Many businesses that applied for PPP loans during the first wave of funding have either received those funds or will be receiving them shortly.  If that scenario sounds familiar, now is the time to make sure you understand how PPP loan forgiveness works.  While we are still waiting for the SBA to release specifics regarding forgiveness calculations and qualified expenses, we have put together some commonly asked questions below and our suggestions on how to handle these scenarios.

Here’s our most frequently asked question:

Will my entire loan be forgiven?

  • DHA Take: If you requested your maximum loan amount, most businesses will NOT have the entire loan forgiven.  Loan amounts were calculated using 2.5 months (10 weeks) of payroll, health insurance and retirement benefits, and forgiveness is based on 8 weeks.  Forgiveness does include two months of rent and utilities, but for most businesses those are less than half a month of payroll, health insurance, and retirement benefits.

Below are other common questions that we receive, but since we are still waiting for the SBA to release specifics, our “DHA Take” on the items below is conjecture based on our professional knowledge and interpretation of the currently available information from the SBA, and should not be considered final advice.

Once we receive final determinations from the SBA, we will share updated information and recommendations.  In the meantime, here’s how we’re suggesting that you handle some of the unknowns:

Are payments made with forgiven funds still tax deductible?

  • As of 4/30, the IRS stated in Notice 2020-32[1] that any otherwise deductible expenses that result in forgiveness of a PPP loan pursuant to Section 1106 of the CARES Act will not be deductible in computing the taxpayer’s income.
  • DHA Take: A bipartisan group of Senators has already introduced legislation that would allow small businesses to reduce their expenses even if they received a PPP loan that was later forgiven.  In a letter to Steven Mnuchin the lawmakers pointed out that the IRS notice guidance runs contrary to congressional intent for the program.  We anticipate that Congress will prevail and that the expenses will be deductible.

Can a business pay interest on non-mortgage debt during the covered period and have it forgiven?

  • The act lists interest on debt obligations incurred as eligible for use of the PPP funds but then in the section that details the items eligible for forgiveness, mortgage interest is absent
  • DHA Take: We expect that interest paid on secured debt incurred prior to 2/15/20 will be eligible for forgiveness

What qualifies as “rent” for forgiveness?

  • It is unclear if only real estate qualifies or if leased equipment also qualifies.  There are still questions about restrictions put on self-rentals where the owner of the business also owns the rental property. It is also unclear whether individuals that office out of their home will get to count any home office expenses.
  • DHA Take: We believe self-rental will count for separate buildings but needs to be pursuant to a lease at market-based rent. At this point it appears that home-office based rent and related expenses will not qualify. Our prediction is that rent will be limited to real estate and will not include leased/rented equipment.

Is the ability to restore your FTE (full time equivalent) headcount as of 6/30/2020 an all or nothing rule?

  • The regulations reduce your forgiveness to the extent your FTE headcount is reduced.  The law allows you to restore that as of 6/30 and not be penalized for a drop for 2/15/-6/30, but seems to read that if it’s not fully restored then you don’t get to use the 6/30 count. 
  • DHA Take: We believe it does seem to require a full restore or you do not get that benefit

Will my loan forgiveness amount be reduced if I laid off an employee, offered to rehire the same employee, but the employee declined the offer?

  • No.  SBA and Treasury intend to issue a rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation.  The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer much be documented by the borrower.  Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
  •  DHA Take: When re-hiring employees, make it a requirement that the offer of re-hire is written, and that the employee and employer must document acceptance or rejection of the offer.
    • Be aware, that while not explicitly stated, the sentence above (from the SBA) regarding the loss of unemployment benefits suggests that it is reasonably possible the SBA may forward the evidence of the offer of employment and documentation of the rejection of the offer to the appropriate state agency for action if the employee did not volunteer that he/she has turned down employment.
    • While this decision provides relief for the headcount requirement for forgiveness, it does not indicate any changes or relief on the qualified expenses spending side of the loan.  If a borrower is unable to spend the provided funds in the 8-week period on qualified expenses, the balance of funds will be paid back over 2 years at a 1% interest rate.

What is included in utilities?

  •  The phrasing on utilities specifically calls out electricity, gas, water, transportation, telephone, and internet access.  There is some gray area about association dues that cover these items, as well as expenses that are not explicitly called out, such as garbage collection and cell phone bills.  It is also unclear how “transportation” will be interpreted and applied.
  • DHA Take: We believe that vehicle expenses will be limited to gas, that cell phones will count only if you don’t have an additional phone provider, and that association dues that cover garbage, water, or other utilities may be eligible.

 How do we determine eligible payroll cost for forgiveness for Partners in an LLC who do not receive a W-2 payroll?

  • Recent guidance has indicated that for purposes of determining eligible payroll cost, a Partner’s payroll cost is their net self-employment earnings from their 2019 K-1, reduced by section 179 and unreimbursed partners expenses (UPE).
  •  DHA Take:  At this point, it looks like a partner’s payroll for forgiveness will likely by 8/52 of their 2019 net self-employment income reduced by section 179 and UPE. That means they will not get to count retirement contributions or self-employed health insurance in their payroll cost like S-Corporation and C-Corporation shareholders do.

Payroll is limited to a $100,000 annual salary, “prorated as necessary”.  What does “prorated as necessary” mean?

  •  Payroll includes payment of salary, wages, commissions, tips, vacation, medical and sick leave but is limited to a salary 100,000 “prorated as necessary”.  How does the payment of lump-sum commissions or bonuses factor into that calculation?
  •  DHA Take:  Recently the SBA clarified that self-employment income for the purposes of forgiveness is to be calculated at 8/52 of the taxpayer’s 2019 income. Based on that we expect the $100,000 limit for W-2 wages to mean that compensation, however paid, is limited to $15,385 (8/52 * $100,000) per employee for the 8-week period.

 Do HSA contributions count as part of Health Insurance cost for purposes of qualifying forgiveness expenses?

  • Currently, the phrasing states “Group health care coverage including insurance premiums,” which neither specifically includes nor excludes HSA contributions.
  •  DHA Take: Based on the interconnectedness between high-deductible low-premium health insurance plans and HSAs, we believe there’s reasonable basis to expect that HSA contributions may count as part of group health care coverage expenses.

Who gets to make the final call on forgiveness?

  • Forgiveness is NOT guaranteed. The borrower needs to submit documentation to the lender after their 8-week covered period is over to substantiate the qualifying expenses, FTE head counts and loan forgiveness calculations. The lender then has 60 days to decide on the forgiveness. The only thing certain is that there will be uncertainty with various aspect of qualifying expenses, so who will get to make the judgement call on those “gray” areas?
  • DHA Take:  As we saw with the application process, in the absence of guidance, every lender will come up with their own interpretation of key terms and computational formula, and just as was the case with the determination of maximum proceeds, some borrowers will win and some will lose.

Once we receive final determinations from the SBA or additional information from lenders, we will share updated information and recommendations.  If you have specific questions about your PPP loan, recommended accounting procedures, or forgiveness calculations, please reach out to your DHA primary contact.