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What We Know Today About Loan Forgiveness Under the Paycheck Protection Program

Within the past week, many small businesses (including MHA members) have received proceeds through the Paycheck Protection Program (PPP) which was part of the comprehensive Coronavirus Aid, Relief, and Economic Security (CARES) Act.

One of the most appealing aspects of the PPP program is the possibility of loan forgiveness. Keep in mind, borrowers may not apply for loan forgiveness through their lender until at least eight weeks after receiving their loan proceeds. How the PPP funds are used during the eight-week measurement period will have a big impact in determining if the loan qualifies for full, partial, or no forgiveness.

While there are still a lot of questions being sorted out surrounding PPP loan forgiveness, here are some FAQ’s outlining what we think we know today.

When does the eight-week measurement period of qualifying costs begin?

The eight-week period begins on the date the lender makes the first disbursement of the loan.

What are acceptable uses of the PPP funds for business other than self-employed individuals?

Acceptable uses of PPP funds include:

  1. Payroll costs, which include salary, wages, commissions, tips, vacation pay, parental leave, family leave, or sick leave (capped at $100,000 on an annualized basis for each employee). Payroll costs also include payments made to allow for the separation or dismissal of an employee, payments required for the provision of group health care benefits (including insurance premiums) and payment of any retirement benefits. They also include state and local taxes levied on compensation paid to employees.
  2. Interest on mortgage obligations incurred before February 15, 2020.
  3. Rent, under lease arrangements in force before February 15, 2020.
  4. Utilities for which service began before February 20, 2020.

Do the wages being paid to employees receiving paid sick leave under the conditions outlined in the Families First Coronavirus Response Act (FFCRA) count towards PPP qualified payroll costs?

No. The CARES act expressly excludes qualified sick leave and family leave wages for which an employer may receive an employment tax credit under FFRCA.

Are rent payments made to related-parties included in the amount eligible to be used to determine loan forgiveness?

At this time, more guidance is still being sought in this area.

How much of the loan will be forgiven?

Money will still be owed when the loan is due if the loan proceeds are used for anything other than the qualifying costs and expenses previously discussed.

Also, at least 75% of the loan proceeds need to be used on qualified payroll costs.

Inversely, no more than 25% of the loan proceeds may be used on other qualifying items such as mortgage interest, rent and utilities.

Loan forgiveness will be reduced if the average number of full-time equivalents (FTE’s) during the eight-week measuring period is less than the average number of FTE’s in one of two periods, February 15 - June 30, 2019 or January 1, 2020 - February 29, 2020. The borrower gets to choose the FTE period to use in the denominator. Also, employers will have until June 30, 2020, to restore their full-time equivalents and salary levels for any changes which were made between February 15, and April 26, 2020.

Loan forgiveness will also be reduced if the borrower decreases salaries and wages by more then 25% for any employee that made less than $100,000 annualized in 2019.

During the eight-week period used for determining loan forgiveness, will expenses be measured using a cash or accrual basis?

More guidance is needed on this issue. The terms “payments made” (which implies cash basis) and “costs incurred” (which leaves open the possibility of the accrual basis) are both found in the CARES Act.

When is the loan due?

Two years from the date of disbursement.

What is the interest rate?

1.00% fixed rate.

When are loan payments due?

All loan payments are deferred for the first 6 months. However, interest will still accrue over this period.

Can the loan be repaid prior to the 2-year due date?

Yes. There are no prepayment penalties or fees.

Can a business who receives a PPP loan still elect to defer payment of the employer’s share of Social Security tax?

Yes. Employers who have received a PPP loan may defer deposit and payment of the employer’s share of Social Security tax that otherwise would have been required. This deferral is allowed to be made beginning on March 27, 2020, through the date the lender issues a decision to forgive the PPP loan in accordance with the CARES Act. Such deferrals will not incur failure to deposit and failure to pay penalties. Once an employer receives a decision from its lender that its PPP loan is forgiven, the employer is no longer eligible to defer deposits and payments of the employer’s share of Social Security tax after that date.

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