Our Only Constant is Change: Update on Presidential Enactments and PPP Owner Compensation Rules

Last week, ATKG released a newsroom update on Congress’s attempt at a fourth stimulus package as well as updates on the Paycheck Protection Program (PPP). Several developments have happened since the release of that article, and we wanted to provide you with an update. 

Presidential Memorandums and Executive Order

Last weekend, after negotiations on stimulus packages stalled between the House and the Senate, President Trump signed a series of memorandums and one Executive Order:

Despite these directives, House Democrats and Senate Republicans are still negotiating the provisions we discussed in our last newsroom update (link above). 

Presidential Enactments and PPP Owner Compensation Benefits

New FAQs released for the Paycheck Protection Program

Meanwhile, after nearly a month and a half of silence, the SBA released 26 new FAQs for its Paycheck Protection Program (PPP).  The highlights of these are listed below:

Group Health Care Benefits

The employer’s expenses for employee group health care benefits are considered payroll costs and are eligible for loan forgiveness. Payroll costs do not include expenditures for group health care benefits paid by the employees (such as the employees’ share of their healthcare premiums). Furthermore, forgiveness is not provided if the expenses are accelerated from periods outside the Covered Period or Alternative Payroll Covered Period. (Refer to FAQ #6 on page 3 of the FAQs linked above.)

Contributions for Retirement Benefits

Generally, employer contributions for employee retirement benefits are eligible payroll expenses. Like group health care benefits, retirement contributions do not qualify for forgiveness if they are accelerated from periods outside the Covered Period. Also, retirement contributions paid by the employee are not eligible for forgiveness. (Refer to FAQ #7 on page 4.)

Owner Compensation

Across all business types, the amount of loan forgiveness for owner-employees and self-employed individuals is capped at $20,833 per individual if using a 24-week Covered Period or $15,385 for an 8-week Covered Period. This newest round of FAQs provides explicit instruction on how to calculate owner compensation for different business structures: 

C Corporations

  • C corporation owners’ compensation is eligible for forgiveness up to the amount of 2.5/12 of his or her 2019 employee cash compensation.
  • Additional costs eligible for loan forgiveness include:
    • Employer state and local taxes paid by the borrowers and assessed on their compensation,
    • Contributions towards their health insurance, and
    • Contributions to their retirement plans are capped at the amount of 2.5/12 of the 2019 employer retirement contribution.

S Corporations

The rules for C corporation owners also apply to the owners of S corporations with one crucial exception. 

  • Employer contributions for health insurance are not eligible for forgiveness for S-corporation owners who own at least 2% of the S corporation, including for employees who are family members of an at least 2% owner. 

Self-Employed Schedule C (or Schedule F) Filers

  • Forgiveness is limited to 2.5/12 of 2019 net profit, as reported on IRS Form 1040 Schedule C line 31 (or 2.5/12 of 2019 net farm profit, as reported on IRS Form 1040 Schedule F line 34).
  • Separate payments for health insurance, retirement, or state or local taxes are not eligible for forgiveness.  

General Partners

  • Forgiveness is limited to 2.5/12 of their 2019 net earnings from self-employment that is subject to self-employment tax.
  • Compensation is only eligible for loan forgiveness if the payments to partners are made during the Covered Period or Alternative Payroll Covered Period.
  • Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness.  

LLC Owners

  • LLC owners must follow the instructions that apply to how their business was organized for tax filing purposes for the 2019 tax year.

(Refer to FAQ #8 on page 4.)

Nonpayroll Costs

The new FAQs provide clarification on allowable nonpayroll costs:

  • Interest on unsecured credit is not eligible for loan forgiveness because it is not secured by real or personal property. (Refer to FAQ #4 on page 7.)
  • Payments made on recently renewed leases or interest payments on refinanced mortgage loans are eligible for loan forgiveness if the original lease or mortgage existed before February 15, 2020. (Refer to FAQ #5 on page 7.)
  • Regarding utility payments under the CARES Act, expenses in this category include a “payment for a service for the distribution of…transportation.”  The FAQ specifies that this language refers to transportation utility fees assessed by state and local governments. (Refer to FAQ #6 on page 7.).

Loan Forgiveness Reduction for Salary/Hourly Wage Reductions Over 25%

Suppose the salary or hourly wage of a covered employee is reduced by more than 25% during the Covered Period. In that case, the portion over 25% reduces the eligible forgiveness amount unless the borrower satisfies the Salary/Hourly Wage Reduction Safe Harbor. A new FAQ provides three specific examples on this issue:

  • The first example addresses how to calculate the loan forgiveness reduction for a salaried employee whose salary was reduced but continued to work on a full-time basis.
  • The second example addresses the consequences of reducing the hourly wage of an hourly employee.
  • The third example outlines the implications of reducing the hours, but not the pay of an hourly employee.

       (Refer to FAQ #4 on page 8.)

Conclusion

A week ago, it seemed Congress was poised to pass a stimulus package of some sort.  However, President Trump’s Memorandums and Executive Order certainly changed the dynamics of bipartisan negotiations. At a minimum, PPP borrowers are hoping that Congress will make forgiveness more streamlined. ATKG promises to keep you informed as developments unfold. Please contact your ATKG advisor with any questions you may have.

For our latest news on the financial impact of COVID-19, visit ATKG’s Coronavirus Newsroom.

Kristina Dravis is a tax senior with ATKG. She began her career at ATKG as an intern in 2016. She graduated Cum Laude from The University of Texas at San Antonio with a double major Bachelor of Business Administration in Accounting and Finance.

Image Credits: Fox Business