Navigating the Forgiveness Portion of the PPP
If your business has received approval for a loan from the Paycheck Protection Program (PPP), congratulations on obtaining aid to help get your business up and running again. You may have found a solution, but understanding key provisions of that bill is imperative to successfully navigate that solution.
First, you want to maximize the forgivable portions of the PPP loan. Second, you want to use the loan properly so that you stay out of legal trouble for any potential abuse of the program. Finding a new normal while trying to keep your business afloat and your employees paid can be overwhelming. Hopefully, the following can help you navigate through some of the challenges of the PPP and answer some of the FAQs we all face.
What makes the program very attractive is that these PPP loans are loans in name only; once a borrower receives the funds, the amount spent over the next 8 weeks on payroll, mortgage interest, rent, and utilities is eligible to be completely forgiven.
Even better, while cancellation of a borrower’s debt typically creates taxable income, the CARES Act provides that forgiveness of a PPP loan is completely tax-free. An important fact to remember, any portion of a PPP loan that isn’t forgiven must be paid back over two years at an interest rate of 1% (They have built-in is a six-month deferral period).
The CARES Act states that during the 8-week stretch beginning on the date a PPP loan originates (The date your loan is funded), the following costs incurred and payments will be eligible for forgiveness:
- Payroll costs (we will cover this later);
- Payment of interest on any obligation that was incurred before February 15, 2020,
- Payment of rent under a leasing agreement in force before February 15, 2020,
- Utility Payments (water & power, gas, telephone, or internet access for services that began before February 15, 2020.)
Since this is a Paychecks Protection Program, it’s a good idea to go over what will be considered as payroll costs and what is not.
Payroll costs are equal to the sum of:
- Salary, wage, commission, or similar compensation. Recent guidance from the SBA explains payroll costs include guaranteed payments to a partner PLUS the partner’s share of partnership income subject to self-employment taxes. These amounts are subject to a per-employee or per-partner cap of $100,000.
- Cash tips or equivalent;
- Vacation, parental, family, medical, or sick leave;
- Group health care benefits, including insurance premiums;
- Retirement benefit; and
- State or local tax assessed on wages.
Payroll costs do NOT include:
- Compensation in excess of $100,000 to an individual employee — or the self-employment income of a partner in a partnership – for the covered period (The math works out be about $15,385 for the entire 8 weeks period);
- Federal Taxes imposed and withheld;
- Any compensation of an employee whose principal place of residence is outside of the United States;
- Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act; or
- Qualified family leave wages for which a credit is allowed under section 7003 of that same Act.
Important facts to remember:
- Additional costs can be included as part of employee payroll costs on top of the per-employee limit of $100,000. These costs include the employer’s share of state and local taxes, employer contributions to retirement plans, and group health care coverage expenses;
- No more than 25% of the loan can be spent non-payroll expenses such as runt, utilities, and interest expense;
- The number of Full-Time Equivalent employees must remain the same as the numbers reported on your application, which are most likely derived from your Quarterly payroll reports. This can pose an important challenge for many small business owners and we’ll dive into that.
Now that we know the formula, let’s review the fun part of the bill.
Most small business owners will face the same dilemma and are asking the same question: How am I going to rehire my employees if I can’t even open my doors? Frankly, it’s a fair question and I personally think the administration dropped the ball on the 8-week covered period. Remember, your 8-week period begins from the date your loan is disbursed and you have received the funds, not from the day you open your doors. The banks can’t hold the funds back, they have 10 days to disburse the funds once approved. Bottom line, unless the SBA releases more guidance, you must exhaust all of the funds within the 8-week covered period after receiving your funds, if you are trying to maximize a perfect 100% forgiveness.
Another challenge we are facing is convincing our employees to actually come back to work. Remember, the federal government is now supplementing the unemployment compensation with an additional $600 per week, so in most states, the unemployed employees are receiving about $1,000 per week, which in some cases it is actually more than what they were making before! This will make it that much more difficult for a business owner who’s trying to hit the 100% forgiveness mark. Remember, you must hire your employees back and run payroll as if everything is back to normal after all this is called the “Paychecks” Protection Program. If you fail to hire back a percentage of your employees and you can’t rehire, chances are you are going to lose a percentage of the forgiveness portion of the loan. We’ll cover more of this in our FAQs.
Frequently Asked Questions
- Should I set up a new bank account?
Chances are you are going to need proper bookkeeping and recordkeeping setup, having a separate business bank account to hold your PPP funds will make it easier for your bookkeepers to keep track and your banker to verify later.
- Is the forgivable portion of the loan taxable income?
Generally, loans forgiven are taxable, but the treasury has made it clear in this scenario, it does not constitute taxable income.
- What happens to the portion of the loan that isn’t eligible for forgiveness?
If you are not able to hit the 100% mark, don’t panic, the portion will turn into a 2-year loan at a rate of 1% plus a 6-month deferment.
- What happens if some of my employees refuse to come back to work?
Consult with an HR professional on this one, but chances are they’re going to lose their unemployment benefits since they’re technically quitting their job. Remember, finding employment is a key-factor in unemployment compensation. I can’t emphasize enough the importance of consulting with an HR professional if you do run into this issue.
- What happens if my number of FTE employees drops from prior periods?
If the number of employees drops, you may lose a percentage of the forgivable portion of the loan. Let’s assume you can only re-hire 2/3 of your staff. Chances are 1/3 of your PPP loan will actually turn into a loan. We’re still waiting for more guidance on this, bus so far this seems to be the case.
- If I own my own real-estate, can I continue paying myself rent?
It’s very common for small business owners to keep their real estate wrapped in an LLC as a separate entity and rent it to themselves (self-rentals). We don’t see an issue with continuing to pay rent to your LLC and counting it as part of the covered expenses as long as the lease was in place prior to the 2/15/2020 and the figures stay the same as before.
- What happens if I don’t hear back from my bank?
The banks are doing everything they can to support their customers. I know many of us are upset and angry with them, after all it only took minutes for them to burn through the first round of funds. But look on the bright side, now that we know more about the 8-week covered period, I would rather be one of the last ones to get funded and not the first! Timing is key, but obviously we don’t want to sit around and wait for the funds to be fully depleted. Do contact your bank, but keep in mind, they’re overwhelmed.
- Who do I contact if I have questions?
The bank should be your first choice since they’re actually in charge of the verification process, but since all of this is as clear as mud, chances are they will direct you to the SBA. The SBA is also overwhelmed with the number of calls and inquiries, so you have to be extremely patient.
Unfortunately, the lack of detailed guidance will impose numerous challenges for many business owners. With all that said, a key rule to remember is that this is called the Paychecks Protection Program and it’s meant to reduce the burden on other government programs, in particular, the state unemployment insurance funds and help businesses spring back into action.
If you feel we can offer support and help you navigate through any part of this, please feel free to contact us.