PPP Loan Forgiveness and Tax Implications05/06/2020
Are you a recipient of a Paycheck Protection Program (PPP) loan? While there have been some hiccups in the program’s rollout, we are hearing that more and more people are finally receiving the funds that they applied for back in March or April. Now that you have the funds, or when they finally arrive, keep in mind that a “good faith” effort will not be enough for loan forgiveness. Additionally, keep in mind that Treasury Secretary Steven Mnuchin has stated that the government plans to audit any company that receives more than $2 million from the program. Therefore, you must keep detailed records to ensure forgiveness and get the most from the loan.
How You Can, and Can’t, Spend Your PPP Loan
Your PPP loan’s forgivability depends greatly on how you spend it. Approved expenses include the following but keep in mind that at least 75% of the loan must be used for payroll costs:
- Payroll (if you’re self-employed, this includes your business’s net profit amount from your 2019 tax return),
- Interest payments on mortgages before 2/15/20,
- Rent payments on leases before 2/15/20, and
- Utility payments before 2/15/20.
Since immaculate bookkeeping is going to be important in getting your loan forgiven, we recommend you do the following:
- Set up a separate bank account for PPP funds. Or, if you prefer, deposit funds into your business savings account and transfer the money to checking and payroll accounts when needed and noting when and how the transfers were made.
- If you don’t think that you will use 75% of the loan for payroll, look into changing your payroll periods (i.e. from every 2 weeks to weekly) or pay bonuses toward the end of the eight-week period.
- Review your mortgage, leases and utility bills and make sure obligations are all prior to 2/15/2020.
- If you pay your expenses with a business credit card or other method, pay that portion of the credit card bill with PPP funds before the end of the eight-week period.
Track of Employee Headcount and Salary
The amount of loan that is forgivable depends, in part, on maintaining a consistent workforce. Therefore, if your average number of full-time employees per month is less than the average during a “base period,” the forgivable portion of your loan will be reduced. The “base period” is your choice of either 2/15/19 through 6/30/19 or 1/1/20 through 2/29/20. We can help you choose the period that produces the best result.
Also, your forgivable loan amount will be less if you reduce salary levels by more than 25%. For each employee who earns less than the cap of $100,000, you must compare the total salary paid during the eight weeks of the loan period with that employee’s salary during the most recent full quarter (Jan – March 2020 for most people). If the reduction is greater than 25%, a corresponding reduction must be made to the loan forgiveness amount.
Depending on your business, it is a good idea to bring back employees that you may have had to furlough or lay off by June 30, 2020. If you do so, any headcount and salary reductions made between 2/15/20 and 6/30/2020 will be ignored. If those employees have taken other jobs, or you don’t want to hire them back, you can still bump up your employment levels to qualify by hiring new people. There are caveats to this portion of the rules though, so you may want to get expert advice from an employment attorney if this applies to you and your company.
Keep Immaculate Records
At the end of your loan period, you will have to prove to the bank that you used the loan in the way it was intended, so we recommend starting with a spreadsheet to record all expenses paid with PPP money. You will also want to save the following items in a PPP folder (electronic or hard copy):
- Payroll tax filings (both federal and state)
- Mortgage documents, leases, and utility bills
- Employee headcount calculations
- Cancelled checks and payment receipts
- Bank statements for the account used to pay forgivable expenses
Prepare to File for Forgiveness
You can’t apply for forgiveness until at least eight weeks after receiving your PPP loan, but it doesn’t hurt to prepare for the time when you can. You will need an authorized company representative to certify that:
- Your documentation is accurate, and
- The forgiveness requested was used to required.
The bank has 60 days to review your forgiveness request and either approve or deny it. If a portion, but not all, of the loan is forgiven, you will have to pay the “unforgiven” portion back over the next two years along with 1% interest. You aren’t required to start making payments for six months but interest will accrue during that time.
Tax Implications of PPP Loans
The good news: While most “forgiven” loans are classified as debt income and taxed as income, the PPP loan does not count as income for tax purposes. So if used according to the rules, and properly documented, it really can be “free money.”
The bad news: As of this writing, expenses paid for with a forgiven PPP loan are not tax-deductible. Typically, wages, rent, etc. are fully deductible for businesses. But while these are the same expenses for which you have to spend your PPP money, they are not tax deductible if you use the loan to pay for them. We realize this is super confusing, so say you pay 2 months of rent with your PPP loan, which is later forgiven. Unlike other years, you won’t be able to deduct those two months of rent on your 2020 tax return because the IRS says doing so would create an unintended “double tax benefit.” This is a hot topic right now and may change in the coming weeks, since many argue that this isn’t Congress’ original intent. If it does change, we’ll do our best to keep you posted on it.
We realize this is a lot of information and it is changing all the time. If you have any questions or need help, let us know and we will be happy to do what we can. And stay healthy too!