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There has been no shortage of news about the loan forgiveness process and requirements for California and Texas businesses that received a Paycheck Protection Program loan. Earlier this month, the PPP Loan Forgiveness application was finally released, implementing a framework for borrowers to follow. While desperately needed, the guidance appears to have created more questions than answers. At the same time, Congress has been working to pass legislation designed to change certain loan forgiveness provisions. To make matters a little more confusing, on May 22, 2020, Treasury issued a new Interim Final Rule (the Rule) provided new guidance on loan reviews and forgiveness. This includes details on individual loan reviews, prepayments of mortgage interest, limits on self-employed compensation, offers to rehire employees, payments to furloughed employees, and more. Since the CARES Act allows for rule changes to occur without a formal comment period, the changes outlined in the Rule are effective immediately. To help clients, prospects, and others, JLK Rosenberger has provided a summary of key points below.
PPP Loan Guidance Update
- Application Deadline – Many borrowers have been seeking guidance on the deadline for submitting their loan forgiveness application. Unfortunately, the Rule does not provide specific details about when the borrowers are required to submit their application. Borrowers will need to wait to find out when applications have to be submitted.
- Payments to Furloughed Employees – There has been some question about an employer’s ability to receive forgiveness for compensation, including salary, wages, and commissions, to furloughed employees. Yes, the Rule states that as long as an employee’s total compensation does not exceed $100,000 on an annualized basis, additional wages such as hazard pay, and bonuses are eligible for loan forgiveness.
- Advance Payment of Mortgage Interest – Many borrowers have wanted to know if advance payments of mortgage interest can be included as a non-payroll expense for forgiveness. The answer is no. The Rule explicitly prohibits these expenses from being eligible for forgiveness.
- Offers to Rehire Employees – The recent guidance around whether employers who successfully attempt to rehire laid-off workers is reiterated. However, the Rule provides additional information on the conditions under which loan forgiveness would not be impacted. This includes a certification that the borrower made a good faith written offer to rehire the employee during the covered period. It certifies that the offer was for the same salary, wages, and the number of hours earned on the employee’s last day of employment, the offer was rejected, and the borrower maintained relevant documentation. Finally, the borrower must inform the state unemployment insurance office of the rejected offer within 30 days.
- Loan Forgiveness Limits for Self Employed – The Rule clarified there are limits to the amount of loan forgiveness available to owner-employees and the self-employed. Specifically, payroll compensation can be no more than the lesser of 8/52 of 2019 compensation or $15,385 per individual, in total, across all businesses. Specifically, owner-employees are limited to their 2019 cash compensation and employer retirement and healthcare contributions. Schedule C filers are limited by the amount of owner compensation determined by 2019 net profit. Finally, general partners are limited to the amount of their 2019 net earnings from self-employment times .9235. There is no additional forgiveness for the latter groups for healthcare and retirement contributions because these expenses are paid out of net self-employment income.
- PPP Loan Reviews – Over the last 30 days, there has been much discussion about loan reviews from the Small Business Administration (SBA). Given the evolving nature of the guidance, some may have taken a loan without fully meeting all the requirements. The Rule states the SBA may review any PPP loan it deems appropriate, including the loan amount and use of proceeds. Loan review is at the discretion of the SBA, and they may work with the bank or borrower to resolve issues. Finally, the SBA will issue a subsequent interim final rule outlining loan forgiveness procedures.
The piecemeal nature of the PPP updates has made it quite challenging for business owners attempting to navigate the forgiveness process. For this reason, it is essential to work with a qualified advisor who can assess your situation and ensure you are in the best position possible. If you have questions about the information outlined above or need assistance with a COVID-19 tax issue, JLK Rosenberger can help. For additional information, call us at 949-860-9895 or click here to contact us. We look forward to speaking with you soon.