The word “autumn” conjures up warm memories of family, friends, and football, but this year feels a lot different than in seasons past, as we continue to navigate a pandemic. If you are one of the millions of small businesses that received funds through the Paycheck Protection Program (PPP), it is also the season to prepare for PPP Loan Forgiveness. As the 24-week Covered Period ends, Small Business Administration (SBA) approved lenders and other financial institutions are gearing up for the onslaught of Borrowers seeking forgiveness over the coming weeks. Below are several key items that Borrowers should consider while preparing to apply for loan forgiveness.
Amounts Eligible for Forgiveness
The PPP Flexibility Act of 2020 (PPPFA), signed into law June 5, 2020, extended the Covered Period for loan forgiveness purposes to either 24 weeks after the loan disbursement date or December 31, 2020, whichever comes first. In addition, the PPPFA decreased the percentage of loan proceeds that must be used toward eligible payroll costs to a minimum of 60%, with the remaining 40% eligible to be used on qualifying non-payroll costs. The combination of the extended period to use the loan proceeds and the decrease in the minimum amount required to be used on payroll costs increases the amount of qualifying expenditures a Borrower can incur—but specific tests as part of the PPP may still impact the forgiveness calculation, resulting in a possible reduction in the amount forgiven. Consider the following questions as you prepare documentation needed for your loan forgiveness application.
- Has a minimum of 60% of PPP loan proceeds been used for qualified payroll costs?
- Have amounts been appropriately limited for owners when calculating qualified payroll costs?
- Should payroll costs be calculated in accordance with the covered period or alternative payroll covered period?
- Has the Borrower calculated its average full-time equivalent (FTE) headcount for one of the allowable reference periods (noted below)?
- February 15, 2019, to June 30, 2019;
- January 1, 2020, to February 29, 2020; or,
- If seasonal employees are utilized, either of the preceding periods or any consecutive 12-week period between May 1, 2019, and September 15, 2019.
- Has the Borrower calculated the average FTE headcount based on the allowable reference periods using the calculated and simplified method?
- Can the Borrower restore average FTE levels by the forgiveness application date, the end of the Covered Period, or the end of the 24 weeks, or December 31, whichever comes sooner? If not, have safe harbors been considered?
- Can the Borrower rely on the rehire exemption?
- Has any employee making $100,000 or less received a compensation reduction greater than 25% as compared to the period of January 1, 2020, through March 31, 2020? If so, has the compensation been restored? If not, can the Borrower rely on any safe harbor provisions?
- Can the Borrower rely on the safe harbor provision documenting an inability to return to the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020, and December 31, 2020?
There are a number of items to navigate in the forgiveness phase, but all are considerations that must be either documented or calculated prior to submitting a loan forgiveness application to the lender to provide for maximum forgiveness eligibility.
Year-End Planning Considerations
A critical consideration when applying for PPP forgiveness is year-end planning. A significant benefit of the CARES Act, apart from the infusion of cash at a much-needed time in the life of a business, is that any PPP loan proceeds ultimately forgiven by the Borrower’s lender are not considered taxable income on the Borrower’s applicable tax return. This is contrary to the normal treatment of cancellation of debt (COD) income, which is ordinarily treated as taxable to the forgiveness recipient.
Unfortunately, the IRS has taken the position that, to the extent of PPP forgiveness, otherwise allowable expenses paid with funds received from the PPP will not be deductible on the Borrower’s applicable income tax return for the year. For example, if the Borrower paid $500,000 in payroll costs during 2020 with funds it received from the PPP (for the same amount) and ultimately received forgiveness for those loan proceeds, none of those expenditures would be deductible on the Borrower’s 2020 federal income tax return (assuming it is a December 31, 2020, year-end filer). When the Borrower’s applicable tax return is prepared, expenses paid with PPP loan proceeds will be non-deductible as ordinary and necessary business expenses, leading to higher taxable income and, as a result, the possibility of an increase in tax liability. As part of effective year-end planning related to PPP loan forgiveness, Borrowers will want to consider all available opportunities to reduce taxable income to avoid undesirable tax results.
It should be noted that various professional organizations continue to lobby Congress and the Treasury to revise their position on the non-deductible nature of expenses paid with PPP loan proceeds in hopes of restoring the deductibility of the expenses. PYA continues to monitor these discussions and will release more details as they become available.
PYA is here to help you and your business navigate PPP forgiveness. PYA’s PPP Overwatch program is a tiered membership service that allows you to select the level of support you desire for your PPP forgiveness needs. Access PYA’s PPP Membership Matrix here.
If you need assistance with PPP forgiveness, or would like additional COVID-19 guidance, visit our COVID-19 hub, or contact one of our PYA executives below at (800) 270-9629.
Disclaimer: To the best of our knowledge, this information was correct at the time of publication. Given the fluid situation, and with rapidly changing new guidance issued daily, be aware that some or all of this information may no longer apply. Please visit our COVID-19 hub frequently for the latest updates, as we are working diligently to put forth the most relevant helpful guidance as it becomes available.