Recent PPP Loan Forgiveness Updates

Timing of Forgiveness & Safe Harbor for Reduction in Wages

Under Section 1106 of the CARES Act, certain provisions regarding the forgiveness of PPP loans are limited to the ‘‘covered period.’’  The covered period was originally defined as the eight-week period beginning on the date of the origination of a covered loan.  However, Section 3(b) of the Flexibility Act extended the length of the covered period from 8 to 24 weeks.  Please note that borrowers that received PPP loans before June 5, 2020, can still elect to use the original eight-week covered period.

Also, please be aware that if a borrower applies for loan forgiveness before the end of the covered period and has reduced any employees’ salaries or wages by more than the 25% allowed for full forgiveness, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period, whichever one applies to its loan.  PPP borrowers that apply early for loan forgiveness forfeit a safe-harbor provision allowing them to restore salaries or wages by Dec. 31 and avoid reductions in the loan forgiveness they receive. For example, if a borrower has a 24-week period that ends in November but wants to apply in September, any wage reduction in excess of 25% as of September would be calculated for the entire 24-week period even if the borrower restores salaries by Dec. 31.

Reduction of Expenditure Thresholds

Section 3(b) of the Flexibility Act also amended the requirements regarding forgiveness of PPP loans to reduce, from 75 percent to 60 percent, the amount of PPP loan proceeds that must be used for payroll costs for the full amount of the PPP loan to be eligible for forgiveness.

Owner-employee Compensation for Less Than 5% Owners of C or S Corporations

Certain owner-employees with less than a 5% ownership in a corporate entity are no longer subject to the owner-employee limitations when calculating forgiveness. 

The initial forgiveness rules provided no exceptions for owner-employees based on ownership percentage.  The rules capped the amount eligible for forgiveness for any owner-employee at 8 weeks of their 2019 compensation up to $15,385 under the 8-week coverage period.  Under a 24-week coverage period, forgiveness was limited to 2.5 months of their 2019 compensation up to $20,833.  Now those owner-employees with less than 5% ownership in a corporate entity are exempt from these limitations. The exemption of owner-employee compensation for those owning less than 5% is intended to cover owner-employees without any significant influence on decisions over how loan proceeds are allocated. 

Eligibility of Certain Non-Payroll Costs for Loan Forgiveness

An August 27^th Interim Final Rule presents four specific examples of non-payroll costs as they relate to the forgiveness calculation.  The examples confirm that:

1. Rent paid to the borrower from a subtenant reduces the rent expense eligible for forgiveness,
2. Mortgage interest for a mortgage that covers property subject to a lease to a third party must be reduced pro rata by the percentage of the fair market value of the property, which is leased,
3. Utility payments of shared spaces must be allocated in the same manner, and
4. Home office expenses are limited to the same proration as 2019 tax filings.

Related Party Rent and Mortgage Interest Forgiveness Eligibility

The August IFR also addressed related party rent and mortgage interest expenses.  Rent or lease payments made to a related party are eligible for loan forgiveness, as long as:

1. the amount of loan forgiveness requested for rent or lease payments to a related party is no more than the amount of mortgage interest owed on the property during the covered period that is attributable to the space being rented by the business, and
2. the lease and the mortgage were entered into prior to February 15, 2020.

Please note while rent or lease payments to a related party may be eligible for forgiveness, mortgage interest payments to a related party are not eligible for forgiveness.

As you begin to review your own PPP loan facts and circumstances for forgiveness application, please let us know if you have any questions or concerns.

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