Was Your PPP Loan Less Than $50,000? Life Just Got (A Little Bit) Easier

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Securities (CARES) Act, a $2.3 trillion relief package designed to help individuals and businesses weather the economic damage caused by the COVID-19 pandemic.

The headliner of the CARES Act was the creation of the PPP, a new loan program under Section 7(a) of the Small Business Act designed to put nearly $600 billion into the hands of small businesses for use in paying employee wages and other critical expenses throughout the pandemic.

The reason over two million businesses rushed to the bank to grab a PPP loan, however, was not because they were eager to saddle their struggling enterprises with more debt. Rather, the idea was that these PPP loans were loans in name only; once a borrower received the funds, the amount spent over the next 8 (now 24!) weeks on payroll, mortgage interest, rent and utilities would be eligible to be completely forgiven.

By late May, however, many borrowers were nearing the end of their 8-week periods, only to find that a number of barriers continued to prevent them from reaching full employment, and thus, achieving full forgiveness of their PPP loans. As a result, on June 5, 2020, Congress passed the Paycheck Protection Program Flexibility Act of 2020, which made several dramatic changes to the legislative text of the CARES Act.

In recent weeks, as Congress has worked towards yet another round of COVID-19 stimulus, there has been talk about even more tweaks being made to the PPP process, but the reality is, at this point, borrowers don’t want more, they want less.

Allow me to explain. Many PPP borrowers are through or nearing the end of their “covered period,” as discussed more fully below. It is now time for them to apply for forgiveness. But when these borrower’s are forced to address the endless morass of poorly-defined terms, ever-changing requirements, and collection of complicated calculations that make up the forgiveness process, they are routinely left with a raging case of buyer’s remorse.

As a result, most borrower’s don’t want more changes to the PPP loan program, they just want to be told that their debt will all magically go away, as they hoped it would when they rushed to borrow it. Or stated another way, they want to hear that their debt will be forgiven without having to pay more to their accountants to compute the forgivable amount than they borrowed in the first place.

Well today, borrowers finally got some good news. Or should I say, a narrow class of PPP borrowers got some good news. The IRS released a streamlined application — Form 3508S — designed specifically for those who borrowed less than $50,000.

A quick perusal of the instructions to the form makes clear that for this class of borrowers, forgiveness will still not be automatic. So where’s the good news? Several of the issues that make the standard application for forgiveness so confusing and time-consuming have now been removed for these small borrowers. Specifically, a borrower of a PPP loan of less than $50,000 is no longer required to reduce the amount eligible for forgiveness if the borrower:

1. Reduces the salary or hourly wage of an employee (who earned less than $100,000 in 2019) during the “covered period” following the borrowing relative to the first quarter of 2020, or
2. Reduces full-time equivalent employees (FTEs) during the covered period relative to a base period.

Stated in another way, a borrower of a PPP loan of less than $50,000 may apparently slash salary and fire FTEs with impunity. And while this new reality may run completely contrary to the initial intent of the PPP, it’s welcome relief to those tasked with applying for forgiveness.

Aside from those very important changes, the application process remains largely the same. A borrower must still do the math and compute the amount eligible for forgiveness; the difference, however, is that small borrowers are no longer required to show their math. Be warned, however: the instructions make clear that the SBA may request from the borrower support for their computation at any time.

Since you’ve read this far, perhaps it’s best that we (briefly) review the process of asking for forgiveness. If you’re not eligible to file on a Form 3508S — and must instead use the Form 3508 — please read these step-by-step instructions.

Getting Started

It all begins on the date the loan was received (or does it?) The borrower must then determine the amount spent on four classes of permitted expenses — payroll costs, mortgage interest, rent, and utilities — that are paid OR incurred throughout the “covered period,” a timeframe that has only grown more confusing since the passage of the CARES Act.

Covered Period

Courtesy of the June 5 legislation, the “covered period” can now be as many as FOUR different periods. The default setting is that the covered period is the 24-week period beginning on the date you received the loan disbursement. 

If you received your loan prior to June 5, 2020, however, you may elect to use the 8-week covered period provided by the CARES Act. Presumably, you would only do this if you 1) spent all of your PPP loan on eligible costs within the 8-week window, 2) did not reduce any salary or headcount during the 8-week period, and 3) are eager to move on from the PPP process and never speak of it again.

In computing payroll costs — and ONLY payroll costs — eligible for forgiveness, you are also permitted to choose an “alternative payroll covered period,” which is the 24-week (168 day) period beginning on the first day of the first pay period following the disbursement date, allowing a business to neatly align its covered period with the beginning of a pay period. Thus, if you received your PPP loan on April 20, 2020, and the first day of your next pay period is April 26, 2020, you may elect to count the payroll costs — and only the payroll costs — for the 24-week period beginning April 26, 2020, rather than the 24-week period beginning April 20, 2020.

Obviously, if you elect to use the 8-week covered period, you simply adjust the language above to suit a 56-day period rather than a 168-day period.

Paid or Incurred

Only costs “paid or incurred” during your appropriate covered period are eligible for forgiveness. Payroll costs are paid on the day the paychecks are distributed or the borrower originates an ACH credit transaction. Thus, you could have received PPP loans on April 26 and immediately paid – as part of your regular payroll process – wages that had been earned by the employees for the previous two weeks, and now include the amounts in the forgiveness calculation because the amounts had been PAID within the covered period.

Payroll costs are incurred on the day they are earned, and will be forgivable as long as they are paid no later than the next regular payroll date after the end of the covered period. Thus, if you covered period ends on November 1st, payroll incurred prior to that date, but paid AFTER that date, will be forgiven provided it is paid on its first regular due date after November 1st.

The rules for non-payroll costs are identical, except the “alternative payroll covered period” is not available. In order for costs such as mortgage interest, rent and utilities to qualify for forgiveness, these expenses must either be: 1) paid DURING the 24-week covered period, or 2) incurred during the 24-week period, and paid by its next regular due date, even if that due date is outside the 24-week period.

Once again, it would appear that by allowing all payments made DURING the period to be eligible for forgiveness, borrowers are permitted to pay rent, interest, or utilities related to periods prior to the 24-week period and have those expenses forgiven.

Payroll Costs

Payroll costs are the first, and largest, of the four classes of forgivable costs. It is a class, however, with four subclasses of its own: cash compensation, health care costs, retirement plan costs, and certain state and local taxes on employee compensation. The forgivable amounts for each subclass depend on whether they are being paid to an employee, an “owner-employee,” or a self-employed taxpayer.

Cash Compensation

The CARES Act provides that the amounts spent on “payroll costs” during the 24-week covered period are eligible for forgiveness. Including in payroll costs are certain compensation amounts; specifically, the sum of payments of any compensation with respect to employees that is a:

• Salary, wage, commission, or similar compensation;
• Payment of cash tip or equivalent;
• Payment for vacation, parental, family, medical, or sick leave; or
• Allowance for dismissal or separation.

Compensation does not include, however:

•  The compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period. As a result, in no situation can you have forgiven more than $46,154 (24/52 * $100,000) in payroll costs for any one employee. If you elect to use the 8-week covered period, the compensation paid to any one employee that is eligible for forgiveness cannot exceed $15,384 (8/52 * $100,000).
• Any compensation of an employee whose principal place of residence is outside of the United States;
• Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116–127); or
• Qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act (Public Law 116–127).

Additional limitations apply to self-employed taxpayers and “owner-employees.”

For a self-employed taxpayer with no employees, full forgiveness should be guaranteed as a result of the mechanics governing the initial borrowing and subsequent forgiveness. A self-employed taxpayer with no employees was entitled to borrow 2.5/12 of the self-employment income from the taxpayer’s 2019 Form Schedule C. Not coincidentally, after the passage of the PPP Flexibility Act, self-employed taxpayers with no employees will have forgiven 2.5/12 of the self-employment income from the taxpayer’s 2019 Form Schedule C. Because these two amounts will be the same, full forgiveness is guaranteed.

The rules are more complicated for “owner-employees,” only recently defined as one who owns 5% or more of the stock of a C or S corporation. Here, two limitations apply. First, the maximum compensation cost for 2020 is capped at 2.5 months of an annualized $100,000 salary, or $20,833 (or $15,384 for a borrower using the 8-week covered period). Compare this to the $46,152 an employee can be paid throughout the covered period.

Then, the forgivable amount is further limited to 2.5 months of the 2019 compensation of the owner-employee. This will prevent an owner from increasing their compensation during the covered period to maximize forgiveness by limiting the amount included in the forgivable amount to 10/52 of the owner’s compensation for 2019.

Non-Cash Compensation Payroll Costs

In addition to cash compensation, a borrower may have forgiven the sum of the following three expenses:

1. Payment required for the provisions of group health care benefits, including insurance premiums;
2. Payment of any retirement benefit; or
3. Payment of State or local tax assessed on the compensation of employees.

For employees with no ownership interest, these amounts are in ADDITION TO the annualized compensation cap of $100,000. Thus, an employee could have up to $46,152 of compensation forgiven, as well as amounts allocable to that employee reflecting his or her share of health costs, retirement benefits, or state and local taxes.

For an owner-employee of a C corporation, all three costs are allowable in addition to the applicable cap. For an S corporation shareholder, however, no costs attributable to health care costs are forgivable, while the remaining two costs are forgivable in ADDITION TO the applicable cap. For a self-employed taxpayer, NONE of the costs are allowable.

Non-Payroll Costs

As a reminder, in addition to payroll costs, the CARES Act permits forgiveness for three other classes of expenses paid during the covered period.

• Any payment of interest on any covered mortgage obligation (not including any prepayment of or payment of principal on a covered mortgage obligation). The term “covered mortgage obligation” means any indebtedness or debt instrument incurred in the ordinary course of business that is a liability of the borrower, is a mortgage on real or personal property, and was incurred before February 15, 2020,
•  Any payment on any covered rent obligation. The term “covered rent obligation” means rent obligated under a leasing agreement in force before February 15, 2020 (recent rules were adding limiting rent expense to a related landlord), and
• Any covered utility payment. The term “covered utility payment” means payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

As we discussed in our “paid or incurred” section, it appears mortgage interest owed in arrears can be paid during the covered period and be forgiven, and mortgage interest incurred DURING the covered period but paid before or on the next scheduled due date will also be forgivable, even if that date is after the end of the covered period.

Putting it All Together

If you borrowed less than $50,000, you are still required to sum up the total costs outlined above and compute the amount of your forgiveness. Unlike those who borrowed MORE than that amount, however, your total amount eligible for forgiveness is not subject to reduction if you reduced salaries or headcount. So you’ve got that going for you. Which is nice.

Once you’ve summed your forgivable costs, the amount you report on the Form 3508S as your “forgiveness amount” is the lesser of three numbers:

1. The sum of your forgivable costs,
2. The principal of the loan, and
3. The payroll costs — and ONLY the payroll costs — divided by 60%. This guarantees that no more than 40% of the forgiven amount will be attributable to the three classes of non-payroll costs.

Interestingly, on the standard Form 3508, the instructions provide that the final forgiveness amount is to be reduced by any Economic Injury Disaster Loan advance received by the taxpayer (up to $10,000). The instructions to Form 3508S, however, contain no such requirement.

Once you’ve gotten to this point, the application becomes MUCH less daunting than the standard Form 3508. No Schedule A. No worksheet to Schedule A. No FTE reduction quotient. Instead, you do all the math behind the scenes and drop the end result in the section titled “Forgiveness Amount.”

The price of that brevity, however, is increased representations. You will now have to state on the application, among other representations, that:

But that’s it. Enter your general information at the top, and drop your application in the mail or send it through the ol’ interwebs. Unless the SBA decides to kick the tires, within a few months you should hear back on your forgiveness, take a deep breath, and revel in the knowledge that you’ll never have to think about the PPP again.