The Paycheck Protection Program's (PPP) loan forgiveness application process generated many questions. Experts from our tax and assurance practices gathered the most frequently asked questions here, along with our responses. These responses are based on the latest guidance.
1. Are PPP loan recipients required to wait the full 24 weeks before applying for forgiveness, or can we apply once the money is spent (or some other earlier date)?
The “covered period” set forth in the PPP is 24 weeks, with an option of eight weeks available to participants who received funds before June 5, 2020, and elect the shorter duration. PPP loan recipients can apply for forgiveness once the funds are spent, even if that’s before the end of the applicable covered period. However, many of the financial institutions that facilitated the PPP loan process are not yet ready to process forgiveness applications. Those who received funds under the program and are ready to apply for forgiveness will need to work with their lender to determine when they can begin the process.
2. Can you describe the pros and cons of selecting the eight-week or 24-week period?
As noted above, the eight-week period is only available to companies that received PPP funds before June 5, 2020. In terms of the forgiveness process, some banks may accept forgiveness applications for eight-week covered period loans before they accept applications for 24-week covered period loans, so there’s a potential timing advantage based on the taxpayer’s institution. In addition to the forgiveness application preference, each period has a few advantages to consider.
The eight-week period may be advantageous if:
- The business has debt covenants in place that don’t allow for additional debt on the books during certain reporting periods.
- The business spent all the PPP proceeds on qualified expenses within the eight-week period. In this case, the taxpayer doesn’t have to continue tracking PPP expenses in separate accounts for the full 24-week period.
The 24-week period may be advantageous if:
- The business had to cut staff hours or pay in a manner that could jeopardize forgiveness.
- The business needs more time to spend the proceeds in order to qualify for the maximum amount of forgiveness available.
3. How does applying for forgiveness early in the 24-week covered period affect the forgiveness application?
The application allows for applicants to apply for forgiveness early and doing so may affect certain calculations within the process.
The only calculation with official guidance relating to an early application relates to the salary and wage reduction calculation. During the covered period, if an employer reduced an employee’s wages by more than 25%, the reduction must be calculated as if it was in place for the full 24 weeks, even if the business applies for forgiveness before the 24-week period is up.
There has not been official guidance regarding compensation limits if a company applies before the end of the covered period (ie. at 20 weeks). The AICPA released an article in the Journal of Accountancy stating that if a borrower applies for forgiveness early, the compensation limit is lowered. For example, if a borrower applies for forgiveness 16 weeks after the start of the covered period, the covered period is still 24 weeks and the compensation maximum would be prorated to $30,769 ((16/24) x $46,154).
When calculating the FTE quotient during the covered period, the safe harbor for FTEs is the earlier of Dec. 31, 2020, or the application date. The instructions are silent on the FTE calculations for weeks within the 24-week period. This issue may be clarified in future guidance.
4. Is there any advantage to waiting to file for loan forgiveness?
Additional guidance on the forgiveness process is still expected from Treasury and the IRS, so most parties involved in the process recommend waiting to file until the guidance comes out. Legislation has been proposed that might allow for additional uses of PPP funds and simplified forgiveness of loans below a $150,000 threshold, but nothing has been enacted at this point.
Update: On October 8, the SBA released an additional application option for loans $50,000 and under. Per the SBA application, “SBA Form 3508S requires fewer calculations and less documentation for eligible borrowers. Borrowers that use SBA Form 3508S are exempt from reductions in loan forgiveness amounts based on reductions in full-time equivalent (FTE) employees or in salaries or wages. SBA Form 3508S also does not require borrowers to show the calculations used to determine their loan forgiveness amount. However, SBA may request information and documents to review those calculations as part of its loan review process.”
Further guidance may be forthcoming, especially as it concerns the relationship between company’s forgiveness application and their tax returns.
5. Who is considered an employee when determining eligibility for a PPP loan? How about when determining eligibility for forgiveness of the loan?
An employee for the purposes of this loan is anyone that’s considered an employee for taxing purposes, which means, the individual will be receiving a W-2 and is included in quarterly payroll tax filings. In order to qualify for a PPP loan, a business can employ no more than the greater of 500 employees or, if applicable, the size standard in number of employees established by the SBA in 13 C.F.R. 121.201 for the applicant’s industry. Certain affiliation rules apply that might cause employee counts in related businesses to be combined for purposes of determining eligibility. There are also waivers and exceptions based on industry. For the purposes of receiving the loan, all employees, whether primarily domiciled in the United States or not, are included toward the industry headcount limit or 500 employees. This differs from the list of employees included when calculating the eligible expenses for employees on the forgiveness application as discussed below.
In order to qualify for forgiveness, a business can only include employees whose principal place of residence is the United States. PPP applicants and lenders may consider IRS regulations (26 CFR Section 1.121- 1(b)(2)) when determining whether an individual employee’s principal place of residence is in the United States.
6. How do you calculate an FTE?
A full-time equivalent (FTE) is calculated based on a 40-hour workweek, regardless of how many hours an employer considers to be full time. No employee can count as more than 1 FTE. If a business considers 36 hours per week to be full time, then a salaried employee would be counted as .9 FTE. However, there is a simplified method allowed for calculating FTEs, which includes any individual working a 40-hour workweek is considered 1 FTE, and any individual working less than 40 hours is considered .5 FTE. Both scenarios may need to be evaluated to determine which is more beneficial.
In order to complete the forgiveness application, a business will need to calculate FTEs during the following periods:
- Reference period
- Covered period or alternative payroll covered period
If you had a decrease in headcount during your covered period but have recovered subsequently, you may qualify for a safe harbor under the guidance. In that case, you will also need to determine your FTE count for the following periods:
- Pay period overlapping Feb. 15, 2020
- Pay period overlapping the earlier of the application date or Dec. 31, 2020
- Period Feb. 15–April 26, 2020
Please see the next question below for exceptions under which reductions in FTEs will not count against the business for purposes of the forgiveness application.
7. How do non-COVID-19 changes in headcount (such as resignations, terminations for cause) affect forgiveness?
The PPP loan forgiveness application states that a change in headcount will not affect the FTE count for reduction quotient purposes if any of the following circumstances apply:
- The borrower made a good-faith, written offer to rehire an individual who was an employee on Feb. 15, 2020, and the borrower was unable to hire similarly qualified employees for unfilled positions on or before Dec. 31, 2020.
- The borrower made a good-faith, written offer to restore any reduction in hours, at the same salary or wages, during the covered period or the alternative payroll covered period and the employee rejected the offer.
- During the covered period or the alternative payroll covered period, an employee:
- Was fired for cause
- Voluntarily resigned
- Voluntarily requested and received a reduction in scheduled hours
All documentation relating to the FTE count exceptions need to be maintained in writing, per the forgiveness application instructions. It’s important to note that these conditions affect the head count for purposes of calculating full-time equivalents, but not salary and wage reductions.
8. How is forgiveness affected if 100% of PPP proceeds were used on payroll?
If 100% of the PPP proceeds were used on payroll, the business would be eligible to apply for full forgiveness of the loan, assuming the FTE quotient and salary and wage reductions don’t affect the calculation. Always keep in mind, though, that payroll expenses included in the forgiveness calculation are no longer deductible for income tax purposes. That could affect calculations of wage-based tax credits (such as the R&D credit) or deductions (such as the qualified business income deduction).
9. Are employees who make more than $100,000 annually included in the tables at $100,000 or excluded from the tables altogether?
Employees who made over $100,000 in 2019 would be listed in Table 2 and their wages would be capped at $100,000 annually for purposes of the forgiveness calculation. (That works out to $15,385 for the eight-week period and $46,154 for the 24-week period.) Salary and wage reduction rules do not apply to employees in Table 2, so if their wages were reduced during the covered period it would not affect the business’ forgiveness calculation.
New employees in 2020 with annual salaries over $100,000 will be listed in Table 1, because their 2019 wages were $0. Their wages are capped at $100,000 for the covered period, and salary and wage reductions would apply to individuals in this category.
Employers can continue to pay employees wages in excess of $100,000 per year, but the forgivable portion of their salaries will always be limited to the annualized amount of $100,000.
10. How do we account for bonuses paid during the period?
Bonuses are included as cash compensation, along with salary/wages, commissions, cash tips, hazard pay, vacation, parental, family, medical, or sick leave, and severance payments.
11. If employees own stock in the company, are they subject to limits on owner compensation? If company is 100% ESOP-owned, do the owner rules apply to every employee?
IRS guidance has stated that limits on owner compensation do apply to owners who are also employees. A recent IFR clarified that less than 5% owners of a C or S corporation would be excluded from the owner-employee definition. Current guidance doesn’t address ESOPs specifically.
12. Can you provide a detailed list of items that qualify as utilities?
The Coronavirus Aid, Relief and Economic Security (CARES) Act defines “covered utility payment” as the following services that began prior to Feb. 15, 2020:
- Electricity
- Gas
- Water
- Transportation
- Telephone
- Internet access
A PPP FAQ from August 4 specifies a “transportation utility” as a utility fee assessed by a state or local government. Based on current guidance, gas and parking are not directly defined as transportation expenses.
13. How do we record amounts for tax and accounting purposes if loan proceeds are received and expenses are incurred in year one and loan forgiveness is not effective until year two?
Regardless of the recipient’s intent at the time PPP funds are received, the amount is considered a liability upon distribution.
Accounting treatment:
Generally, a PPP loan will be treated as a liability on the books until forgiveness is “likely or received,” depending on which authoritative guidance is followed. AICPA guidance suggests that for-profit organizations could look to ASC 470, ASC 450-20, ASC 958, or IAS 20 for treatment options. Nonprofits would follow procedures under ASC 958. Public companies should refer to guidance issued by the SEC before adopting a method of recognizing the loan and any subsequent forgiveness.
ASC 470, which is the guidance issued on debt by FASB, requires companies to recognize the loan as a liability until they receive notice of forgiveness or pay off the loan. Interest is accrued at 1% per annum based on ASC 835-30, and companies wouldn’t be required to accrue any additional interest even if stated rate is below market rate. Derecognition of the loan, when forgiveness is received, would allow for companies to follow the guidance in ASC 405-20, which would be a gain on extinguishment.
Tax treatment:
Similar to the accounting treatment, the PPP proceeds are treated as a liability until the loan is forgiven. Unlike most debt, the taxpayer will not recognize cancellation of debt income when the liability is written off at the time of forgiveness. However, expenses that are included in the forgiveness calculation will not be deductible. For this reason, we recommend that taxpayers track expenses paid with PPP funds in separate accounts so that they can be treated properly for tax purposes.
At this time, the IRS has not offered specific guidance on the treatment of these expenses if the loan proceeds are received in one tax year and the loan is forgiven in a subsequent year. Taxpayers who have used PPP loan proceeds to pay expenses during a taxable year and have not received a notice of forgiveness by the end of that taxable year should consult with their tax advisors on how to treat those amounts on their returns.
14. How should a company approach completing the application on their bank’s website?
Borrowers should compile necessary documents and prepare a forgiveness calculation outside of the bank’s software first. This allows borrowers to have a general idea of the amount of forgiveness. We recommend the AICPA calculator, which can be found here.
