PPP Loan Forgiveness May Not Be What You Expect
What did you expect when PPP brought up the term “foregiveness?” Now that you have gotten a Paycheck Protection Program loan (PPP), it is time to start planning how to spend the loan proceeds so some portion of it will be forgiven.
PPP Loan Terms
As the title implies, the purpose of the loans is to enable employers to keep their employees on staff and maintain their normal rates of pay during the 8-week period immediately following the funding of the loan. The term of a PPP loan is 2 years at an interest rate of 1%, and any portion of the loan not forgiven must be repaid at the end of the 2-year period.
Payroll Proctection Program Loan Timing
If you recall, when applying for the loan, borrowers had to provide documentation to verify an average monthly payroll for the 12-month period preceding the application. However, for calculation purposes, each employee’s payroll for a year had to be limited to a maximum of $100,000. A new company, that was not in operating and paying employees before February 15, 2019, the average monthly payroll had a different basis. The average payroll for January and February 2020 was the criteria. For seasonal businesses, other special testing periods were formulated.
Self-Employed Individuals Under PPP
Self-employed individuals are not included on payroll. Therefore, the amount a self-employed individual includes in the average monthly payroll computation is 1/12 of the business’s net profits . Those net profits are subject to the same $100,000 limit that is applied to an employee’s annual compensation.
Payroll Basis for PPP
Regardless of how your business’s average payroll was determined, the PPP loan amount basis is 2.5 times the average monthly payroll according to one of these methods.
Example: Assume your business was not new or seasonal and the loan was applied for on May 1, 2020. You would have added up your company’s payroll for the prior 12 months, May 2019 through April 2020 (subject to the $100,000 limit per employee), and then divided the sum by 12. Assuming the result totaled $80,000, you would have qualified for a PPPL of $200,000 (2.5 x $80,000) at 1% interest, all due and payable in 2 years.
These PPP loans are partially forgivable if the intention of your business is to keep your employees working during the 8 weeks following the funding of the loan. The purpose of the forgiveable loan is so you can maximize loan forgiveness for your particular circumstances. It may seem simple at first, but this is before taking into consideration all of the details that are behind PPP loan forgiveness computation that will reduce the loan forgiveness amount.
Reduction of Employee Pay
You must determine any reduction in pay that is in excess of 25% on an employee-by-employee basis. These reductions in excess of the 25% will reduce the forgiveness amount dollar for dollar. There is no reduction in pay for an employee whose reduction will go back to full rate by June 30, 2020.
Reduction in Pay
Decrease in Employees – Where the average number of employees has been reduced during the 8-week period as compared to a prior testing period, the forgiveness is proportionally reduced.
For example, let’s say you have an average of 10 employees during the testing period. However, you have an average of 9 employees during the 8-week period. There will be a 10% reduction to the forgiveness. You will be able to choose either January 15 to June 30, 2019 or January 1 to February 29, 2020 as your testing period.
Qualified Expenses Limitation
Limitation of Expenses Other than Payroll – The loan proceeds are primarily for maintaining payroll. However, other qualified uses include: rent, lease, business interest and utility payments in force before February 15, 2020. Yet, there is a 25% limit on these expenses for the forgiven debt.
Other Forgivable Debt Complications
There are other complications involved in determining the forgiveness as well.
Determining a loan’s forgiveness starts with the sum of the payroll and expenses for the 8-week period. Then there is the reduction of each of the items above. As you can see, it is not as simple as some would have you believe, and the forgiveness is not automatic. As you can see, with all the criteria that the PPP Loan Forgiveness program is a delicate balance.
Good Faith Certification on PPP
Did you borrow less than $2 Million dollars when you took out the loan? If so, as a borrower you had to make a good faith certification that there was a need for the loan. Originally the Treasury indicated that every loan certification would be subject to an audit. However, the Treasury has since come up with an “economic uncertainly” safe harbor for loans of less than $2 Million. This meant borrowers of these loans will receive the money in good faith, under the assumption they met the criteria for the loan.
Did Your Business Borrow More than $2 Million Dollars on the Payment Protection Program?
For loans of $2 million or more, the Treasury Department is gave businesses until May 18, 2020 to return the funds. This would allow them to avoid an audit concerning the Good Faith Certification. For the businesses that return the funds by May 18, the Treasury will not pursue administrative enforcement. They will also not bother to make referrals to other agencies. In an audit, where the SBA finds that the borrower’s certification lacks an adequate basis for needing the loan the Treasury will not pursue administrative enforcement. The is providing the borrower returns the funds after notification by the SBA.
Borrowers that do return the loan proceeds will be eligible for the Employee Retention Credit.
Was your PPP Loan Forgiveness Less Than You Anticipated?
This office can assist you in planning your expenditures to maximize your loan forgiveness according to government guidelines. Do you have questions behind the Paycheck Protection Program Loan Forgiveness? Please call for an appointment with one of our tax experts or Alex Franch, 781-849-7200.. Joseph Cahill and Associates/Worthtax are accepting appointments to help you regardless if it is with regard to the PPPP Loan Forgiveness or filing your tax return. The tax filing due date is now July 15, 2020. Especially if you believe you will owe the IRS money. We invite you to our online scheduling tool to book your appointment now. Also, we have the capability to hold virtual engagements with you by way of our Client portal for Secure file sharing E-Signing Expert.