Author: J&R Accounting Group LLC. |

Blog by J&R Accounting Group LLC

The U.S. Small Business Administration, which administers the Payroll Protection Program (PPP), began accepting loan forgiveness applications Aug. 10. Just two weeks later, the agency, in conjunction with the Treasury Department, released additional guidelines surrounding forgiveness of the pandemic loans designed to keep workers on payrolls. 

In general, PPP loans are forgivable if your business used at least 60% of the loan for eligible payroll costs over a span of 24 weeks. Non-payroll costs, including mortgage interest, business rent and utilities are also eligible for forgiveness, but the new rules tweak certain eligibility requirements. Here’s what’s changed.

Some Owner-Employees Can See More Salary Forgiveness

The new guidelines state that an owner-employee in a C- or S-corporation who has less than a 5% ownership stake will not be subject to the owner-employee compensation rule, which caps the amount of loan forgiveness on owner-employee compensation.

Prior to the change, the owner-employee compensation rule stated that anyone with a stake in a company—no matter how small—that took out a PPP loan was eligible for forgiveness of the lesser of $20,833 or 20.833% of their 2019 compensation or $15,385 or 15.385% if the borrower elected to use an eight-week covered period.

The updated guidance means that if you have an equity stake under 5% in your company, you are now eligible for more salary forgiveness—up to $46,154 per individual over 24 weeks. In addition, covered benefits like health care expenses, retirement contributions and state taxes imposed on employee payroll paid by the employer would also be eligible for forgiveness. 

No Forgiveness For Home Office or Tenant Expenses

If you rent out a portion of your office, you will not receive forgiveness for the portion of the rent your tenant pays you. For example, if you sublease some of your office space and they pay you one-third of your total monthly rent, you are only entitled to forgiveness on the two-thirds of the rent you pay. 

The reverse also holds true. If you sublease your office space, you’re only eligible for forgiveness on your business’ portion of the total monthly amount. If you pay a portion of the utility bills for that space, you’ll only receive forgiveness for the portion of the bill you pay. And, home office expenses are only forgivable based on the prorated amount you claimed as a deduction on your 2019 tax filings or the amount you expect to claim on your 2020 filings. 

Mortgage Interest Payments: It’s Complicated

The revised guidelines also include changes to the forgiveness rules for businesses that own the building where they pay rent. Here’s how it works: If Business A holds any ownership interest in Business B, which owns the building, Business A is now considered “related” to Business B.  

This makes Business A eligible for forgiveness only for the portion of the rent or lease payments to Business B equal to or less than the amount of mortgage interest Business B pays on the property. One more caveat: All of this only applies when the lease and the mortgage agreement were entered into prior to Feb. 15, 2020.

This rule also means that if Business A is making mortgage payments on Business B’s property, or if Business B owns the building outright, without a mortgage or mortgage interest, Business A won’t receive any forgiveness. That’s a potential penalty for those who were expecting to receive forgiveness on this portion of their loan. 

Bottom Line

With this new set of rules, owner-employees may not be eligible for as much forgiveness of their PPP loans as they originally thought. New guidelines continue to be rolled out regarding the PPP loan forgiveness process and how to calculate your company’s eligibility. It’s key to stay on top of any new rules and regulations, to make sure your paperwork is up-to-date when you submit for forgiveness.

Loan Forgiveness

Borrowers may be eligible for loan forgiveness if the funds were used for eligible payroll costs, payments on business mortgage interest payments, rent, or utilities during either the 8- or 24-week period after disbursement. A borrower can apply for forgiveness once it has used all loan proceeds for which the borrower is requesting forgiveness. Borrowers can apply for forgiveness any time up to the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred and borrowers will begin making loan payments to their PPP lender.

How to Apply for Loan Forgiveness

1. Contact your PPP Lender and complete the correct form

Your Lender can provide you with either the SBA Form 3508, SBA Form 3508EZ, SBA Form 3508S, or a Lender equivalent.

The 3508EZ and the 3508S are shortened versions of the application for borrowers who meet specific requirements. Your Lender can provide further guidance on how to submit the application.

2. Compile your documentation

Payroll (provide documentation for all payroll periods that overlapped with the Covered Period or the Alternative Payroll Covered Period):

  • Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
  • Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period:
    • Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941); and
    • State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state.
  • Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the borrower included in the forgiveness amount.

Non-payroll (for expenses that were incurred or paid during the covered period and showing that obligations or services existed prior to February 15, 2020):

  • Business mortgage interest payments: Copy of lender amortization schedule and receipts verifying payments, or lender account statements.
  • Business rent or lease payments: Copy of current lease agreement and receipts or cancelled checks verifying eligible payments.
  • Business utility payments: Copies of invoices and receipts, cancelled checks or account statements.

This list of documents required to be submitted to the Lender is not all-inclusive.

3. Submit the forgiveness form and documentation to your PPP Lender

Complete your loan forgiveness application and submit it to your Lender with the re­quired supporting documents and follow up with your Lender to submit additional documentation as requested. Consult your Lender for additional guidance and provide requested documentation in a timely manner.

4. Continue to communicate with your Lender throughout the process

If SBA undertakes a loan review of your loan, your Lender will notify you of the review and the SBA loan review decision. You have the right to appeal certain SBA loan review decisions. Your Lender is responsible for notifying you of the forgiveness amount paid by SBA and the date on which your first payment will be due, if applicable.