PPP Loans

Frequently Asked Questions

Your Paycheck Protection Program (PPP) loan from the Small Business Administration (SBA) came with a number of specific rules and stipulations. And, as you’re probably aware, the PPP remains somewhat a work in progress.  Based on the most current information the First Internet Bank SBA team has, here are answers to some of the most frequently asked questions from our small business clients:

Questions about Use of Funds

Q: What can PPP loans be used for?

A: PPP loans can be used for the following as long as they were in force before February 15, 2020:

  • Payroll costs
  • Mortgage interest payments, utilities and rent deducted on business tax returns
  • Interest payments on other debt
  • To refinance an SBA Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020

 

Q: What is considered payroll cost?

A: Payroll costs include more than simple base salary.  Payroll costs may include:

  • Salary (Gross Pay)
  • Payment of cash tips
  • Employer match of 401(k) or other retirement payments
  • Payment of state and local tax assessed on the compensation of employees (i.e. SUTA, SUI, SDI, etc.)
  • Group healthcare costs – Employer portion of premiums
  • For sole proprietorships, independent contractors, and similar: owner compensation replacement calculated based upon 2019 Schedule C line 29 tentative profit
  • For partnerships, net earnings from self-employment computed from box 14a of Schedule K-1 IRS Form 1065 reduced by section 179 deduction claimed, unreimbursed partnership expenses claimed and depletion claimed on oil and gas properties multiplied by 09235
  • For self-employed farmers use line 34 net farm profit on IRS Form 1040 Schedule F in lieu of  line Schedule C line 29 tentative profit

 

Q:  What is excluded from the definition of “payroll costs”?

A:  The program excludes:

  • Employee compensation for those residing outside the United States
  • Individual employee compensation in excess of $100,000 annually
  • Amounts paid to independent contractors, as independent contractors can apply for their own PPP loan
  • Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020 including the employer’s share of FICA (i.e. Social Security and Medicare) and Federal Unemployment (FUTA)
  • Owner’s distributions/draws

 

Q: What is considered a covered utility cost?

A: The CARES Act lists the following items as utility costs. It is unclear at this time whether any other items can be included.

  • Electricity
  • Gas
  • Water
  • Transportation
  • Telephone
  • Internet access

 

Q:  Do all benefits of monetary value factor into payroll costs of employees making more than $100,000?

A:  No, the exclusion applies only to cash compensation and not to non-cash benefits, such as employer contributions to retirement plans, health benefits, etc.

 

Q:  Is paid sick leave covered?

A:  Yes. Usual payroll expenditures, including those for vacations, parental, medical, family and sick leave are covered.  However, certain family and sick leave salary expenses covered by the Families First Coronavirus Response Act are excluded.

 

Q: Are employee bonuses or raises permitted?

A: Currently, it remains unclear whether bonuses and raises that would increase payroll costs will be permitted. If you choose to provide them, document your reasons as to why they’re “necessary to support the ongoing operations” of the business. Additionally, employee compensation, including any bonuses paid, is limited to $100,000/year for purposes of the payroll cost calculation.

 

Q: Does the cost of a housing stipend or allowance provided to an employee as part of compensation count toward payroll costs?

A: Yes.

Questions About Documentation

Q: Do I need to maintain loan-specific documentation?

A:  Yes.

  • Keep detailed records on every expenditure directly tied to your loan (payroll registers, utility bills, rent invoices, employer matching payments to retirement funds, interest invoices, receipts, bank statements, etc.).
  • Prepare a summary spreadsheet showing, by category, each use of the PPP funds and the applicable expenses that were paid with the funds.
  • Be able to show proof of the number of employees you have employed at the end of the 8 weeks and/or June 30, 2020 and that no individual’s payroll has been reduced more than 25%.
  • If you did lay off or furlough employees after you received the loan, to get full loan forgiveness you must hire them back or replace them between now and June 30.
  • Remember, at least 75% of the loan must be used for payroll costs.  Be prepared to substantiate that.
  • Loans over $2 Million may be audited by the Small Business Administration (SBA) or the Department of Treasury to ensure PPP compliance, and others of lesser amounts may be as well, so it’s important to be prepared.

Questions about Loan Forgiveness

Q: Are there steps I can take to ensure that I maximize my chances to successfully obtain loan forgiveness?
A: Yes – Here are the important considerations:

  • Loan forgiveness must be requested by the borrower. Forgiveness may be granted for some or all of the principal balance of the loan on eligible payments made within 8 weeks from the date of loan disbursement (the date funds were deposited into your account). We expect additional SBA guidance, and will begin to accept forgiveness requests once we feel comfortable that we have it – refer to our COVID-19 resource page at firstib.com for updates to help you determine when to submit your request.
  • Per the initial structure of the loan, to qualify for 100% forgiveness, at least 75% of the funds must be used for payroll costs as specified by the SBA. The remaining 25% of the loan amount can be used for specified non-payroll expenditures.
  • With certain exceptions (for example: bringing laid off or furloughed full-time employees back or replacing any full-time employees that have been called back, but decline to return, with new hires before the end of the 8-week period but no later than June 30), companies must have maintained employee headcount and compensation levels equivalent to the number of employees listed on the application throughout the 8-week period after receiving the loan. Failure to maintain both headcount and compensation levels can – and likely will – result in reduced forgiveness.
  • To the best of our current understanding, the amount of loan forgiveness is not an all or nothing calculation and can be up to the full principal amount of the loan. The actual amount of loan forgiveness will depend, in part, on the total amount of the following costs over the eight-week period:
    • Gross payroll up to $100,000/yr. in pro-rated wages per employee
    • Employer-paid medical premiums and employer paid retirement benefits
    • Employer-paid state unemployment taxes
    • Interest payments on mortgage obligations incurred before February 15, 2020
    • Rent payments on leases dated before February 15, 2020
    • Utility payments on accounts opened before February 15, 2020
    • Transportation costs, which includes fuel and loan interest (no principal) for a business use vehicle on accounts opened before February 15, 2020
  • In order to support the forgiveness, borrowers will need to maintain (and possibly provide) complete documentation for the expenses incurred.
  • The amount of the loan forgiveness may be reduced if there is a reduction of more than 25% in wages paid to employees.
  • While loan payments will be deferred for 6 months, interest will continue to accrue.  The borrower will be held responsible to repay the loan for any amounts not forgiven under the terms and conditions of the Loan Documents signed during the loan closing.
  • Here’s the most important recommendation – Document! Document! Document!

Questions about Self-employed workers or sole proprietors

Q: For self-employed workers or sole proprietors, what specifics do they need to know concerning their loan?
A: Here are the critical issues to bear in mind about the loan and forgiveness:

  • Proceeds from the PPP loan can be used to cover:
    • salary, wages, tips and owner compensation replacement up to $100,000 annualized per employee (i.e. for eight weeks; a maximum of $15,358 per individual)
    • employer portion of healthcare expenses
    • employer portion of retirement contributions
    • state taxes imposed on employee payroll paid by the employer, such as state unemployment insurance
    • mortgage obligations on real or personal property, rent, office lease and utilities in force prior to February 15, 2020 to the extent they are deductible on Form 1040 Schedule C or Form 1065
    • transportation costs
  • For those who have a home office, a portion of the mortgage, rent and utilities based on the percentage of the home used as an office may be claimed to the extent they are deductible on Schedule C or Form 1065
  • If loan proceeds are used for those expenses in the 8 weeks following receipt of the funds, all or some portion of the loan will be eligible for forgiveness. A minimum of seventy-five percent of the amount forgiven must be attributable to payroll costs as defined
  • As with all other PPP loans, Loan forgiveness must be requested by the borrower – the SBA and the Department of Treasury has not released details on that process yet. Once we receive those details, we will share them

Questions about Loan Payback Terms

Q: What should I expect if my business does not qualify for full – or partial – loan forgiveness?
A: If, for any reason, you do not meet all requirements for PPP loan forgiveness, there are specific terms (which are the same for every business) to pay back the required portion of the loan:

  • A 1% interest rate will be charged
  • The full amount of non-forgiven principal and any interest is due in 2 years
  • There is a 6-month deferment period before repayment begins; however, the 1% interest still accrues during this period
  • The loan is 100% guaranteed by the SBA
  • No collateral or personal guarantees are required
  • No borrower or lender fees need to be paid to the SBA
  • Current information remains subject to change/expansion by SBA/Treasury

Paycheck Protection Program (PPP) Loan Forgiveness Clarification

The SBA and Treasury have provided additional clarification regarding loan forgiveness.  While information may continue to be updated, we wanted to share the most current answers to some of the frequently asked questions we’ve received from our customers:

Q: Are salary, wages, or commission payments to furloughed employees during the covered period eligible for loan forgiveness?
A:  Yes. If a borrower pays furloughed employees their salary, wages or commissions during the covered period, those payments are eligible for forgiveness so long as they do not exceed an annual salary of $100,000 OR $15,385 for an eight-week covered period for any one employee.

Q: Are bonuses or hazard pay during the covered period eligible for loan forgiveness?
A:  Yes. If an employee’s total compensation does not exceed $100,000 OR $15,385 for an eight-week covered period, that employee’s hazard pay and bonuses are eligible for loan forgiveness because they constitute a supplement to salary or wages, and are thus a similar form of compensation.

Q: Are there caps on the amount of loan forgiveness available for owner-employees and self-employed individuals’ own payroll compensation?
A:  Yes. In all cases, loan forgiveness for owner-employees and self-employed individuals cannot exceed the lesser of a) 8/52 of their 2019 cash compensation OR b) $15,385 per individual. Additional limits also apply to specific business types:

  • Owner-employees may add employer retirement and health care contributions made on their behalf to the amount of their 2019 cash compensation (option a, above)
  • In addition to option b above, Schedule C filers are also capped at c) 8/52 of their owner compensation replacement, calculated based on 2019 net profit
  • In addition to option b above, general partners are also capped at 8/52 of the amount of d) their 2019 net earnings from self-employment (reduced by claimed Section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235

Again, program information may be subject to change or be expanded; our SBA team will do our best to keep you up to date. As the borrower, you are expected to be aware of, and understand, the SBA’s PPP rules. The US Treasury provides a great resource for program updates. We encourage you to keep an eye on any updates they post – including their FAQs.

The information provided on our website does not, and is not intended to, constitute legal or financial advice; instead, all information, content, and materials that we may make available are for general informational purposes only.  Information contained on our website may not constitute the most up-to-date information.  Any content that we provide is “as is” and no representations are made that the content is error-free.