Paycheck Protection Program (PPP) FAQ

By June 11, 2020 CARES Act
PPP FAQ

This page has been updated as of June 11th, 2020.

Much like the COVID-19 situation as a whole, information surrounding the Paycheck Protection Program (PPP) continues to evolve on a daily basis. With the constant flux in guidelines, it is unsurprising that business owners and organization directors are left with many questions. Our team of PPP experts are here to provide some answers and guidance during this uncertain time.

Note: Squar Milner will provide updated information as it becomes available. Due to the nature of the emerging and rapidly evolving information from the government, some requirements and offerings may change before they are listed here. Please consult with your Squar Milner advisor for the most current details.

How can Squar Milner help?

As we continue to navigate this uncertain time, Squar Milner stands ready to help you with practical advice on informing and supporting your employees as well as keeping your business running.

We have a team of PPP tax experts ready to answer your questions and guide you through the process of applying and utilizing PPP funds, as well as maximizing your loan forgiveness.

View Our PPP Services

What is the Paycheck Protection Program?

The Coronavirus Aid, Relief, and Economic Security (CARES) Act signed into law on March 27, 2020, established the Paycheck Protection Program to distribute $349 billion in loans to qualifying small businesses, which funds were completely exhausted by April 16. An additional $310 billion was authorized to replenish the PPP by the Paycheck Protection Program and Health Care Enhancement Act, which was signed into law on April 24, 2020.  Most recently, on June 5, 2020, the Paycheck Protection Program Flexibility Act (PPPFA) was signed into law, which provided several revisions to the CARES Act relating to the PPP, including extension of the covered period from eight weeks to up to 24 weeks and changing the safe harbor restoration date from June 30 to December 31, 2020 (unless an eight-week covered period is elected for loans entered into before June 5, 2020). (A summary of PPPFA Key Takeaways may be viewed here.) Administered by the U.S. Small Business Administration (SBA), the PPP provides cash-flow assistance through 100% federally guaranteed, forgivable loans to employers who maintain their payroll during the COVID-19 crisis.

The PPP has an array of attractive features, such as loan forgiveness, no SBA fees and interest payment deferral until 10 months from the end of the covered period or final determination of PPP loan forgiveness. Small businesses and other eligible entities impacted by the coronavirus outbreak between February 15, 2020 and June 30, 2020 are able to apply.

View the PPP loan application form

Paycheck Protection Program (PPP) FAQs

1. What is the deadline for applying for a PPP loan?

The last day to submit a PPP loan application to an SBA-approved lender is June 30, 2020.

2. What types of businesses and entities may be eligible for a PPP loan?

  • Any small business concern that meets the SBA’s size standards (either industry based size standard or the alternative size standard)*
  • Any business, 501(c)(3) non-profit organization, 501(c)(19) veterans organization, or tribal business concern as defined in section 31(b)(2)(c) of the Small Business Act, with the greater of:
    • 500 employees, or
    • That which meets the SBA industry size standard if more than 500.
  • Any business assigned a North American Industry Classification System (NAICS) code beginning with 72 (Accommodations and Food Services) that has more than one physical location and employs less than 500 individuals per location
  • Farmers, ranchers, and agricultural producers
  • Sole proprietors, independent contractors or eligible self-employed individuals
  • Certain faith-based organizations

*Per the April 8, 2020 FAQ published by the SBA, in consultation with the Treasury Department, small business concerns are no longer required to have 500 or fewer employees to be eligible borrowers in the PPP. A business can qualify as a small business concern if it met both tests in the SBA’s “alternative size standard” as of March 27, 2020: 1) maximum tangible net worth of the business is not more than $15 million; and 2) the average net income after federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.

3. Other than businesses that exceed the SBA size standards or do not otherwise meet the SBA eligibility requirements, are there any types of businesses or borrowers that are not eligible to obtain PPP loan funds?

In short, yes. If your situation meets any of the below scenarios, you are ineligible to be a PPP loan borrower:

  • You engage in any activity that is illegal under federal, state or local law (i.e., marijuana industry)
  • You are a household employer (i.e., individuals who hire household employees such as nannies or housekeepers)
  • If any person who owns 20% or more of the borrowing entity’s equity is incarcerated, on probation, on parole, presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction, or have been convicted of a felony within the last five (5) years.
  • You, or any business owned or controlled by you or any of your owners, previously obtained a direct or guaranteed loan from the SBA or any other federal agency that is currently delinquent or has defaulted within the last seven (7) years and caused a loss to the government.
  • If you are deemed to be ineligible under 13 CFR 120.110 and described further in the SBA’s Standard Operating Procedure (SOP) 50 10, Subpart B, Chapter 2 (except not-for-profit organizations authorized under the CARES Act). Some common ineligible businesses within SOP 50 10 are:
    • Businesses that primarily engage in owning or purchasing real estate and leasing it for any purpose. For example, this includes shopping centers, salon suites, and similar business models that generate income by renting space to accommodate independent businesses that provide services directly to the public.
    • Businesses that have entered into a management agreement with a third party that gives the management company sole discretion to manage the operations of the business (e.g., apartment building and mobile home parts and residential facilities that do not provide healthcare and/or medical services with some minor exclusions).

4. Is a hedge fund or private equity firm eligible for a PPP loan?

No. Hedge funds and private equity firms primarily engage in investment or speculation, and such businesses are therefore ineligible to receive a PPP loan. The Administrator, in consultation with the Secretary, does not believe that Congress intended for these types of businesses, which are generally ineligible for section 7(a) loans under existing SBA regulations, to obtain PPP financing.

5. Do the SBA affiliation rules prohibit a portfolio company of a private equity fund from being eligible for a PPP loan?

Borrowers must apply the affiliation rules as set forth in the Second PPP Interim Final Rule. The affiliation rules apply to private equity-owned businesses in the same manner as any other business subject to outside ownership or control. However, in addition to applying any applicable affiliation rules, all borrowers should carefully review the required certification on the PPP Borrower Application Form stating that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

6. What are the affiliation rules?

They become important when the SBA is deciding whether a business’s affiliations preclude them from being considered “small.” Generally, affiliation exists when one business controls or has the power to control another, or when a third party (or parties) controls or has the power to control both businesses. To review, the “Small Business Compliance Guide Size and Affiliation,” please check here.

7. How do the $10 million cap and affiliation rules work for franchises?

If a franchise brand is not listed on the SBA Franchise Directory, each of its franchisees that meets the applicable size standard can apply for a PPP loan. (The franchisor does not apply on behalf of its franchisees.) The $10 million cap on PPP loans is a limit per franchisee entity, and each franchisee is limited to one PPP loan.

Franchise brands that have been denied listing on the Directory because of affiliation between franchisor and franchisee may request listing to receive PPP loans. The SBA will not apply affiliation rules to a franchise brand requesting listing on the Directory to participate in the PPP, but the SBA will confirm that the brand is otherwise eligible for listing on the Directory. (The SBA clarified this in an FAQ document issued in consultation with the Treasury Department.)

8. How do the $10 million cap and affiliation rules work for hotels and restaurants (and any businesses assigned an NAICS code beginning with 72)?

Under the CARES Act, any single business entity assigned an NAICS code beginning with 72 (including hotels and restaurants) and that employs 500 or fewer employees per physical location is eligible to receive a PPP loan.

In addition, the SBA’s affiliation rules do not apply to any business entity assigned an NAICS code beginning with 72 and that employs not more than a total of 500 employees. As a result, if each hotel and restaurant location owned by a parent business is a separate legal business entity, each hotel or restaurant location that employs no more than 500 employees is permitted to apply for a separate PPP loan provided it uses its unique Employer Identification Number (EIN).

The $10 million maximum loan amount limitation applies to each eligible business entity because individual business entities cannot apply for more than one loan.

9. I have income from self-employment and file a Form 1040 Schedule C. Am I eligible for a PPP loan?

You are eligible for a PPP loan if you satisfy the following criteria:

  • You were in operation on February 15, 2020;
  • You are an individual with self-employment income (such as an independent contractor or sole proprietor);
  • Your principal place of residence is in the United States; and
  • You filed or will file a Form 1040 Schedule C for 2019 with net income greater than zero.

You should also be aware that participation in the PPP may affect your eligibility for state administered unemployment compensation or unemployment assistance programs, as well as other programs authorized by the CARES Act, including the Employee Retention Credit.

10. Does a sole proprietor, independent contractor or eligible self-employed individual need to provide anything to establish eligibility?

Yes, you must also submit documentation, as necessary, to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship.

For borrowers that do not these forms of documentation, you must provide other supporting articles, such as bank records, to sufficiently demonstrate the qualifying payroll amount.

11. If I am a partner in a partnership, can I submit a separate PPP loan application?

No, the SBA determined that it is more appropriate for the partnership itself to be the PPP loan applicant/borrower, with the self-employment income of general active partners constituting eligible payroll costs, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership. Partnerships are eligible for PPP loans under the CARES Act but limited to one PPP loan for the entire partnership.

12. What certifications need to be made?

On the PPP application, an authorized representative of the applicant must certify in good faith below. (Note: A representative for the applicant can certify for the business as a whole if the representative is legally authorized to do so.)

  • The applicant was in operation on February 15, 2020, and had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.
  • Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.
  • The funds will be used to retain workers and retain payroll or make mortgage interest payments, lease payments, and utility payments; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable such as for charges of fraud. As explained above, not more than 25% of the loan proceeds may be used for non-payroll costs.
  • Documentation verifying the number of full-time equivalent employees on the payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the covered period following this loan will be provided to the lender.
  • Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. As explained above, not more than 25% of the forgiven amount may be for non-payroll costs.
  • During the period beginning on February 15, 2020, and ending on December 31, 2020, the applicant has not and will not receive another loan under this program.
  • I further certify that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I understand that knowingly making a false statement to obtain a guaranteed loan from the SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than 30 years and/or a fine of not more than $1,000,000.
  • I acknowledge that the lender will confirm the eligible loan amount using the tax documents I have submitted. I affirm that these tax documents are identical to those submitted to the Internal Revenue Service. I also understand, acknowledge, and agree that the lender can share the tax information with SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA loan program requirements and all SBA reviews.

13. What certifications need to be made?

In addition to the certification of “economic need,” PPP borrowers also certify that “the funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments.” Knowingly making any certification in less than good faith, including using PPP loan funds for unauthorized purposes, can lead to dire consequences, including but not limited to:

  • Renders the loan ineligible for forgiveness
  • Conversion to a recourse liability – i.e., the government can seek repayment of the loan from not only the borrower, but also its owners, shareholders, members, and partners
  • Civil and/or criminal fraud charges and other federally prosecutable offenses may be brought if the loan is not immediately repaid in full upon notification by the SBA

14. Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere. Specifically, before submitting a PPP application, all borrowers must certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.

Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repaid the loan in full by May 18, 2020 will be deemed by SBA to have made the required certification in good faith. (Updates to the SBA’s PPP FAQ issued on May 13, 2020 extended this safe harbor to May 1 from the original date of May 7.)

15. What happens if I requested and received a loan but determine after further review I do not meet the requirements?

Consistent with Section 1102 of the CARES Act, the Borrower Application Form requires PPP applicants to certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The SBA will deem any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 18, 2020, to have made the required certification in good faith.

The Administrator, in consultation with the Secretary, determined that this safe harbor is necessary and appropriate to ensure that borrowers promptly repay PPP loan funds that the borrower obtained based on a misunderstanding or misapplication of the required certification standard.

16. Is an employer that repaid its PPP loan by the safe harbor deadline (May 18, 2020) eligible for the Employee Retention Credit (ERC)?

Yes. If an employer applied for a PPP loan, received payment and repaid the loan by the safe harbor deadline (May 18, 2020), they will be treated as though they had not received a covered loan under the PPP, and therefore may be eligible for relief under the Employee Retention Credit (ERC) under the CARES Act.  For more information about the ERC, please refer to our recent webinar or article.

17. Do student workers count when determining the number of employees for PPP loan eligibility?

Yes, student workers generally count as employees, unless (a) the applicant is an institution of higher education, as defined in the Department of Education’s Federal Work-Study regulations, 34 C.F.R. § 675.2, and (b) the student worker’s services are performed as part of a Federal Work-Study Program (as defined in the aforementioned regulations) or a substantially similar program of a State or political subdivision thereof. Institutions of higher education must exclude work-study students when determining the number of employees for PPP loan eligibility, and must also exclude payroll costs for work-study students from the calculation of payroll costs used to determine their PPP loan amount.

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1. How much can I borrow?

Depending on your business situation, the loan size will be calculated in different ways. The maximum loan size is always $10 million.

  • For non-seasonal businesses: Your max loan is equal to 250% of the average monthly payroll costs from the last 12 months prior to the application for employees whose principal residence is the United States.
  • For seasonal businesses (as determined by the SBA):
    • If you were in business Feb. 15, 2019 – June 30, 2019: Your max loan is equal to 250% of your average monthly payroll costs during that time period. If your business employs seasonal workers, you can opt to choose March 1, 2019, as your time period start date.
    • If you were not in business between Feb. 15, 2019 – June 30, 2019: Your max loan is equal to 250% of your average monthly payroll costs between January 1, 2020 and February 29, 2020.

Note: If your seasonal business is such that it increases from April to June and was not fully ramped up on February 15, 2020, a lender may consider whether a borrower was in operation on February 15, 2020, or for an eight-week period between February 15, 2019 and June 30, 2019.

  • If you took out an Economic Injury Disaster Loan (EIDL) between February 15, 2020 and June 30, 2020, and you want to refinance that loan into a PPP loan, you would add the outstanding loan amount to the payroll sum.

2. What costs are eligible for payroll loan computation?

The following costs are eligible:

  • Cash compensation (gross salary, wage, commission, or similar compensation, payment of cash tip or equivalent) subject to cap, discussed below
  • Payment for vacation, parental, family, medical, or sick leave
  • Allowance for dismissal or separation
  • Employer-paid portion of employee retirement benefits and group health care coverage including insurance premiums
  • For independent contractor or sole proprietor: wage, commissions, income, or net earnings from self-employment or similar compensation

Update: Per the SBA’s April 8, 2020 FAQ, applicants should calculate payroll costs on a gross basis without regard to federal taxes imposed or withheld, including FICA and Medicare. As a result, payroll costs are not reduced by taxes imposed on an employee and are not increased by the employer’s share of payroll taxes.

3. Are there any other specific exclusions in determining payroll costs?

Payroll cost calculations do not include:

  • Compensation of an employee whose principal place of residence is outside of the U.S.
  • Cash compensation to an individual employee in excess of an annual salary of $100,000
    • Non-cash compensation such as employer-paid retirement contributions and group health care benefit premiums are not subject to the $100,000 annualized cap
  • Salaries and wages that are eligible for tax credits under the Families First Coronavirus Response Act (FFCRA) (e.g., emergency paid sick leave, emergency family medical leave) or other program (e.g., workforce opportunity tax credit).

4. Do independent contractors count as employees for purposes of PPP loan calculations?

No, independent contractors have the ability to apply for a PPP loan on their own so they do not count for purposes of a borrower’s PPP loan calculation. Also, independent contractors do not get factored into the loan forgiveness calculation for the same reasons.

5. What is the interest rate on the PPP loan?

The loan has an interest rate of 1%.

6. What is the maturity date on the PPP loan?

For loans entered into after the enactment of the PPPFA on June 5, 2020, the minimum maturity date is five (5) years. PPP loans that were issued prior to the enactment of the PPPFA generally had a maturity date of two (2) years from the date of loan disbursement, which may be modified by mutual agreement between the lender and the borrower to conform to the five (5) year maturity under the PPPFA. There is no loan prepayment penalty.

7. Can I apply for more than one PPP loan?

No, an entity is limited to one PPP loan. Each loan will be registered under its Taxpayer or Employer Identification Number (TIN or EIN) at the SBA to prevent multiple loans to the same entity.

8. Can I use e-signatures or e-consents if a borrower has multiple owners?

Yes, e-signatures or e-consents are permitted regardless of the number of owners.

9. Is the PPP Loan “first come, first served?”

Yes, but the last day to submit a PPP loan application is June 30, 2020. After that date, no additional PPP loans will be entered into even if there are PPP funds still available.

10. When will I have to begin paying principal and interest on my PPP loan?

You will not have to make any principal, interest or fee payments until the date that is 10 months after the last day of your covered period (if you do not apply for loan forgiveness) or until the date the lender receives the loan forgiveness amount from the SBA. However, interest on PPP loan amounts that are not forgiven begins to accrue beginning on the date the loan proceeds were originally disbursed and continue through the deferment period until fully repaid.

11. Should both part-time equivalents (PTE) and full-time equivalents (FTE) be counted to determine past average payroll costs that are used to determine the loan size?

Yes, for the purpose of loan eligibility, the CARES Act defines the term employee to include “individuals employed on a full-time, part-time, or other basis.” A borrower must therefore calculate the total number of employees, including part-time employees, when determining their employee headcount for purposes of the eligibility threshold. For example, if a borrower has 200 full-time employees (e.g., working an average of 40 hours per week) and 50 part-time employees each working 10 hours per week, the borrower has a total of 250 employees.

By contrast, for purposes of loan forgiveness, the CARES Act uses the standard of “full-time equivalent employees” to determine the extent to which the loan forgiveness amount will be reduced in the event of workforce reductions. For PPP loan forgiveness purposes, a full-time equivalent employee is based on an average of 40 hours per week.

12. What would happen if the application I submit has an error?

Providing an accurate calculation of payroll costs is the responsibility of the borrower, and the borrower attests to the accuracy of those calculations on the application form. If the lender identifies errors in the calculation or material lack of supporting documentation, the lender should work with the borrower to remedy the issue.

If a submitted loan application has not been processed, the applicant may revise its application and should work with its lender to determine how to do this.

13. Can a borrower take multiple draws from a PPP loan and thereby delay the state of the covered period?

Generally, no. The lender must make a one-time, full disbursement of the PPP loan within ten (10) calendar days of loan approval; for the purposes of this rule, a loan is considered approved when the SBA assigns the loan a loan number. For loans that received an SBA loan number prior to the posting of this interim final rule but have not yet been fully disbursed, the following transition rules apply:

  • The 10 calendar-day period described above began on April 28, 2020.
  • The covered period began on the date of first disbursement.

Notwithstanding this limitation, lenders are not responsible for delays in disbursement attributable to a borrower’s failure to timely provide required loan documentation, including a signed promissory note. Loans for which funds have not been disbursed because a borrower has not submitted required loan documentation within 20 calendar days of loan approval shall be cancelled by the lender, subject to the transition rules above. When disbursing loans, lenders must send any amount of loan proceeds designated for the refinance of an EIDL loan directly to the SBA and not the borrower.

14. Are there exceptions to the single-disbursement rule?

Yes, on May 13, 2020, the SBA issued an interim final rule authorizing all PPP lenders to increase existing PPP loans to partnerships or seasonal employees to include appropriate amounts to cover partner compensation in accordance with the interim final rule posted on April 14, 2020, or to permit the seasonal employer to calculate its maximum loan amount using the alternative criterion posted on April 28, 2020. Refer to discussion of each exception below.

15. If a partnership received a PPP loan that did not include any compensation for its partners, can the loan amount be increased to include partner compensation?

Yes. If a partnership received a PPP loan that only included amounts necessary for payroll costs of the partnership’s employees and other eligible operating expenses, but did not include any amount for partner compensation (refer to discussion above regarding eligible partner compensation), the lender may electronically submit a request through the SBA’s E-Tran Servicing site to increase the PPP loan amount to include appropriate partner compensation, even if the loan has been fully disbursed, provided that the lender’s first SBA Form 1502 to report to the SBA on the PPP loan has not yet been submitted. The loan amount cannot be increased after the initial SBA Form 1502 has been submitted, or the deadline for submission of Form 1502 including the borrower’s loan has passed.

The deadline for the lender to electronically upload SBA Form 1502 has been extended to the later of May 29, 2020, or a date which is 10 calendar days after disbursement or cancellation of the PPP loan.

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1. What are the authorized uses of PPP loan proceeds for businesses?

Businesses may use the PPP loan proceeds for:

  • Cash compensation paid to U.S.-based employees, subject to $100,000 annualized cap, and employer-paid costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums.
  • Payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation) and interpreted to be “personal property”
  • Rent (including rent under a lease agreement)
  • Utilities (such as electricity, gas, water, transportation, telephone or internet access for service which began prior to February 15, 2020.)
  • Interest payments on debt obligations incurred before the covered period
  • Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020. (Note: If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan.)

The first interim final rules (INFR) provided by the U.S. Treasury in April provides that borrowers must use at least 75% of the funds for which it seeks forgiveness for eligible payroll costs, or stated another way, nonpayroll costs are capped at 25% of the eligible loan forgiveness amount. This is a change from the final bill issued on March 27, 2020. The PPPFA revised this rule, stating instead that borrowers must use at least 60% of the PPP funds for eligible payroll costs, and further that if more than 40% of PPP funds are used for nonpayroll costs then none of the PPP loan may be forgiven, and the first INFR issued under the PPPFA on June 11, 2020, conforms the PPP first INFR for this change. The PPPFA first INFR also clarifies a drafting error in the PPPFA which implied that using less than 60% of PPP funds for eligible payroll costs would render the entire loan amount ineligible for forgiveness. The INFR issued June 11, 2020, clarifies that the 60% requirement is interpreted as a proportional limit on nonpayroll costs as a share of the loan forgiveness amount.

Note: Section 1102 allows a borrower to use the funds to pay “interest on any other debt obligations that were incurred before the covered period.” This is in addition to payroll costs, mortgage interest, rent, and utilities. However, Section 1106 of the Act, which addresses items eligible for forgiveness, does not include this item. Consequently, although it appears that a borrower is permitted to use PPP funds to pay interest on a debt obligations that are not secured by real or personal property, such amounts are not eligible for forgiveness.

2. What are authorized uses for self-employed individuals who file (or will file) a 2019 Form 1040, Schedule C?

The SBA issued guidance on April 20, 2020, stating that a self-employed individual’s eligible PPP costs consist of the following:

  • “Owner compensation replacement” of up to an annualized $100,000 of 2019 Form 1040 Schedule C net income (excluding income earned as a partner in a partnership) but not in excess of the PPP loan amount, which maximum would generally be $20,833 for a self-employed individual.
    • If Schedule C net income was over $100,000, then the maximum would be the PPP loan amount of $20,833 (i.e., $100,000 divided by 12 months, multiplied by 2.5 months)
    • If Schedule C net income was zero, then you would not be eligible to obtain a PPP loan
  • Other costs on obligations entered into prior to Feb. 15, 2020, incurred and paid during the covered period, the type of which were claimed as a deduction on the borrower’s 2019 Form 1040 Schedule C:
    • Mortgage interest payments on obligations secured by real or personal property (i.e., no prepayment or principal)
    • Rent payments on leases
    • Utility payments (e.g., power, water, telephone, internet, fuel for business vehicles)

However, in the same publication, the SBA included the following language which seems to indicate that PPP Loan Forgiveness for self-employed individuals would be limited to the owner compensation amount, and that “home office” expenses may not be PPP eligible costs. The language is as follows:

“For individuals with self-employment income who file a Schedule C,… it is appropriate to limit loan forgiveness to a proportionate eight-week share of 2019 net profit, as reflected in the individual’s 2019 Form 1040 Schedule C. This is because many self-employed individuals have few of the overhead expenses that qualify for forgiveness under the Act.

For example, many such individuals operate out of either their homes, vehicles, or sheds and thus do not incur qualifying mortgage interest, rent, or utility payments. As a result, most of their receipts will constitute net income. Allowing such self-employed individual to treat the full amount of a PPP loan as net income would result in a windfall.” 

3. Are there any other restrictions on how I use PPP loan proceeds?

Yes. At least 60% of the PPP loan proceeds shall be used for eligible payroll costs. For purpose of determining the percentage of use of proceeds for payroll costs (but not for forgiveness purposes), the amount of any refinanced EIDL used for payroll will be included.

Accordingly, if a loan recipient does not use at least 60% of the original proceeds on payroll costs during the covered period, it must demonstrate that any remaining amounts were used for payroll costs subsequent to the covered period. This is consistent with the requirement that no more than 40% of the forgiven amount of the loan proceeds may be attributable to non-payroll payments (interest, rent, utilities) made during the covered period.

Any unused PPP loan proceeds remaining at the end of the covered period, as well as any amounts that are not forgiven, will be subject to 1% interest accruing beginning on the date of loan disbursement until repaid or the maturity date of the PPP loan. Prepayment of interest and principal may be made any time prior to the maturity date without penalty.

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1. Can my PPP loan be forgiven in whole or in part?

Yes, the amount of PPP Loan Forgiveness may be up to the full principal amount of the PPP Loan and any accrued interest, so long as the borrower maintains salary and employee counts at pre-COVID-19 levels, and all of the loan proceeds are used for authorized costs that are incurred and paid during the covered period beginning on the date the lender makes the first disbursement of PPP Loan Funds to the borrower (or the alternative payroll covered period, if elected).

2. In general, what are Eligible Costs for purposes of computing my PPP loan forgiveness amount?

Eligible Costs are comprised of Eligible Payroll Costs and Eligible Nonpayroll Costs that are paid and incurred during the Covered Period:

  • Eligible Payroll Costs include the following:
    • Cash compensation portion of salaries, wages, commissions, and tips up to annualized $100,000 per US-based employee, partners in partnerships, or self-employment income for sole proprietors (Note: payments to independent contractors are not payroll costs)
    • Employer contributions for employees (but not owners) to group retirement plans, health care coverage including insurance premiums, employee benefits for vacation, parental, family, medical and sick leave (except FFCRA)
    • Employer-paid state/local (but not federal) employment taxes
  • Eligible Nonpayroll Costs (capped at 40% of PPP loan amount) in respect of obligations entered into before Feb. 15, 2020:
    1. Mortgage interest payments on obligations secured by real or personal property (i.e., no prepayment or principal)
    2. Rent/lease payments

Utility payments (e.g., electricity, water, telephone, internet, fuel for business vehicles)

3. What amounts shall be eligible for forgiveness if you are an individual with self-employment income who files a Form 1040, Schedule C?

Loan forgiveness can be up to the full principal amount of the loan plus accrued interest. The actual amount of loan forgiveness will depend, in part, on the total amount spent over the covered period on:

  • Payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee, as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums);
  • Owner compensation replacement, as discussed in Question 2 in Section 3 (Loan Proceeds), excluding any qualified sick or family leave equivalent amount for which a credit was claimed under FFCRA;
  • Interest payments on mortgage obligations for real/personal property incurred before February 15, 2020;
  • Rent payments on lease agreements in force before February 15, 2020; and
  • Utility payments under service agreements dated before February 15, 2020.

For mortgage interest, rent and utility payments, the amounts must be of the type that were claimed as deductions on the 2019 Form 1040 Schedule C.

SBA guidance published on April 20, 2020, included the following language which seems to indicate that PPP Loan Forgiveness for self-employed individuals would be limited to owner compensation replacement, and that “home office” expenses may not be PPP eligible costs:

“For individuals with self-employment income who file a Schedule C,… it is appropriate to limit loan forgiveness to a proportionate eight-week share of 2019 net profit, as reflected in the individual’s 2019 Form 1040 Schedule C. This is because many self-employed individuals have few of the overhead expenses that qualify for forgiveness under the Act.

For example, many such individuals operate out of either their homes, vehicles, or sheds and thus do not incur qualifying mortgage interest, rent, or utility payments. As a result, most of their receipts will constitute net income. Allowing such self-employed individual to treat the full amount of a PPP loan as net income would result in a windfall.” 

4. Can bonuses paid with PPP loan funds during my covered period be Eligible Payroll Costs?

Discretionary bonuses for hazard pay, additional shift premiums or performance that are earned and paid during the Covered Period or Alternative Payroll Covered Period may be eligible PPP payroll costs, provided that such bonuses would otherwise qualify as “reasonable compensation”. However, keep in mind the cap on eligible payroll costs of annualized $100,000.

Note: Bonus payments for 2019 performance, or earned during periods outside the Covered Period (or Alternative Payroll Covered Period, if elected) are not eligible PPP payroll costs.

5. What is the period during which my eligible costs for PPP loan forgiveness purposes are determined?

Section 1102 of the CARES Act provides that PPP loans are only available during the “covered period” of February 15, 2020 through June 30, 2020, and during that time, may only be used to pay payroll costs, mortgage interest, rent, utilities, and interest on other debt during the “covered period.” Section 1106 of the CARES Act, as amended by the PPPFA, governs PPP loan forgiveness and provides that only amounts spent during the “covered period” are eligible for forgiveness. As amended by the PPPFA, the covered period for determination of PPP loan forgiveness is the period beginning on the date of disbursement of PPP loan funds to the borrower and ending on the earlier of (i) the date that is 24 weeks after the disbursement date, or (ii) December 31, 2020.

However, a PPP borrower whose loan proceeds were disbursed before the enactment of the PPPFA on June 5, 2020, may elect its covered period to end on the date that is eight weeks after the date of receipt of the loan proceeds.

SBA Form 3508 PPP Loan Forgiveness Application (which will be revised and reissued by the SBA to reflect amendments enacted with the passage of the PPPFA) clarified that your Eligible Costs for purposes of computing your PPP loan forgiveness amount is determined by actual eligible Payroll and Nonpayroll Costs that are incurred and paid during the covered period (i.e., 168 days total for a 24-week covered period; or 56 days total if the eight-week covered period is elected for loans entered into prior to June 5, 2020).

For Eligible Payroll Costs, the covered period is one of the following:

  • For administrative purposes, the SBA permits borrowers with a biweekly or more frequent payroll schedule to determine its eligible payroll costs during the covered period that begins on the first day of their first pay period following the PPP loan disbursement date (the Alternative Payroll Covered Period).
  • For borrowers that do not or cannot elect the Alternative Payroll Covered Period, their Covered Period begins on the PPP loan disbursement date.

Note: The alternative payroll covered period only applies to determining eligible payroll costs and does not apply to the period during which eligible nonpayroll costs are determined. For nonpayroll costs, the covered period begins on the loan disbursement date.

6. When are Eligible Payroll Costs considered to be incurred and paid?

Eligible Payroll Costs are considered incurred on the date the employee’s pay is earned and considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction.

  • Payroll costs that are incurred but not paid during the Covered Period or Alternative Payroll Covered Period are eligible for forgiveness if paid on or before the next regular payroll date.

Otherwise, they must be paid during the Covered Period or Alternative Payroll Covered Period, as applicable.

7. When are Eligible Nonpayroll Costs considered to be incurred and paid?

Eligible Nonpayroll Costs must be either:

  • Paid during the Covered Period beginning on the date of Loan Disbursement – i.e., the Alternative Payroll Covered Period is not applicable for nonpayroll costs, or
  • Incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.

8. What is my maximum PPP loan forgiveness amount?

SBA Form 3508 PPP Loan Forgiveness Application (which will be revised and reissued by the SBA to reflect amendments enacted with the passage of the PPPFA) provides detailed instructions regarding the calculation and required documents to support the borrower’s loan forgiveness application. The PPP loan forgiveness amount is the lowest of the following:

  • Principal balance of PPP loan;
  • Eligible Payroll Costs divided by 0.6; or
  • Modified Total Forgivable Amount

PPP FAQ Calculation

The forgiveness calculation methodology may generally be summarized as follows:

PPP Steps Updated

9. How do I calculate my full-time equivalent employee (FTEE) count?

For PPP purposes, FTEEs include employees who are employed on average at least 40 hours per week, as well as a combination of employees, each of whom individually are not a full-time employee because they are not employed on average at least 40 hours per week, but who, in combination, are counted as the equivalent of a full-time employee

  • Method 1: Standard – Average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0
  • Method 2: Simplified – Assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.

Note: Prior to the publication of the SBA’s PPP Loan Forgiveness Application (Form 3508) on May 15, 2020, SBA guidance had indicated FTEEs were determined based on an average of 30 hours per week

10. Are there any exceptions to FTEE count during my covered period for employees who refuse to return to work?

Any FTEE reductions during the Covered Period or Alternative Payroll Covered Period for the following do not reduce the borrower’s loan forgiveness if not filled by a new employee:

  • Any positions that the borrower made a good-faith written offer to rehire an employee, which was rejected by the employee
  • Any employees who were fired for cause
  • Any employees who voluntarily resigned
  • Any employees who voluntarily requested and received a reduction of their hours

Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment consideration.

In addition, the PPPFA provides that if the borrower can document any of the following in good faith, then it will likewise not suffer a reduction in FTEE for PPP loan forgiveness purposes:

  • Inability to rehire similarly qualified employees for unfilled positions on or before December 31, 2020; or
  • Inability to return to the same level of business activity as it was operating at February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health & Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety & Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.

11. How is my PPP loan forgiveness amount impacted by reductions in my FTEE count, and is there a FTEE Safe Harbor I can meet to prevent reduction to my loan forgiveness amount?

If you fully restore your average number of FTEEs by December 31, 2020, subject to the exceptions outlined above, to the number of FTEEs you had during the pay period that included February 15, 2020 (i.e., the FTEE Safe Harbor), then your PPP loan forgiveness amount will not be reduced.

Otherwise, your PPP loan forgiveness amount is reduced proportionately by the percentage that your average number of FTEEs during your applicable Covered Period is below the average number of FTEEs you had during one of three reference periods.

FTEE Measurement Reference Periods include the following, and you are permitted to use the period that results in the lowest average number of FTEEs:

(i) February 15, 2019 to June 30, 2019;

(ii) January 1, 2020 to February 29, 2020; or

(iii) In the case of seasonal employers, either of the preceding periods or a consecutive twelve-week period between May 1, 2019 and September 15, 2019.

12. If I reduce employee salaries and/or hourly wages during my covered period, will that reduce my loan forgiveness amount? If so, is there is Safe Harbor I can meet to avoid that?

If the average salary or hourly wage as of December 31, 2020, is equal to or greater than 75% of the annual salary or hourly wage as of Feb. 15, 2020, then the PPP loan forgiveness amount will not be reduced for salary/wage reductions. Otherwise, the Salary/Hourly Wage Reduction is equal to the shortfall of actual salary/hourly wage paid during the covered period that is below 75% of the average annual salary/hourly wage between Feb. 15-Apr. 26, 2020.

The instructions to SBA Form 3508 and interim final rule posted on May 22, 2020, confirmed that salary/wage reduction does not apply to FTEE reduction. So the determination as to whether there is a salary/wage reduction is measured against base salary or hourly wage rate, as applicable to the employee. The SBA acknowledges that this may appear contrary to the language in sec 1106(d)(3) referring to reductions in “total salary or wage,” but the SBA state that it believes it was Congressional intent to distinguish between FTEE reduction vs. salary/wage reduction.

13. How do I obtain forgiveness on my PPP loan?

In order to obtain partial or full PPP Loan Forgiveness, you must submit a completed SBA Form Paycheck Protection Program (PPP) Loan Forgiveness Application (HERE) which was issued with detailed instructions on May 15, 2020, and will be revised and issued as a result of the enactment of the PPPFA:

  • PPP Loan Forgiveness Calculation Form
  • PPP Schedule A (FTEE and Eligible Payroll Costs)
  • PPP Schedule A Worksheet
  • PPP Borrower Demographic Information Form (optional)

Among other things, the PPP Loan Forgiveness Calculation Form must include:

  • Documentation verifying eligible payroll costs incurred and paid during the covered period (e.g., IRS Form 941; and state quarterly wage unemployment insurance tax forms (or equivalent payroll processor records).
  • Documentation verifying the number of FTEEs at the time of PPP loan application, during the covered period, and at the time of application for loan forgiveness
  • Documentation of invoices and payments on eligible mortgage interest, rent, and utility obligations
  • For self-employed individuals, copy of 2019 Form 1040 Schedule C
  • Signed and initialed Representations and Certifications on Behalf of the Borrower
  • If the original principal amount of the PPP loan is over $2 million, borrower must check a box

The SBA Lender is obligated to do the following:

  • Collect paperwork from the borrower in connection with the forgiveness request and submit an application to the SBA for forgiveness
  • The lender must make a decision on the forgiveness within 60 days of submission of the completed SBA Form 3508

14. What is the deadline to submit my PPP loan application (Form 3508)?

Borrowers must submit their application for PPP loan forgiveness no later than the date that is 10 months after the last day of their covered period.

15. What happens after the forgiveness period?

You may either pay back all remaining loan funds that were not spent during your covered period, or you may continue to carry the balance to pay authorized expenses (e.g., payroll, mortgage interest, rent/lease payments, utilities). Any amounts that are not forgiven incur interest at 1% beginning on the loan disbursement date until fully repaid or maturity date of the loan.

16. Is the PPP loan forgiveness amount taxable income?

Not for federal tax purposes, but it could be subject to state income/franchise tax. The CARES Act provides that PPP loan forgiveness amounts will not be subject to US federal income tax. However, forgiven amounts may be taxable by certain states as cancellation of debt (COD) income. Whether your state treats the forgiven amounts as taxable income depends on whether such state conforms to the U.S. Internal Revenue Code (IRC).

Certain states have “rolling conformity” or “static conformity” to the IRC, and other states do not conform at all, instead of enacting their own income/franchise tax rules that may or may not line up with the IRC. For example, California conforms with U.S. IRC as of Jan. 1, 2015, and in the absence of specific California tax guidance otherwise, PPP loan forgiveness amounts will be subject to California state income/franchise tax.

States are providing guidance on state taxability that will be included in the AICPA state tax guidance chart.

17. Do I still get to take tax deductions for eligible costs paid for with PPP loan funds that are forgiven?

IRS Notice 2020-32 issued on April 30, 2020, provides that no U.S. federal income tax deduction is allowed for an expense that is otherwise deductible if the payment of the expense results in forgiveness of PPP loan proceeds.

Practitioners and certain members of Congress have spoken against the IRS Notice, stating that the IRS position is contrary to the policy of the PPP and effectively nullifies the specific guidance in the CARES Act indicating that forgiven PPP loan amounts are excluded from taxable income for US federal income tax purposes. We anticipate there will be additional guidance issued on this matter.

18. Will I be audited?

On April 28, 2020, U.S. Treasury Secretary Steven Mnuchin announced on CNBC that the government will perform a full audit on any company that borrowed more than $2 million of PPP funds and that borrowers with smaller loan amounts could be subject to spot checks.

Subsequently, the SBA issued an FAQ, confirming that it will review all loans in excess of $2 million as well as other loans “as appropriate.” Additional guidance implementing the review procedure will be issued by the SBA.

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1. Where should I go to get a PPP loan?

All current SBA 7(a) lenders are eligible lenders for PPP. The Department of the Treasury will also be in charge of authorizing new lenders, including non-bank lenders, to help meet the needs of small business owners. Our recommendation is to start with your existing bank. From discussions with bankers and clients, this appears to be the best route to obtain your loan quickly and easily.

If you do not have an existing banking relationship or other circumstances, there are other options available to you, like FinTech providers. For more information please check here.

As of May 15, 2020 there were 5,475 participating lenders (according to the SBA’s official website).

2. How does the PPP loan coordinate with other SBA loans?

Borrowers may apply for PPP loans and other SBA financial assistance, including the Economic Injury Disaster Loans (EIDLs), 7(a) loans, 504 loans and microloans, and also receive investment capital from Small Business Investment Corporations (SBICs). However, you cannot use your PPP loan proceeds for the same purpose as your other SBA loan(s). Loan proceeds would need to cover payroll for a different period or other qualifying costs. This includes the up to $10,000 grant available with the EIDL loans.

The EIDL grant received will reduce the forgiveness amount of the PPP loan.

3. How does the PPP loan work with the temporary Emergency Economic Injury Grants and the Small Business Debt Relief program?

Emergency Economic Injury Grant recipients and those who receive loan payment relief through the Small Business Debt Relief program may apply for and take out a PPP loan as long as there is no duplication in the use of funds.

4. Are there any fee waivers?

Per the First Interim Final Rules:

  • There will be no up-front guarantee fee payable to the SBA by the borrower.
  • There will be no lender’s annual service fee (“on-going guarantee fee”) payable to the SBA.
  • There will be no subsidy recoupment fee.
  • There will be no fee payable to the SBA for any guarantee sold into the secondary market.

 5. Who pays the fee to an agent who assists a borrower?

The lender will pay the agent fees out of the fees the lender receives from the SBA. Agents may not collect fees from the borrower or be paid out of the PPP loan proceeds. The total amount that an agent may collect from the lender for assistance in preparing an application for a PPP loan (including referral to the lender) may not exceed:

  • 1% for loans that do not exceed $350,000;
  • 5% for loans greater than $350,000 and less than $2 million;
  • 25% for loans of at least $2 million.

6. Can PPP loans be sold into the secondary market?

Yes, a PPP loan may be sold on the secondary market after the loan is fully disbursed. A PPP loan may be sold on the secondary market at a premium or discount to par value. The SBA will issue guidance regarding any advance purchase for loans sold in the secondary market.

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KEY CONTACTS

Caroline Banzali
Partner, Tax Services

cbanzali@squarmilner.com

Pauline Dumas
Principal, Consulting Services

pdumas@squarmilner.com

Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.

Paycheck Protection Program Loan Forgiveness Series | Part III

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