There was a sigh of relief across many businesses when the Senate Republican and Democrats reached a deal on Tuesday of this week to provide an additional $310 billion to the CARES Act Paycheck Protection Program (PPP) loan program, increasing the total funding of the program to $659 billion. It is expected that the House will approve the bill and it will be advanced to the President’s desk for signature later this week. For businesses who were not able to get approval yet, they are rushing to get their applications finalized for the second wave of funding which hopefully will be provided by early next week.
Here are some key items that remain unclear regarding the PPP (as of today) and need additional SBA guidance:
1. What costs are allowed to be included when determining debt forgiveness?
Under the CARES Act, an employer can receive debt forgiveness on a PPP loan for eligible amounts equal to the costs incurred and payments made during the covered period. The literal reading of that statement suggests that not only must the payments be made during the covered period, which is the 8 weeks after the lender made the disbursement to the borrower, but they also must be incurred during that same 8-week period.
2. Assuming that the paid and incurred hurdle is answered, what costs are eligible for debt forgiveness?
The CARES act specifically states that an eligible recipient will receive forgiveness of indebtedness on PPP loan in an amount equal to the sum of the following costs incurred and payments made during the covered period:
- Payroll costs.
- Payments of interest on any covered mortgage obligation.
- Payments on any covered rent obligation.
- Payments for covered utility payments.
What are payroll costs? The CARES Act directly links the loan forgiveness definition of payroll costs back to the payroll definition under Section 1102, which is the Payroll Protection Program. Based on SBA guidance, the payroll definition includes gross pay, including taxes imposed on the employee and required to be withheld by the employer, but not including the employer’s share of payroll tax.
What are payments of interest on any covered mortgage obligations? Under the CARES Act, interest paid on covered mortgage obligations during the covered period can be included in the debt forgiveness calculation. The term covered mortgage obligation includes indebtedness or debt instrument incurred in the ordinary course of business that:
- Is a liability of the borrower.
- Is a mortgage on real or personal property.
- Was incurred before February 15, 2020.
3. Once you determine your debt forgiveness based on eligible costs paid and incurred during the covered loan period, it can be reduced further by a decrease in full-time employee equivalents (FTEE’s) during specific testing periods and for salary reductions of greater than 25 percent for employees who make an annualized salary of less than $100,0000 during specific testing periods.