Loan forgiveness under the Paycheck Protection Program and next steps

Tax Law and News tax matters for self-employed people

Note: PPP borrowers may engage the services of an accountant to track the use of their PPP funds.  However, only the borrower or an authorized representative who is legally authorized to make certifications on the borrower’s behalf may submit an application for loan forgiveness.  Accountants should be aware of this limitation and ensure that an authorized representative of the borrower understands his or her obligation to complete, review, and certify to the contents of any loan forgiveness application.

 

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, and the PPP Flexibility Act gives additional flexibility to borrowers who take a PPP loan after June 5. 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 certain Economic Injury Disaster Loans (EIDL) made during the Loan Forgiveness Covered Period (defined below). PPP loans may also be used to refinance certain Economic Injury Disaster Loans (EIDL) where the borrower received funds from Jan. 31, 2020, to April 3, 2020. A PPP loan must be used to refinance an EIDL loan where the borrower used the EIDL loan funds to pay payroll costs.

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 1, 2020, or when all the funds have been committed. The PPP loan carries a maturity of five years (two years for those loans made before the June 5, 2020, date the PPP Flexibility Act was passed, unless the borrower and lender agree to extend the maturity period to five years) and a 1% interest rate.

Loan forgiveness

A PPP loan may be forgiven, in whole or in part, if certain requirements are met. Loans made on or after June 5, 2020, have a 24-week Loan Forgiveness Covered Period. Loans made before June 5, 2020, have a 24-week Loan Forgiveness Covered Period, unless borrowers elect to use an eight-week Loan Forgiveness Covered Period. The Loan Forgiveness Covered Period of any borrower will end no later than Dec. 31, 2020. Borrowers can apply for loan forgiveness with their lender, and the lender is responsible for determining eligibility. Certain borrowers are also eligible to use a simplified EZ Loan Forgiveness Application when filing for forgiveness. Borrowers don’t have to use all the loan proceeds in the Loan Forgiveness Covered Period, but funds used after this period are not eligible for loan forgiveness. Loan forgiveness is limited to the loan principal plus accrued interest. For tax purposes, the loan forgiveness amount is excluded from gross income, but forgiven expenses are not deductible.

In addition to eligible payroll costs, the following expenses are included in loan forgiveness. To maximize loan forgiveness, the non-payroll expenses cannot exceed 40% of the PPP loan proceeds:

  • Mortgage interest payments on business mortgage obligations for real or personal property incurred in the ordinary course of business before Feb. 15, 2020.
  • Business rent or lease payments on lease agreements for real or personal property in force before Feb. 15, 2020.
  • Business utility payments for electricity, gas, water, transportation, phone, or internet access under service agreements dated before Feb. 15, 2020.

The non-payroll 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 Loan Forgiveness Covered Period following disbursement of your client’s PPP loan are eligible for forgiveness.

60% or more of PPP funds used on eligible payroll costs that are paid during the Loan Forgiveness Covered Period or Alternative Covered Period (or that are incurred during the last pay period in that time period and paid on or before the next regular payroll date) are eligible for forgiveness.

Eligible payroll costs may include, but are not limited to, compensation paid to (non-owner) employees whose principal place of residence is the U.S. in the form of salaries, wages, commissions, or other similar compensation, cash tips, and employee benefits, such as paid vacation, parental, family, medical, or sick leave; allowance for employee separation or dismissal; payments required for the provision of group healthcare benefits and insurance premiums; payment of retirement benefits; payment of state and local taxes assessed on compensation. However, borrowers need to exclude Federal employment taxes imposed or withheld between Feb. 15, 2020, and Dec. 31, 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 Loan Forgiveness Covered Period (or, if applicable, the Alternative Payroll Covered 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:

  • 15, 2019, and June 30, 2019, or
  • 1, 2020, and Feb. 29, 2020

Most borrowers can choose which time period to use for comparison, but seasonal applicants may choose either of the above reference periods or any consecutive 12-week period between May 1, 2019, and Sept. 15, 2019.

If reductions made between Feb. 15, 2020, and April 26, 2020, are reversed by the earlier of (i) the date the borrower submit your application for loan forgiveness or (ii) Dec. 31, 2020, the loan forgiveness amount will not be reduced due to full-time equivalent employee reductions. Additional safe harbors and reduction exceptions may also apply if other requirements are met.

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 Loan Forgiveness Covered Period (or, if applicable, the Alternative Payroll Covered Period) after the lender sent the PPP loan funds to the borrower as compared Q1 2020.

If reductions made between Feb. 15, 2020 and April 26, 2020 are reversed by the earlier of (i) the date the borrower submit your application for loan forgiveness or (ii) Dec. 31, 2020, the loan forgiveness amount will not be reduced due to salary or wage reductions.

This forgiveness reduction does not apply to reductions associated with employees who had received compensation at an annualized rate of more than $100,000 for any pay period in 2019.

Other reasons why the forgivable amount may be reduced  

  • Only 40% of the loan forgiveness amount may be attributed to eligible 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.

Recordkeeping

Borrowers can apply for loan forgiveness through their lender (or lender servicing their loan). They will need to verify the number of employees on the payroll and their pay rates for the Loan Forgiveness Covered Period. 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 five-year period (two-year period for those borrowers who received their PPP loan before the June 5, 2020, enactment of the PPP Flexibility Act) at a 1% interest rate. 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
  • A full list of the documents required documents are set forth in the PPP Loan Forgiveness Application. Certain borrowers are also eligible to use a simplified EZ Loan Forgiveness Application when filing for forgiveness. For such borrowers, the documentation requirements differ, and are set for in the EZ PPP Loan Forgiveness Application.

Tracking expenses

The forgivable amount will depend, in part, on how the PPP loan funds are spent during the Loan Forgiveness Covered Period. At the end of the Loan Forgiveness Covered Period, clients who borrowed can apply for PPP loan forgiveness with their lender. A borrower may apply for forgiveness before the end of the covered period if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness. However, borrowers who apply before the end of their Loan Forgiveness Covered Period must account for full-time equivalent employee reductions and salary/wage reductions for the full covered period. 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:
    • 60% threshold
    • Exclusion of federal taxes paid
    • Exclusion of annual compensation above the $100,000 annual cap ($8,333.33 per month)
  • Run reports to help apply for forgiveness:
    • Create a profit and loss statement for the Loan Forgiveness Covered 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.

PPP loan changes under the PPP Flexibility Act

The below chart explains the main changes that have been made to the PPP loan under the PPP Flexibility Act.

PPP loan under the CARES Act PPP loan under the PPP Flexibility Act
Loan maturity on amounts not forgiven – two years. Loan maturity on amounts not forgiven – five years (for loans after June 5, 2020). Loan maturity for loans made before June 5, 2020, remains two years. However, borrowers and lenders may agree to extend the period to five years. Loans are deemed made for this purpose on the date the SBA assigned a loan number to the PPP loan.
Borrowers can defer principal and interest payments for six months (interest accrues). Borrowers who apply for forgiveness within 10 months after the last day of the 24-week forgiveness covered period can defer principal and interest payments until SBA pays the forgiveness amount to the lender or tells the lender that the borrower is ineligible for forgiveness. Borrowers who do not apply for forgiveness must begin making payments 10 months after the earlier of the end of the last day of the 24-week covered period or Dec. 31, 2020.
Not allowed to defer employer’s 6.2% share of 2020 Social Security tax if PPP loan forgiven. Allowed to defer employer’s 6.2% share of 2020 Social Security tax if PPP loan forgiven.
Covered Period – earlier of eight weeks from loan origination or June 30, 2020, to incur costs eligible for forgiveness. Loan Forgiveness Covered Period – earlier of 24 weeks from the date the borrower received the PPP funds or Dec. 31, 2020. If a borrower’s loan was made before June 5, 2020, the borrower can elect to use the eight-week covered period instead of the 24-week period.
No more than 25% of the loan forgiveness amount may be attributable to non-payroll costs (interest, rent, utilities). No more than 40% of the loan forgiveness amount may be attributable to eligible non-payroll costs (mortgage interest, rent, utilities).
Borrower can avoid a reduction in forgiveness if FTE headcount reduction or salary / wage reduction are restored to the Feb. 15, 2020, levels by June 30, 2020. Borrower can avoid a reduction in forgiveness if FTE headcount reduction or salary / wage reduction are restored to the Feb. 15, 2020 levels by the earlier of (i) the date the borrower submits the application for loan forgiveness or (ii) Dec. 31, 2020.
Exemption Based on Employee Availability – Between Feb. 15, 2020, and Dec. 31, 2020, loan forgiveness won’t be reduced when the borrower experiences a loss in FTEs if the borrower is able to document either of the following:
1) an inability to rehire individuals who were employees of the borrower on Feb. 15, 2020, and an inability to hire similarly qualified employees for unfilled positions on or before Dec. 31, 2020. 
2) an inability to return to the same level of business activity that was operated before Feb. 15, 2020, due to compliance with HHS, CDC, or OSHA requirements between March 1, 2020, and Dec. 31, 2020, related to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement related to COVID–19. 

 

Practitioner insights

  • 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

Editor’s note: This article was originally published in the CPA Practice Advisor. It was originally published on the Tax Pro center on May 11, 2020, and was updated on June 29, 2020, to reflect the PPP Flexibility Act.

Note: The Paycheck Protection Program Flexibility Act (“PPP Flex Act”) was signed into law on June 5, 2020. The PPP Flex Act extends the availability of loans under the Paycheck Protection Program (PPP) and adjusts certain rules applicable to PPP loans. The information reflected here may therefore be outdated. We are working to update our resources to reflect these updates to the PPP, so be sure to check back soon. Please refer to the latest guidance from the SBA and Treasury to confirm current program rules and how they apply to your particular situation.
PPP borrowers may engage the services of an accountant to track the use of their PPP funds. However, only the borrower or an authorized representative who is legally authorized to make certifications on the borrower’s behalf may submit an application for loan forgiveness. Accountants should be aware of this limitation and ensure that an authorized representative of the borrower understands his or her obligation to complete, review, and certify to the contents of any loan forgiveness application.
This information is provided as a courtesy. Nothing in these materials is intended to, and does not, create an agency relationship with Intuit Financing Inc. (d/b/a QuickBooks Capital), or any right to fees from QuickBooks Capital for any services you may provide to borrowers. QuickBooks Capital will not compensate any person or entity assisting a borrower without first having executed a written compensation agreement with both the borrower and agent, and by providing this information, QuickBooks Capital does not agree that it will enter (or has entered) into any written compensation agreement with any person or entity.
The funding described is made available to businesses located in the United States of America and are not available in other locations. 
This content is for information purposes only and should not be considered legal, accounting or tax advice, or a substitute for obtaining such advice specific to your business. Additional information and exceptions may apply. Applicable laws may vary by state or locality. No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a customer’s particular situation. Intuit Inc. does not have any responsibility for updating or revising any information presented herein. Accordingly, the information provided should not be relied upon as a substitute for independent research. Intuit Inc. does not warrant that the material contained herein will continue to be accurate, nor that it is completely free of errors when published. Readers should verify statements before relying on them.
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Comments (18) Leave your comment

  1. Please clarify: “However, you need to exclude Social Security and Medicare taxes.” Does this mean reducing gross payroll by the employee half of SS & Med? I was operating under the belief that full gross payroll (including the employee half of SS & Med) would be an allowable payroll cost, but that the EMPLOYER half of SS & Med would not be included.

  2. This is interesting. It is my understanding that the amount forgiven is not to be counted as revenue and is not to be taxed.

    I saw the IRS notice 2020-32, however. indicating that any expenses paid with forgiven funds will not be deductible. Isn’t this the same as taxing the debt relief as income?

    This seems inconsistent with congress’ intent and the design of the program.

    I’m curious if you were aware of this and if you know if this is being challenged?

  3. Have a question. Saw several articles and on the IRS website the computation for maximum loan forgiveness for an Schedule C taxpayer that showed this example
    Sch C line 31– $100,000. Therefore max loan 100,000 /12 x 8 =8333 x 2.5 = $20,833
    Article stated maximum forgiveness is $ 20,513
    How do you compute the $ 20,513 maximum forgiveness

  4. Are we allowed to hire new employees or must keep and PAY the current existing employees in order to qualify for the PPP forgiveness?

    1. Businesses can hire new employees — it’s maintaining the full-time employee headcount that will be measured when the borrower is being considered for the amount of PPP loan forgiveness, assuming the borrower meets any other requirements.

  5. Thank you very much. This will be very useful to all of my clients that received the PPP Loan.
    I appreciate your article and your sharing it with all of us.

  6. PPP Loan Forgiveness for a Self Employed person with a seasonal employee outside of FTE time period
    To whom it may concern:

    I need guidance on calculating PPP loan forgiveness in what is turning out to be a fairly common situation.

    The scenario involves a sole proprietor who receives a PPP loan, and that sole proprietor also has employees.

    1 example is a sole proprietor whom has 1 employee that works December only.

    In this case their denominator in the forgiveness calculation would be 0, does that mean no forgiveness?

    Sch C 2019 Net Income = $100,000. Employee wages from sch C were $1,000.

    loan = Sch C 100,000 plus employee wages 1,000 = 101,000 divided by 12 times 2.5 = Total PPP Loan = 21,042 rounded to 21,000.

    The PPP is used as follows: Owner replacement = 100,000 x 8/52 = 15,385, employee wages = 1000, Total payroll = 16,385, the rest is spent on rent.

    21000 x .75 = 15,750 so the 75% rule has been met.

    But the employee normally only works in December to help with that busy time of year.

    The forgiveness ratio calculation is 1 employee in the eight week period divided by 0 employees in the specified time period 2/15-6/30/19 or 1/1-2/29/20. This employee worked in December of 2019, and a paycheck was given to them to meet the 75% rule.

    How does the ratio 1/0 work?

    Does that mean none of it will be forgiven?

    Does that mean all of it will be forgiven?

    It is very confusing, because the point of the PPP was a forgiven loan to a self-employed person.

    Please let me know.

    Thank you.

    Sincerely,

    Tony

  7. I think this statement may be incorrect or I could be misreading it: However, you need to exclude Social Security and Medicare taxes. This statement is under the subtitle, Loan Forgiveness. And one question: why would we need to track the EIDL advance if we received it after the PPP loan? Not sure where that fits in. Thank you.

  8. Two Questions

    How does this work for a self-employed person with no payroll, they were eligible for the loan but it isn’t clear what they can spend the loan proceeds on since they have no payroll. If the give themselves the 75% of the loan and use the 25% of the loan to pay rent, will that work?

    If the client does have payroll, do they have to keep the same employees on for the eight week period or can they hire new people if the old ones do not want to come back. What if the new employees are spouse/adult children.

    1. Individuals with self-employment income and who file a Form 1040 Schedule C can use the PPP loan for:
      – Owner compensation replacement (calculated based on 2019 net profit.)
      – Employee payroll costs for employees whose principal place of residence is in the U.S. (if your client has employees.)
      Note that at least 60% of the PPP loan proceeds must be used for payroll cost per the PPP Flexibility Act (changed from 75% per the CARES Act).

      As provided on your 2019 Form 1040 Schedule C:
      – Mortgage interest payments on any business mortgage obligation on real or personal property
      – Business rent payments
      – Business utility payments

  9. Mike: Must the applicant exclude the withheld FICA & Medicare & FIT withheld? I understand the employer portion is not eligible for forgiveness, but the amounts withheld also?

  10. Can anyone explain why garbage services are not explicitly listed as a utility expense?
    Not all cities have garbage costs included in the water bill.

Comments are closed.