Many Paycheck Protection Program (PPP) loan recipients have already received and are in the process of spending down their loan proceeds. Now, these small-business clients are likely turning toward unpacking the details of maximizing their loan forgiveness entitlement.
The Small Business Administration (SBA) and Treasury have released substantial guidance to help clients understand whether they will be eligible for loan forgiveness and how to calculate the amount that can be forgiven.
Some of that guidance will work in favor of certain owner-employees — while other aspects of the interim final rule might come as a surprise to clients who didn’t anticipate having trouble qualifying for loan forgiveness.
As clients begin to navigate the tricky process of obtaining loan forgiveness, it’s critical that they receive up-to-date information in order to maximize their loan forgiveness potential.
SBA Revised Owner-Employee Compensation Rule
Loan forgiveness for owner-employee compensation is more limited than in the case of wage payments made to traditional employees. Assuming the loan recipient uses a 24-week “covered period,” loan forgiveness on payments to owner-employees is limited to the lesser of $20,833 (2.5 months of a $100,000 annual salary); or 2.5/12, multiplied by the owner’s 2019 compensation.
By way of clarification, the SBA interim final rule provides that owner-employees who own less than 5% equity in a C corporation or S corporation are not treated as owner-employees. These owner-employees are eligible to take advantage of the more generous cap, which limits loan forgiveness to $46,154 (which works out to 24 weeks of a $100,000 annual salary).
Loan recipients should also be sure to pay close attention to the headcount and wage reduction rules. To ensure that the business owner has not impermissibly reduced its workforce, the client should compare its headcount on Feb. 15, 2020, to the earlier of the date of the loan forgiveness application, or Dec. 31, 2020.
Employers are permitted to rehire laid-off or furloughed employees by the end of the year in order to qualify for forgiveness. There’s also an exception for employers who are unable to rehire people who were employees as of Feb. 15, 2020, or similarly qualified employees for open positions as of Dec. 31.