Group, PLLC, a health care law firm established in 2012. Dr. Ghafoorian focuses his practice in the fields of provider health law and patent law, representing health care entities and professionals.
