Answers to Some of the More Common PPP Loan Forgiveness Questions

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Jason B. Freeman

Jason B. Freeman

Managing Member


Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

On May 15, 2020, the Small Business Administration (SBA) issued Form 3508, the Paycheck Protection Program Loan Forgiveness Application.  It consists of the:  (1) PPP Loan Forgiveness Calculation Form; (2) PPP Schedule A; (3) PPP Schedule A Worksheet; and (4) the (optional) PPP Borrower Demographic Information Form (collectively, the “Forgiveness Application”).

Because PPP loans began to be disbursed in early to mid- April 2020, many were hoping the SBA would provide more clarification with respect to the hundreds of open questions regarding the PPP loan forgiveness aspect of the program.  Although the SBA did offer some guidance, many questions remain.  In this Insight, we attempt to answer some of the tougher questions we have fielded, particularly those that were posed to us via our webinars.  As the reader will discover, many of the questions lack a definitive answer, but we have attempted to provide a response based on the existing guidance and the statutory text of the CARES Act.


Does a self-employed sole proprietor with no employees need to write a check to himself or herself from a separate account for the owner replacement compensation or is the 2019 Schedule C, Line 31, amount multiplied by 8/52 sufficient for the payroll support position?

The CARES Act specifically provides that individuals who operate a sole proprietorship or act as an independent contractor, in addition to eligible self-employed individuals, may receive a PPP loan.  In addition, the CARES Act defines “payroll costs” for purposes of the maximum PPP loan amount and the forgivable amount as payment of any compensation or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation not in excess of $100,000.

In its Second Interim Rule, the SBA provided additional guidance to self-employed and independent contractors.  In that Rule, the SBA indicated that these persons were eligible for a PPP loan if they:  (1) were in operation as of February 15, 2020; (2) were an individual with self-employment income; (3) had a principal place of residence in the United States; and (4) filed or will file a Schedule C for 2019.

In addition, the Rule provides that to determine the payroll costs, self-employed and independent contractors should first determine their net profit on Line 31 of Schedule C, divide the amount by 12, and multiply such amount by 2.5.  Self-employed and independent contractors with employees could also add those payroll costs, subject to limitations.

For eligible costs, the Rule permits Schedule C filers to use the proceeds of the PPP loan for, among other things, “owner compensation replacement.”  Finally, the Rule provides that the forgivable portion of these PPP loans will depend, in part, on the total amount spent over the covered period on “owner compensation replacement,” which is calculated based on the 2019 Line 31 net profit multiplied by 8/52 (i.e., 8 weeks).

The PPP Loan Forgiveness Calculation Form requests the borrower to report on Line 1 its “payroll costs,” as determined from the PPP Schedule A, Line 10.  On the PPP Schedule A, Line 9, it requests the borrower to report the “[t]otal amount paid to owner-employees/self-employed individual/general partners.”  Thus, the instructions, read literally, seem to suggest that the Schedule C filer should make an actual payment to qualify.

It should be noted that much of the confusion surrounding this question stems from federal tax law principles.  Generally, federal tax law prohibits a Schedule C filer from making payments of wages to himself or herself.  This makes sense because the Schedule C filer computes a self-employment tax on the return, which is analogous to an employer’s obligation to withhold and remit employment taxes to the IRS.  In addition, more confusion exists because in many cases Schedule C filers do not have a separate business account for their business, although it is certainly recommended for a variety of reasons not relevant here.

For those wishing to play it safe, they may consider an actual payment or withdrawal from the bank account holding the PPP loans.  However, it would seem difficult, at least to the author, for the SBA or a lender to disqualify Schedule C filers simply because they did not take the unnecessary step of making a payment from their bank account to themselves representing the owner compensation replacement.


A PPP borrower did not have an account at the bank in which he applied but received a PPP loan.  Because the PPP borrower did not have an account, the lender mailed a paper check to the applicant.  In this case, the check was dated May 7, 2020 and was received on May 11, 2020.  When does the 8-week period start?

Under the CARES Act, the covered period (or alternative covered period for certain borrowers with payroll costs) begins 8 weeks after the date of the origination of the covered loan.  However, in SBA FAQ No. 20, the SBA concluded that the 8-week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower.  In many cases, this date should be easy to determine because the disbursement will occur via a credit to the bank account.

But, what about the issue above?  The commonsensical answer would be that the 8-week period begins when the borrower is able to deposit the funds into the account.  Stated differently, how could the borrower even incur eligible expenses under the PPP loan program until the borrower has access to the funds?  In this instance, and depending on whether it matters, an argument could certainly be made that the covered period began on the May 11, 2020, and at the earliest May 7, 2020.


Are payments by a church to the pastor for payroll and housing covered under the PPP?

Unlike other Section 7(a) loans, the CARES Act provides that PPP loans may be made to certain non-profit organizations.  Generally, churches will meet the requirement for an eligible non-profit organization.

There is nothing in the CARES Act or other guidance to suggest that payroll made to a pastor would be disqualified, provided the church at issue meets the requirements under I.R.C. § 501(c)(3) (which many do).  Moreover, an Interim Rule issued by the SBA suggests that the general rules of the CARES Act are more relaxed for “faith-based organizations,” particularly due to constitutional concerns.

In addition, the housing stipend provided by the pastor should likewise qualify for the PPP loan program.  Under SBA FAQ No. 32, the SBA indicated that payroll costs include all cash compensation paid to employees, including a housing stipend or allowance provided to an employee as part of compensation.


What if a business that received a PPP loan shuts down permanently?  Should it repay the funds?

Unfortunately, this may be a common issue for many small businesses due to COVID-19.  As a general matter, PPP borrowers should return the PPP funds to the lender.

Under the CARES Act, the SBA does not have recourse against an individual shareholder, member, or partner of a PPP borrower for nonpayment of the PPP loan, except to the extent the shareholder, member, or partner uses the loan proceeds for an expense other than:  (1) payroll costs; (2) costs related to the continuation of group health care benefits during periods of sick, medical, or family leave, and insurance premiums; (3) employee salaries, commissions, or similar compensations; (4) payments of interest on certain mortgage obligations; (5) rent; (6) utilities; and (7) interest on any other debt obligations that were incurred before the covered period.  Thus, if the owners of the business simply wind down and distribute the funds to themselves, the owners would be personally liable on and have to pay back the PPP loan.


What counts as an eligible utility expense?  For example, do monthly fees paid for offsite computer backup and monthly fees for payroll and bookkeeping software count?

Under the CARES Act, “any covered utility payment” is forgivable, subject to the SBA’s 75% payroll limitation.  The CARES Act specifies that a “covered utility payment” means payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

On Line 4 of the PPP Loan Forgiveness Calculation Form, it requests the borrower to report “Business Utility Payments.”  In the instructions to the Forgiveness Application, it provides that “covered utility payments” are “business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.”  These “covered utility payments” are referred to as “business utility payments.”

Many borrowers understandably wonder whether eligible utility expenses can include others, such as security system monitoring or trash collection services.  Given the statutory language and the lack of SBA guidance, it is likely lenders and the SBA will interpret eligible utility expenses narrowly to only include those items listed above.

The terms electricity, gas, water, telephone, and internet access are fairly straightforward.  PPP borrowers should be entitled to forgiveness of these expenses if they are related to the borrower’s business.  Moreover, although the term “transportation” is not defined or clarified in SBA guidance, it could reasonably be interpreted under existing statutory interpretation canons to relate to the “distribution” of a transportation-type utility.  This would suggest gas for vehicles or perhaps some other type of transportation expense.

Although it is unlikely the lender or the SBA would permit forgiveness for offsite computer backup (e.g., cloud storage), an argument could potentially be made that it falls within the definition of transportation expense in that the business is “transporting” data to a more secure location.  I would expect some push back on this issue, though.


What’s the latest position of the IRS to disallow expenses that give rise to loan forgiveness?

The IRS’ current stance remains, under Notice 2020-32, that PPP borrowers cannot take a deduction for any expenses that are forgiven under the PPP loan program.  But, many congressional leaders have expressed their disagreement with this position.  Congressional Leaders Tell Treasury that PPP Borrowers Should be Entitled to Deductions.  Moreover, many tax practitioners, including the author, believe there may be strong arguments that the IRS simply got it wrong, as a matter of law, in Notice 2020-32.  Various legislative fixes have been introduced in Congress to override the IRS’ interpretation.  Stay tuned.


Can Schedule C filers with home offices claim home office expenses as forgivable?

The Internal Revenue Code permits Schedule C filers to claim deductions related to their home office.  Generally, such taxpayers can use either the “simplified option” or the “regular method.”  Under the simplified option, taxpayers can claim a deduction of $5 per square foot of home used for business up to a maximum of 300 square feet (i.e., $1,500).

As its name seemingly implies, the regular method requires additional computations.  Under this method, taxpayers must determine their actual expenses of their home office, which includes mortgage interest, insurance, utilities, repairs, and depreciation.  The amount of the home office deduction is based on the percentage of the home devoted to business use multiplied by the actual expenses.

Schedule C filers claiming forgivable amounts related to home office expenses face several hurdles.  First, the Second Interim Rule limits Schedule C filers to the lesser of either the actual eligible costs paid or incurred in the covered period or the actual eligible costs paid or incurred and reported on the 2019 Schedule C.  In other words, if you did not claim home office deductions in 2019, you may have an issue arguing to the SBA or a lender that you are entitled to forgiveness for them in 2020.

The second hurdle is whether home office expenses can be forgiven under the CARES Act and existing guidance.  There is no clear answer.  Conceivably, a strong argument can be made that, under the regular method, Schedule C filers should be entitled to mortgage interest and utilities (as defined and discussed above).  Moreover, without this interpretation, many Schedule C filers would have little to no other eligible expenses other than owner compensation replacement.

The final hurdle for many Schedule C filers will apply to those who used the simplified method to claim a home office deduction in 2019.  The IRS permits this method for administrative convenience of the federal tax laws, but does administrative convenience similarly apply for determining the forgivable portion of a PPP loan?  There is no clear answer.


I have a client that has yet to file a 2019 Schedule C.  Can he apply for a PPP loan now?

The answer is a resounding “yes,” provided the client meets all the other requirements in the Second Interim Rule.  Under that Rule, it indicates that a lender may use an unfiled 2019 Schedule C for purposes of determining the PPP maximum loan amount.  However, borrowers should be careful in that the Forgiveness Application requires a certification from the borrower that the tax documents submitted as part of the request for loan forgiveness (i.e., Schedule C) is consistent with what the borrower has submitted or will submit to the IRS.


Should I apply for a PPP loan even if I know it won’t be forgiven because I will not have payroll, rent, or utilities to use it on.  I have software subscriptions to purchase which I could use the money for

Under the CARES Act, a PPP borrower can only use the loan proceeds for:  (1) payroll costs; (2) costs related to the continuation of group health care benefits during the periods of paid sick, medical, or family leave and insurance premiums; (3) employee salaries, commissions, or similar compensations; (4) payments of interest on any mortgage obligation; (5) rent; (6) utilities; and (6) interest on any other debt obligations that were incurred before the covered period.  Moreover, the standard Borrower Application Form requires the borrower to make various certifications and representations, which include:

It is likely the SBA or a lender would challenge the usage of PPP loan proceeds for software subscriptions unless the borrower was able to successfully argue that such expenses represented a lease or rent-like expense.


Can 100% of the PPP loan proceeds be used for employee payroll costs?

Yes.  The CARES Act specifically provides that payroll costs are eligible for forgiveness and the 75% limitation to forgiveness only applies if the eligible expenses are less than 75% of payroll costs.


Would “bonuses” count as payroll costs?

This is a common question right now, primarily because many businesses remain under business closure orders or citizens of their applicable State remain under strict stay-at-home orders.  The CARES Act does not mention the term “bonuses” or extra pay.  However, it does limit the amount of eligible payroll costs to $15,385 for the covered period per employee.  Although the usage of bonuses may be frowned upon by the SBA, in many cases businesses can make good-faith arguments that extra pay is warranted.  For example, given the risk of COVID-19 infection, businesses may reasonably pay their employees more as a type of “hazard pay.”  Moreover, in many industries such as restaurants, additional pay may be necessary to lure these workers away from the current benefits of unemployment (and the federal government’s extra $600 per week).  Given the lack of guidance on this issue, the answer may be “it depends” on the facts and circumstances.  Borrowers should bear in mind, however, that their original PPP loan amount may limit the usage of bonuses, particularly because the PPP loan amount is based on historic periods of employment (either 2019 or the one-year rolling period before the PPP loan application).  All things being equal, the borrower would expend “bonus” pay much more quickly during the 8-week period.


Can PPP loan proceeds be used 100% to pay off an existing mortgage?

No.  The CARES Act only permits the payment of interest on mortgage obligations and specifically excludes any prepayment of or payment of principal.


Will non-compliance with the 75% use of the PPP on payroll costs reduce the amount of forgiveness or eliminate the forgiveness altogether?

The First Interim Rule provides that “at least 75 percent of the PPP loan proceeds shall be used for payroll costs.”  Thus, if the borrower received a PPP loan of $1 million, the borrower must use at least $750,000 for payroll costs. Thus, if the borrower has no payroll costs, the entire amount of the PPP loan would not be forgiven.  However, if the borrower in our example had $500,000 of payroll costs, the borrower would qualify for $666,667 of loan forgiveness, assuming the borrower had $166,667 of other eligible expenses.


What do I do if my employees refuse to come back to work?  For example, they are scared of infection or no longer want to work for the business?

Under the CARES Act, the amount of loan forgiveness can be reduced if the borrower fails to maintain a sufficient employee headcount during the covered period.  For purposes of determining the appropriate headcount, it is either (at the borrower’s election):  (1) February 15, 2019, through June 30, 2019; (2) January 1, 2020, through February 29, 2020; or (3) in the case of seasonal employers, either of the preceding periods or a consecutive twelve-week period between May 1, 2019, and September 15, 2019.

But, there are exceptions for reductions of headcount outside the borrower’s control.  Specifically, there is no reduction for any positions in which the borrower made a good-faith, written offer to rehire an employee during the covered period which was rejected by the employee or if the employee was fired for cause, voluntarily resigned, or voluntarily requested and received a reduction of their hours.


Should I get an opinion from legal counsel?

Attorneys often prepare legal opinions for their clients on various legal matters.  In the federal tax world, opinions are routinely given to taxpayers to explain their risks of taking a certain reporting position or whether there is sufficient authority in the first instance to claim the reporting position.

But, legal opinions are not unique to federal tax law.  In fact, the same rationale for obtaining a legal opinion for issues on the CARES Act may apply with equal force.  Depending on the comfort level and difficult of the legal issue, it may be advisable to at least speak with an attorney about obtaining an opinion.


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