In order for Paycheck Protection Program (PPP) loan funds to be forgivable by the Small Business Administration (SBA) the funds must be spent by the borrower within 8 weeks from the date the lender makes the first disbursement to the borrower. After the 8-week period is up, borrowers may apply to have the loan forgiven. The SBA will repay a portion of the loan to the lender on behalf of the borrower and the borrower will be required to pay the balance of the loan. According to the SBA the first disbursements went out the week of April 6. This means that for the earliest borrowers, the period to spend the funds ends as early as this Sunday, May 31. In fact, the SBA has already released an initial version of its loan forgiveness application which can be found here. On Friday, May 22, the SBA also issued two more Interim Final Rules (Interim Final Rules number 32 and 33) to answer questions about PPP loan forgiveness. You can find Interim Final Rule 32 here and Interim Final Rule 33 here. As the time to apply for loan forgiveness approaches, many borrowers have questions about how aspects of loan forgiveness will work. Here are answers to some frequently asked questions I’ve been hearing from pastors, churches, and other religious organizations.
1) Will borrowers have to prove financial loss or economic injury when applying for PPP loan forgiveness?
It depends. The PPP loan application required borrowers to make the following certification: “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” At the time, there was a presumption of economic uncertainty. However, after many larger organizations with sizable profits applied for and received the maximum PPP loan of $10 million, there were claims by some that organizations may be investigated for applications filed fraudulently or in bad faith. This became a cause of concern for many smaller borrowers (including churches) when their income during the Covered Period fared better than originally anticipated. As a result, on May 13, the SBA provided additional guidance that included a “safe harbor” rule stating that borrowers of PPP funds of less than $2 million will be assumed to have performed the required certification concerning the necessity of the loan in good faith. The vast majority of churches and religious organizations applied for loans of less than $2 million and, as a result, fall under this safe harbor provision.
* Note: Questions 2-8 specifically address the 4 types of expenses that are eligible for forgiveness: Rent, Mortgage Interest, Utilities, and Payroll Costs. *
2) What is the “Alternative Covered Payroll Period” and how does it affect the Covered Period?
With regard to PPP loan forgiveness, “Covered Period” is the term used to describe the 8 week (56 day) period during which a borrower may spend funds of the loan on qualifying expenses in order to have that expense be eligible for forgiveness. This period begins on, and includes, the day the lender makes the first fund disbursement. If a lender first disbursed funds to a borrower on Monday, April 6, then the borrower’s Covered Period ends on Sunday, May 31.
However, when it comes to payroll costs, the borrower may elect to have its Covered Period for payroll costs begin on the first payroll period after PPP loan disbursement. This alternative Covered Period only applies to payroll costs and only for borrowers that have chosen to use an alternative payroll period.
Example: A borrower first received the PPP fund disbursement from its lender on Monday, April 6. The borrower doesn’t make a payroll payment until Wednesday, April 15 and elects to use the “Alternative Covered Payroll Period”. For this borrower, the 8-week (56 day) covered period for rent, mortgage interest, and utilities ends on Sunday, May 31 while the Alternative Covered Payroll Period for payroll costs ends on Tuesday, June 9.
3) What does it mean that costs for rent, interest, and utility payments “cannot exceed 25% of the loan forgiveness amount”?
This language comes from the SBA’s Interim Final Rules. It means that 75% of the total amount of loan forgiveness must be based on expenses that constitute payroll costs (more on what constitutes payroll costs later). On the application it looks like this: Line 1 of the application is the amount of payroll costs during the 8-week (56 day) period. Line 10 asks you to divide the number from Line 1 by 0.75. The loan forgiveness from the SBA can’t exceed the amount listed in Line 10.
Example 1: A borrower receives $50,000 in PPP funds. If the borrower spends $40,000 on payroll costs, then to calculate the amount for Line 10 of the application, the borrower divides 40,000 by 0.75. This number is $53,333.33 and the loan forgiveness can’t exceed this amount. For this borrower, the “75% payroll costs/25% other” rule won’t prevent the borrower from being eligible for forgiveness of the full $50,000 loan amount.
Example 2: A different borrower also receives $50,000 in PPP funds. If this borrower spends $30,000 on payroll costs, then to calculate the amount for Line 10 of the application the borrower divides $30,000 by 0.75. This number is $40,000 and the loan forgiveness can’t exceed this amount. For this borrower, the 75% payroll costs/25% other” rule means that this borrower won’t be eligible for forgiveness on more than $40,000 (80%) of the loan amount.
4) What constitutes a forgivable rent expense?
Although it’s the most comment form of rent, forgivable expenses related to rental payments are not limited to the rental of real estate. Rent includes payments pursuant to a lease agreement for real property or other tangible personal property. For churches, common examples of lease agreements that would be covered are office equipment (i.e. copiers and postage machines), audio and visual equipment, appliances, and even carpet/rugs. It would also include a lease on a vehicle (though this is more common for other religious nonprofits than for a church). The lease agreement must have been in place prior to February 15, 2020. Borrowers should be careful about modifying the terms of a lease during the Covered Period and should be especially cautious if the modification includes changing the payment terms (when and how much). The SBA may use the modification as a reason to disallow the rental payment entirely. Advanced or early rental payments are generally not a forgivable expense. Rent expenses incurred before the Covered Period can be paid during the Covered Period and be eligible for forgiveness.
5) How do I distinguish between rent expenses and interest expenses?
It’s important to understand that not all agreements for use of tangible personal property truly constitute a “lease”. Some rental agreements are lease purchase contracts where the borrower may own the property at the end of the agreement. In some situations, the “lease” may function more like a loan. In that instance, only the interest on the agreement is a forgivable expense and not the entire payment. For example, if a church would own the copier at the end of the lease purchase contract, payments under the contract may not be considered a forgivable rent.
6) What constitutes a forgivable mortgage interest expense?
As with rent, forgivable mortgage interest expenses are not limited to interest on real estate. The “mortgage interest” category may also include interest on loans that are secured by tangible personal property. Examples of this type of interest would be interest for the loan to purchase office equipment, appliances, or a company vehicle. This may also include a construction loan if the property being constructed is security for the loan. Any amount paid to principal (including prepaid principal) is not interest and therefore not a forgivable expense. Prepayments of interest are also not a forgivable interest expense. Additionally, the loan agreement upon which interest is being paid must have been in place prior to February 15, 2020 for that interest to be forgivable.
7) What constitutes a forgivable utility expense?
The SBA guidance clarifies that utilities mean an expense “…for the distribution of electricity, gas, water, transportation, telephone, or internet access…”. Telephones and internet access include cell phone and internet services in the name of the borrower (the church or religious organization). It likely does not include home internet for employees or a cell phone contract in the name of the employee that is reimbursed by the employer. Internet access means the expense of internet service and does not include the cost of other services provided on the internet by third parties (e.g. Dropbox, Amazon Prime, Zoom, etc.) Transportation is an odd inclusion with the list of utilities and, as of the time of this writing, the SBA had not provided guidance on what transportation means in this context. As with rent, utility expenses incurred before the Covered Period can be paid during the Covered Period and be eligible for forgiveness.
8) What constitutes a forgivable payroll expense?
Salary, wages, commissions, and other similar compensation all count as forgivable payroll expenses. Any amount of compensation for an individual in excess of $100,000 when annualized cannot be counted. This means any amount of compensation paid to an individual in excess of $15,384.61 (100,000 divided by 52 times 8) will not be a forgivable expense. The most recent Interim Final Rules clarify that compensation paid to a furloughed employee, bonuses, and “hazard pay” are forgivable payroll expenses, except to the extent the amount of total compensation is exceeds $15,384.61 for any individual employee. Compensation designated as housing allowance for a minister does count as a forgivable payroll expense. Health insurance premiums qualify, but prepaid premiums that were paid prior to the Covered Period are likely not a forgivable payroll expense.
9) What doesn’t constitute a forgivable payroll expense?
Compensation paid to anyone with primary residence outside the United States and compensation paid to independent contractors (i.e. 1099 workers) does not count as a forgivable payroll expense. Independent contractors are eligible to apply for their own PPP loans. Payments paid for workers compensation insurance and reimbursements to the State of Texas for unemployment benefits most likely do not constitute a forgivable payroll expense. Severance or separation payments are also unlikely to constitute a forgivable payroll expense.
10) Is Congress considering any additional legislation that would affect PPP loan forgiveness?
Yes. On May 15, the House of Representatives passed the Health and Economic Recovery Omnibus Emergency Solutions or “HEROES” Act in which it proposed a Phase 4 of congressional COVID-19 relief legislation. The bill contains some key revisions to the PPP program. One amendment to the PPP program currently in the HEROES act would extend the Covered Period from 8 weeks (56 days) to 24 weeks. Another amendment removes the SBA requirement that at least 75% of PPP loan funds be used on payroll expenses. The Senate will discuss the HEROES Act on June 1. However, it is unlikely that the HEROES Act will pass in its current form. Currently, the main dispute between political parties over the HEROES Act is the $3 trillion price tag. The provisions of the HEROES Act that would revise the PPP are much less controversial. Several members of the Senate have stated that while a Phase 4 COVID-19 relief bill may be necessary, it may be on the scale of the CARES Act (which included the PPP). It’s possible that Phase 4 legislation, whether it be the HEROES Act or some other bill, will revise the PPP loan forgiveness. Borrowers seeking forgiveness would be wise to stay informed on updates to the PPP loan forgiveness process.
John Litzler directs the Church Law division of Christian Unity Ministries in San Antonio. He is a graduate of the University of Texas and Baylor Law school.