The Coronavirus Aid, Relief, and Economic Security (CARES) Act established the Paycheck Protection Program (PPP) as an incentive for small businesses to retain employees during the COVID-19 pandemic. The program provides a low-interest loan to eligible small business owners, self-employed individuals, and other eligible businesses, including non-profits, and is meant to cover eligible payroll costs, mortgage interest, rent, utilities, and interest on certain other debt obligations and refinancing an Economic Injury Disaster Loan (EIDL) made between Jan. 31, 2020, and April 3, 2020 (though at least 75% of the loan proceeds must be used for eligible payroll costs to be forgiven) over an eight-week period.
Borrowers can apply for approximately 2.5 times their average qualified monthly payroll expenses, up to $10 million and subject to certain restrictions. The application period began on April 3, 2020, and runs through the earlier of June 30, 2020, or when all the funds have been committed. The PPP loan carries a maturity of two years and a 1% interest rate.
A PPP loan may be forgiven, in whole or in part, if certain requirements are met. Borrowers can apply for loan forgiveness with their lender eight weeks after loan disbursement, and the lender is responsible for determining eligibility. Borrowers don’t have to use all the loan proceeds in the eight-week period, but funds used after the eight week period are not eligible for loan forgiveness. Loan forgiveness is limited to the loan principal plus accrued interest. For tax purposes, forgiven loan amounts are excluded from gross income, and associated expenses are not deductible.
The following expenses are included in loan forgiveness, and the non-payroll items are capped at 25% of the loan proceeds:
- Eligible payroll costs
- Mortgage interest payments on mortgages incurred in the ordinary course of business before Feb. 15, 2020
- Rent payments under leases dated before Feb. 15, 2020
- Utility payments for electricity, gas, water, transportation, phone, or internet access under service agreements dated before Feb. 15, 2020
- For certain employers identified in the statute, additional wages paid to tipped employees
The uses listed above are ones that may be covered by loan forgiveness, but they are not the only allowable uses of a PPP loan. Only loan proceeds spent on covered uses during the eight-week period following disbursement of your client’s PPP loan are forgivable.
Eligible payroll costs may include, but are not limited to, compensation paid to employees whose principal place of residence is the U.S. in the form of salaries, wages, commissions, or other similar compensation, cash tips, and payment for vacation, employee benefits, health insurance premiums, retirement benefits, and state and local taxes assessed on compensation. However, you need to exclude Federal employment taxes imposed or withheld between Feb. 15, 2020, and June 30, 2020, including the employee’s and employer’s share of FICA and Railroad Retirement Act taxes, and income taxes required to be withheld from employees.
If your client has employees, their loan forgiveness amount may be reduced as a result of reductions to employee headcount or wages.
Reducing the number of employees
The loan forgiveness amount may be reduced if the average number of full-time equivalent employees* employed during the eight-week period after the lender sent the PPP loan funds to the borrower is less than the average number of full-time equivalent employees per pay period between:
- Feb. 15, 2019, and June 30, 2019, or
- Jan. 1, 2020, and Feb. 29, 2020
Most borrowers can choose which time period to use for comparison, but seasonal employers must use Feb. 15, 2019, to June 30, 2019.
If any full-time employee reductions made between Feb. 15, 2020, and April 26, 2020, are reversed by June 30, 2020, the loan forgiveness amount will not be reduced.
Reducing employee salary or wages
The loan forgiveness amount may be reduced if total salary or wages is reduced more than 25% for any employee during the eight-week period after the lender sent the PPP loan funds to the borrower as compared to the most recent full quarter before the eight-week period.
If reductions made between Feb. 15, 2020, and April 26, 2020, are reversed by June 30, 2020, the loan forgiveness amount will not be reduced.
This forgiveness reduction does not apply to reductions associated with employees who had salaries or wages higher than $100,000 in 2019.
Other reasons why the forgivable amount may be reduced
- Only 25% of the loan forgiveness amount may be attributed to non-payroll costs.
- If the borrower received an advance through the EIDL program, it will be deducted from the forgivable amount on a PPP loan.
Borrowers can apply for loan forgiveness through their lender. They will need to verify the number of employees on the payroll and their pay rates for the eight-week period after the lender sent the borrower their PPP loan funds. Determining how your client used the loan proceeds is important because all or a portion of the loan is forgivable, and the remaining balance needs to be repaid over a two-year period at a 1% interest rate. We’re still awaiting final guidelines on forgiveness from the U.S. Treasury and Small Business Administration.
Documents needed for PPP loan forgiveness include, but may not be limited to:
- Payroll tax filings
- State income, payroll and unemployment insurance filings
- Canceled checks, payment receipts, transcripts of accounts, or other documents verifying payments on mortgage obligations, payments on covered lease obligations, and utility payments
- Documentation of any advance received under the CARES Act EIDL Emergency Grant program
The forgivable amount will depend, in part, on how the PPP loan funds are spent during the eight-week period after the lender disbursed the loan proceeds. At the end of those eight weeks, clients that borrowed can apply for PPP loan forgiveness with their lender. It will be helpful to track this information on spreadsheets or through QuickBooks®.
Here are some tips if your clients use QuickBooks and its tracking features:
- Create the PPP loan as a long-term liability account.
- Create a bank deposit or use a bank feed.
- Categorize any PPP-related expenses (and consider using PPP tags, notes, projects, and classes for optimal tracking).
- Break out your eligible payroll costs to account for the following, and possibly export to a spreadsheet if you don’t want to make permanent changes to your chart of accounts:
- 75% threshold
- Exclusion of federal taxes paid
- Exclusion of annual compensation above the $100,000 annual cap ($8,333.33 per month)
- Run reports because you’ll apply for loan forgiveness at the end of the eight-week period:
- Create a profit and loss statement for the eight-week period by using tags or classes, or by filtering on any relevant expense categories.
- If you use QuickBooks Payroll, you can run a payroll tax and wage summary, exclude federal tax payments, and export it to a spreadsheet.
- Keeping accurate records is important if your clients receive a PPP loan and subsequently apply for forgiveness. Encourage your clients to keep all PPP funds in a separate account.
- Be aware of the timing requirements associated with PPP loan forgiveness and help ensure our clients’ actions, recordkeeping and tracking comply with them.
- Communicating with your clients is key: Be proactive and make sure they understand the requirements!
You already play a key role in advising your clients on their taxes, so spend the extra time to advise on how to keep track of their PPP loans. Spending time on the front end by setting up the recordkeeping and processes will save a lot of time in the long term.
More resources from the U.S. Treasury
- PPP loan forgiveness application
- Paycheck Protection Program Information Sheet: Borrowers
- Paycheck Protection Program Loans: How to Calculate Maximum Loan Amounts – By Business Type
- Paycheck Protection Program Loans: Frequently Asked Questions
Editor’s note: This article was originally published in the CPA Practice Advisor.