Borrowers have waited weeks for more guidance on the loan forgiveness aspect of the Paycheck Protection Program. Over the weekend, the SBA released Form 3508, the application that PPP borrowers will use to apply for loan forgiveness. Form 3508 and its instructions clarified many (but not all) of the questions raised by our clients. The clarifications are as follows:
Loans in Excess of $2 Million
- Borrowers who received PPP loans more than $2 million must check a specific box on Form 3508. This, of course, will be used by the SBA to accumulate a list of PPP loans that will be subject to review for compliance with program requirements.
- For more information on this issue, please refer to our newsroom release from late last week.
Payroll Costs
- Recall that the Covered Period for a PPP loan begins on the day of the loan disbursement. Form 3508 provides the option of using an Alternative Payroll Covered Period that starts on the first day of the first pay period following the loan disbursement date. The Alternative Payroll Covered Period allows borrowers to maximize the number of payroll cycles eligible for forgiveness. It is important to note that this Alternative Payroll Covered Period does not apply to non-payroll expenses.
- The language in the CARES Act left many wondering whether costs must be “incurred AND paid” during the Covered Period or “incurred OR paid.” Thankfully, the Form 3508 instructions provide a very borrower-friendly interpretation. Payroll costs are eligible for forgiveness if they are either (1) paid during the Covered Period or Alternative Payroll Covered Period OR (2) incurred during the Covered Period or Alternative Payroll Covered Period as long as they are paid on or before the next regular payroll date.
- Compensation paid to owners (owner-employees, self-employed individuals, or general partners) is capped at the lower of $15,385 OR the eight-week equivalent of the owner’s compensation in 2019. This means that owners cannot pay themselves a bonus to use up loan proceeds; they are limited to what they paid themselves in the last calendar year.
- Compensation paid to employees (non-owners) is also capped at $15,385. However, in addition to compensation, forgivable payroll costs include health insurance premiums, retirement contributions, and state unemployment insurance paid by the employer on behalf of its employees.
- Payroll costs must comprise at least 75% of the amount submitted for loan forgiveness.
Nonpayroll Costs
- Prior guidance defined nonpayroll costs as business mortgage interest, business rent, or business utility payments. Form 3508 states that business rent obligations include payments for both real AND personal property.
- Like payroll, eligible nonpayroll costs must be either paid during the Covered Period OR incurred during the Covered Period and paid before the next regular billing date, even if the billing date is after the Covered Period. To emphasize, the Alternative Payroll Covered Period cannot be used for these nonpayroll costs.
- The rule still stands that nonpayroll costs cannot exceed 25% of the loan forgiveness amount.
Safe Harbor for Reduction of Salary or Wage
- Prior rules and guidance stated that the amount of loan forgiveness will be reduced if the salary or hourly wage of certain employees is reduced by more than 25%. Borrowers must compare the salary/wage of each individual employee during the Covered Period (or the Alternative Payroll Covered Period) to their salary /wage for the period from January 1, 2020 through March 31, 2020. If that employee’s salary/wage dropped by more than 25%, the borrower’s loan forgiveness amount will be reduced unless a safe harbor is met.
- The safe harbor is met if each employee’s annual salary or hourly wage at June 30, 2020 is equal to or greater than what it was at February 15, 2020.
Safe Harbor for Reductions of Full-Time Equivalents
- The instructions for Form 3508 provide a long overdue definition of full-time equivalent (FTE): it is each employee’s average hours paid per week divided by 40 (capped at 1.0). At the election of the borrower, a simplified method can be used that assigns 1.0 for employees that work 40 hours or more per week and 0.5 for employees who work less than 40 hours per week.
- You may recall that PPP loan forgiveness is reduced if the borrower drops its headcount below pre-pandemic levels. Form 3508 provides a safe harbor in which a borrower is exempt from the reduction if both of the following conditions are met:
- The borrower reduced its FTE levels during the period beginning February 15, 2020 and ending April 26, 2020; and
- The borrower restored its FTE levels by June 30, 2020 to its FTE levels in the pay period that included February 15, 2020.
- Additionally, FTE reductions do not reduce the borrower’s loan forgiveness in the following cases:
- The borrower made a good-faith, written offer to rehire an employee during the Covered Period (or the Alternative Payroll Covered Period) which was rejected by the employee.
- The instructions for Form 3508 provide a long overdue definition of full-time equivalent (FTE): it is each employee’s average hours paid per week divided by 40 (capped at 1.0). At the election of the borrower, a simplified method can be used that assigns 1.0 for employees that work 40 hours or more per week and 0.5 for employees who work less than 40 hours per week.
- You may recall that PPP loan forgiveness is reduced if the borrower drops its headcount below pre-pandemic levels. Form 3508 provides a safe harbor in which a borrower is exempt from the reduction if both of the following conditions are met:
- The borrower reduced its FTE levels during the period beginning February 15, 2020 and ending April 26, 2020; and
- The borrower restored its FTE levels by June 30, 2020 to its FTE levels in the pay period that included February 15, 2020.
- Additionally, FTE reductions do not reduce the borrower’s loan forgiveness in the following cases:
- The borrower made a good-faith, written offer to rehire an employee during the Covered Period (or the Alternative Payroll Covered Period) which was rejected by the employee.
- An employee was fired for cause, voluntarily resigned, or voluntarily requested and received a reduction of hours.
Documentation
- The instructions for Form 3508 explain what type of documentation must be submitted with the loan forgiveness application. It is also stating that the borrower must retain all PPP loan documentation for six years after the date the loan is forgiven or repaid in full.
- Support for eligible payroll costs:
- Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees
- Tax forms for the periods that overlap the Covered Period or the Alternative Covered Period (such as federal and state payroll tax filings)
- Payment receipts, cancelled checks, or account statements to support any employer retirement plan contributions or health insurance premiums paid on behalf of the employees
- Documents supporting average number of FTE employees
- Support for eligible nonpayroll costs:
- For business mortgage interest payments: copies of lender account statements or lender amortization schedules as well as receipts or cancelled checks verifying the payments
- For business rent or lease payments: copies of lease agreements or lessor account statements as well as receipts or cancelled checks verifying the payments
- For business utility payments: copies of invoices as well as receipts or cancelled checks verifying the payments
- Borrowers must maintain, but are not required to submit, the following:
- Documentation that supports the individual salary or wage levels and FTE information
- Documentation regarding any employee job offers and refusals, firing for cause, voluntary resignations, or written requests for reduced hours
- All records related to the borrower’s PPP application, including documentation to support the necessity of the loan request and eligibility for a PPP loan
Conclusion
While Form 3508 and its instructions clarified many issues, the SBA has promised additional guidance to help with the loan forgiveness application process. Keep in mind that guidance has changed and evolved since the CARES Act was passed in March and could change again. ATKG is committed to helping our clients with this program, and we will continue to study and keep you abreast of new guidance as it is issued. We understand this new release covers a great deal of information so reach out to your ATKG advisor with any questions
| Allison Miller is a Senior Manager with ATKG.and serves as the head of the firm’s Federal Tax practice. Allison holds both a bachelor and master degree in accounting from Texas A&M University, having graduated Summa Cum Laude. Arriving at ATKG in August 2017, she comes to us with 10 years of public accounting experience from the Big Four and a great background in retail, non-profit, and wealth management. For further information on this topic or other tax questions please contact Allison Miller or a member of our Tax practice at 210.733.6611 or amiller@atkgcpa.com. |
