The Small Business Administration, in consultation with the Department of the Treasury, has published answers to frequently asked questions regarding PPP loan forgiveness. These FAQs provide additional clarification and address some of the confusion around specific aspects of attaining forgiveness. A few items worth noting:
Compensation limitation for owners- The maximum amount of compensation that qualifies for forgiveness for any individual with ownership interest in an S Corp, C Corp, partnership or sole proprietorship cannot exceed the lesser of $20,833 or 20.833% of their 2019 compensation. This is a cumulative cap that applies to all companies that the individual is paid by. Small businesses will need to ensure that 60% of loan amounts are spent on combined payroll of both owners and non-owners. This is a significant limitation that was not addressed in the original CARES Act. Note: The $20,833 max is for the 24-week covered period. For borrowers who received the loan before June 5, 2020 and elected the 8-week covered period, the cap for owner compensation is $15,385.
Health insurance and retirement plan expenses not included compensation cap for owner-employees, additional limitations apply-
- S Corporation employees with at least 2% ownership in the business are not eligible to add health insurance costs, for themselves or family members, to compensation because those costs are already included in cash compensation. However, health insurance costs for S Corp owner employees who own less than 2% can be counted in addition to compensation. Unemployment and state income taxes are eligible for forgiveness for S Corps. Retirement contributions are also eligible for forgiveness but capped at 20.833% of their 2019 employer retirement contributions.
- C Corporations are eligible for forgiveness of the employee shareholder's compensation based on the 20.833% rule and can also include state and local taxes as well as employer contributions for employee health insurance. Forgiveness for employer retirement contributions will be limited to 20.833% of 2019 employer retirement contributions.
- The FAQs also state that "forgiveness is not provided for employer contributions for retirement benefits (and group health benefits) accelerated from periods outside the Covered Period" or "Alternative Covered Period."
Transportation costs have been more clearly defined- The FAQs addressed "covered utility payments" and "payment for service of the distribution of transportation." The FAQs clarify that this refers to "transportation utility fees assessed by state and local governments." Transportation utility fees, also known as street maintenance fees, road use fees, street utility fees, and pavement maintenance fees, are fees based on use of transportation systems. Gas is considered a utility and, per previous clarifications, gas used driving a business vehicle is included in forgivable expenses.
We are here to help you understand this new guidance and its applicability to your specific situation. You can read all of the recently published FAQs here and feel free to reach out to us for additional clarification.