The CARES Act created a new forgivable loan program called the Paycheck Protection Program (PPP) to provide businesses with funding to keep workers employed and pay other limited expenses. In addition to the law, the Small Business Administration (SBA) has issued Interim Final Guidance regarding PPP loans to clarify how the program works. Two items for which the SBA has provided guidance are interconnected in what types of expenses can be paid using loan proceeds and which costs spent will qualify for forgiveness. It is important for business owners to understand the differences so that the maximum amount of the loan possible will be forgiven.

The Interim Final Guidance published by SBA calls for proceeds from a PPP loan to be used for seven types of expenditures by the business. Additionally, the Interim Final Guidance requires that a minimum of 75 percent of the proceeds must be used to fund payroll costs. Below is a listing of the various allowable uses of PPP loan proceeds.

  • Payroll costs (employee salaries, employer-funded health, and retirement benefits, employer portion of state/local payroll taxes, etc.)
  • Costs related to the continuation of group health care benefits for periods of paid sick, medical, or family leave, and insurance premiums
  • Mortgage interest payments
  • Rent payments
  • Utility payments
  • Interest payments on any other debt obligation that were incurred before February 15, 2020
  • Refinancing of an SBA EIDL loan made between January 31 and April 3, 2020

While the Interim Final Guidance allows for 7 categories of expenditures that the proceeds can be used to pay, there are only 4 types of expenses that also qualify for loan forgiveness. The guidance provides that not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs. Additionally, in order to qualify for forgiveness, the proceeds must be used for these qualifying costs during an 8-week period following the date of the loan. Below is a summary of the expenses qualifying for forgiveness.

  • Payroll costs (employee salaries, employer-funded health, and retirement benefits, employer portion of state/local payroll taxes, etc.)
  • Interest on mortgage obligations incurred before February 15, 2020
  • Rent payments on leases dated before February 15, 2020
  • Utility payments under service agreements dated before February 15, 2020

Although only 4 of the 7 categories are specifically listed as qualifying for forgiveness it may be reasonable to expect that costs related to group health care benefits for periods of paid sick, medical, or family leave could qualify as forgivable payroll costs. Additionally, if the proceeds from a refinanced EIDL were used to fund payroll costs, these amounts can be counted for purposes of meeting the 75% payroll cost requirement. It is also of note that the Interim Final Rule on Additional Eligibility Criteria and Requirements for Certain Pledges of Loans issued by the SBA suggests that interest paid on auto loans could potentially qualify as “mortgage interest”.

In order to ensure the maximum forgiveness of the PPP loan, business owners should first spend the proceeds on the costs which qualify for forgiveness while keeping in mind the requirement to spend a minimum of 75 percent of the proceeds on qualifying payroll costs. It is important to note that the SBA still needs to issue additional guidance regarding loan forgiveness which could impact how loan proceeds need to be spent to obtain forgiveness. Please contact your WG advisor for additional information on PPP loans and the documentation necessary to obtain loan forgiveness.

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Len Nitti

Author Len Nitti

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