As small businesses are beginning to receive and spend their Paycheck Protection Program (“PPP”) funds, many have questions on how they can spend those funds to maximize forgiveness of their loan. The CARES Act and the Small Business Administration (SBA) have given general guidance around what is required for PPP loan forgiveness, but the devil is in the details and many important questions regarding forgiveness have been left unanswered thus far.
Guidance on impact of employee declining offer of rehire
Some positive news on this topic, however, is that in its FAQ document (see question 40), the SBA has now issued guidance on this common question:
Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?
According to the FAQ document, the answer is in general “no.” The guidance goes on, however, to note that the SBA and Treasury intend to issue an Interim Final Rule outlining the parameters for forgiveness under these circumstances, including:
- The offer to rehire must be for the same salary/wages and same number of hours;
- The offer to rehire must be in writing and in good faith; and
- The employee’s rejection of the offer must be documented by the borrower.
More guidance needed on important questions
This new guidance, hopefully, signals that more will be forthcoming from the SBA and Treasury on how borrowers can maximize loan forgiveness. Some unanswered questions that remain include:
- For self-employed and independent contractors whose PPP loan amount is based on Schedule C, Line 31 of their IRS Form 1040, the regulations allow these individuals to pay themselves only 8 weeks of “payroll” (average net profit) out of their PPP funds. Mathematically, that 8 weeks only works out to about 74% of the loan amount, but the regulations require the borrower to spend 75% on payroll. Will that impact forgiveness?
- Many small businesses received loans that are larger than 8 weeks of their average monthly payroll plus their mortgage interest, rent, and utilities. Can these businesses use these extra funds to pay their employees bonuses or hire more employees?
- Can self-rental payments be forgiven?
- Are there parameters around rehiring to maintain the same level of full-time employees? Do you have to hire for the same positions or can you create new positions?
- If the IRS requires you to show evidence that your certification of need was in good faith, what type of evidence will be sufficient?
These are just some of the unanswered questions surrounding forgiveness of PPP loans. Finney Law Firm will continue to monitor guidance on PPP forgiveness as it is issued and will post updates on our blog. If you have questions, please contact Rebecca Simpson Heimlich at 513.797.2856.