SBA RELEASES MORE PPP FREQUENTLY ASKED QUESTIONS LIMITING THE FORGIVENESS BENEFITS FOR BUSINESS OWNERS

Aug 6, 2020

SBA RELEASES MORE PPP FREQUENTLY ASKED QUESTIONS LIMITING THE FORGIVENESS BENEFITS FOR BUSINESS OWNERS

On August 4, the SBA, in consultation with the Treasury, issued new frequently asked questions interpreting a few more aspects of the CARES Act and the subsequent PPP Flexibility Act.   The 10-page document is separated into four sections addressing different aspects of the forgiveness process.  These can be found here.

Here are some of the highlights:

LOAN FORGIVENESS PAYROLL COST FAQ NUMBER 8 IS ESPECIALLY RELEVANT TO PRACTICE OWNERS.

It applies a HARD CAP to the owners’ forgivable compensation which is paid or incurred during the covered period.  Regardless of whether you are a Schedule C sole proprietor, partner in a partnership, S corporation shareholder or C corporation shareholder, the maximum compensation you can take into account for yourself is the LESSER OF $20,833 OR 20.833% OF YOUR 2019 COMPENSATION.  (If the employer is using an 8-week covered period, then the owner’s forgivable compensation drops to the lesser of $15,385 or 15.385%.)

It then goes on to limit the amount of the owner’s health insurance and retirement plan contributions that are forgivable -- but which varies based on the type of entity.

SCHEDULE Cs:  No additions for the doctor’s health insurance, retirement plan contributions, or state or local taxes (e.g., unemployment insurance).   We already knew this.

PARTNERS:  Same as Schedule Cs.

S CORPORATIONS WHERE DOCTOR OWNS MORE THAN 2%:  He or she CANNOT include his or her health insurance premiums – and his or family members can not include their share of health insurance premiums either. As for the retirement plan contributions, the doctor CAN include a limited amount – 20.833% of the doctor’s 2019 employer contribution.  For example, if the doctor received a $37,000 profit sharing/safe harbor contribution in 2019, then the most that would be forgiven would be $7,708 (assuming that is contributed for the doctor during the covered period).  If the doctor received $200,000 in profit sharing plus cash balance contributions in 2019, then, presumably he or she could include $41,666. And, the doctor CAN include his or her share of state or local taxes (e.g., unemployment insurance) paid during the covered period.

C CORPORATIONS: Same as S corporations but with the added benefit that the doctor’s (and family members’) health insurance premiums paid or incurred during the covered period are also forgivable.

THE GOOD NEWS HERE is that the doctor’s spouse and other family members are generally not discriminated against.  They should get the full benefit of their salaries without these caps on 2019 compensation and retirement plans.  This means they should be eligible for up to $46,154 of salary based on a maximum annual salary of $100,000 and prorated for 24 out of 52 weeks.  They are also eligible for the health insurance premiums that the employer pays on their behalf during the covered period (other than family members of S corporation owners), their plan contributions paid or incurred during the covered period, and the Employer’s payment of their unemployment insurance premiums.

DOCTORS WHO OWN MULTIPLE PRACTICE ENTITIES

These FAQs impose a tough new rule.  The $20,833 salary limitation applies across all such entities.  This means that if the doctor owns an interest in two dental corporations and each one took a PPP loan, the doctor cannot use $20,833 of salary at each ($41,666 total).  $20,833 is the aggregate amount, and the doctor can allocate between the two businesses as she chooses.

OTHER THAN OWNERS WHICH ARE DESCRIBED ABOVE, WHAT PORTION OF AN EMPLOYEE’S RETIREMENT PLAN CONTRIBUTION IS FORGIVABLE?

“Loan Forgiveness Payroll Costs FAQ number 7” says that “Forgiveness is NOT provided for employer contributions for retirement benefits ACCELERATED FROM periods outside the Covered Period.”  (emphasis added).

We’re not quite sure what this means, but presumably contributions attributable to a period after the end of the covered period will not be forgiven if they are contributed during the covered period.   On the other hand, if the plan contribution made during the covered period is attributable to the 2019 plan year or for 2020 (through the end of the covered period) it will be forgivable.

This makes some sense in theory, but in practice this is difficult to define.  What if the full 2020 profit sharing or cash balance contribution is made during the covered period?  Does the fact that some of the contributions are based on employee compensation that is yet to be earned mean that part of the contributions are not includible?  Perhaps.  Without further clarification, this is certainly “gray area.”

PAYROLL COST TIMING ISSUES

These FAQs also answer questions about timing mismatches between the employer’s covered period (or alternate covered period) and the employer’s normal payroll dates.  The good news here is that the SBA is being very accommodating in this area where these periods don’t match up either at the beginning or the end (or both) and where partial pay periods are involved.  In every case, the employer gets the benefit of the doubt with its loan forgiveness calculations.

 

 

Collier & Associates, Inc. will update our blog as the CARES Act progresses. We take pride in continuing to keep our subscribers and website visitors updated on current events during this extraordinary time.

We will work diligently to answer general inquiries via our website if time permits and in a little more detail within our Newsletters. However, if your questions are detailed in nature, please request to set up a conference call for a formal legal consultation. Thank you.

DISCLOSURE

Collier & Associates, Inc. provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act on this information without seeking advice from professional advisors.

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