The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act established the Paycheck Protection Program (“PPP”) that provided loan funding for qualifying small businesses. Under the CARES Act, the proceeds received by a borrower from a PPP loan may be forgiven if the borrower uses the proceeds to pay specified expenses (including payroll costs, interest on qualified mortgage indebtedness, rent under a qualified lease contract, and qualified utilities) during a “covered period” beginning on the loan date. The amount of forgiven PPP indebtedness is excludible from gross income for Federal income tax purposes.
On Tuesday, August 4, the U.S. Small Business Administration (“SBA”) released a series of 23 new FAQs providing additional guidance regarding PPP loan forgiveness. The FAQs provide additional guidance and clarification regarding the loan forgiveness process, eligible payroll and non-payroll cost determinations, and loan forgiveness reductions attributable to employee retention and wage levels.
The FAQs are organized under four sections:
- General Loan Forgiveness: This section includes FAQs that address (a) the specific borrower application form that should be used by sole proprietors, independent contractors, and self-employed individuals with no employees, (b) whether scanned copies and e-Signature are acceptable supporting documents that may be submitted with a loan forgiveness application, and (c) the date that borrowers are required to begin making payments for PPP loan proceeds that are not forgiven.
- Loan Forgiveness Payroll Costs: The FAQs in this section clarify the treatment of costs paid or incurred outside of the applicable covered period and for partial pay periods. In addition, this section lists specific types of payroll costs and benefits that are eligible for loan forgiveness. It also clarifies the treatment of compensation for owner-employees of C Corporations and S Corporations as well as self-employed individuals, general partners, and LLC members.
- Loan Forgiveness Non-Payroll Costs: The FAQs in this section clarify the treatment of eligible non-payroll costs, including mortgage interest, rent or lease costs, and business utilities paid or incurred outside of the applicable covered period. FAQ #3 provides that the alternative payroll covered period applies only to payroll costs and not to non-payroll costs. FAQ #4 clarifies that business interest on unsecured loans is not eligible for forgiveness and FAQ #5 provides that lease or interest payments on recently renewed lease contracts or mortgages are eligible for forgiveness if the original underlying contracts existed prior to February 15, 2020.
- Loan Forgiveness Reductions: This section addresses the rules related to calculating a reduction of loan forgiveness attributable to a decrease in full-time employees or employee wages in the covered period.
Congress is currently negotiating another coronavirus economic stimulus bill, but a final version has not been released at this time. Whitley Penn is continually monitoring the tax and economic developments related to the coronavirus pandemic and will send out additional alerts in the future. In the interim, please contact your Whitley Penn tax advisor if you have any questions or require any additional information.
For more information regarding the CARES Act and the SBA loan programs, please see the COVID-19 information page.