You Received Your PPP Loan — Now What?

May 14, 2020

Compliance, COVID-19, Small Business

As you know, we have attempted to keep you updated with the latest news related to the Paycheck Protection Program (PPP) and its impact on you and your business. Our goal in doing so is to help you to maximize the benefit of this program. As much as we would like to provide personal assistance to each and every one of you, that is not possible due to the compressed timelines we are dealing with. That combined with the nature of the loan program and the requirements of our professional liability insurance, we are required to perform any direct/personal consulting under a separate engagement letter and fee arrangement. If you would like to engage us for more direct and personal consulting, please contact Lisa at lhubbard@unifycpa.com.

The fee for this engagement will be:

Business with 0-2 Employees: $750

Businesses with 3-10 Employees: $1500

Businesses with 11-30 Employees: $2500

Businesses with 30+ Employees: $4000

If you would rather NOT engage us, we will continue to provide the latest up to date forgiveness information in our email blasts, as well as provide this loan forgiveness calculator. In this case, you will work directly with your bank on the loan forgiveness process.

You haven’t received or applied for your PPP loan?

If you still did not receive or apply for a PPP loan but would like to, please reach out Lisa at lhubbard@unifycpa.com.

Payroll Protection Program Loan – Forgiveness Info

The original program allowed businesses to borrow 10 weeks of gross wages plus state unemployment cost, related employee health insurance, and retirement contributions for those 10 weeks of wages. The goal was to give employers the money to keep their trained workforce on payroll so when the economy opened the workforce would still be in place.

We believe almost every small business will have to repay some of their PPP loans, but the business owner still gets the benefit of no labor cost for the part of the loan that is forgiven, which allows more funds for the business owner to support the longevity of their business.

What can you spend PPP loan proceeds on?

The law states you use costs “incurred and paid” during the 8-week period starting on the loan funding date. Below are the basic expenses eligible for both use of loan proceeds and forgiveness:

Gross wages paid for paychecks issued (wages over $100,000 per annum excluded.)
State unemployment and other state and local taxes assessed on the employer-based on those wages.
Employer costs related to employee health insurance related to those 8 weeks of payroll.
Employer SEP/SIMPLE/401k match/Profit sharing/pension contribution related to those 8 weeks of payroll including partner/member/owner retirement.
Partners in a partnership and members of an LLC get to use their self-employment earnings, prorated for 8 weeks, from Form 1065 Sch K-1, box 14A of their 2019 partnership tax return as the owner wages since the owner does not draw wages on a W-2.
Self-employed business owners get to use Form 1040 Sch C line 31 or Sch F line 34 of their 2019 individual tax return, prorated for 8 weeks, as their wages.
Business lease payments paid on leases in effect 2-15-20.
Business utility bills for utilities in effect 2-15-20 including electricity, gas, water, telephone, internet, and gas for business vehicles.
Interest on business loans in effect 2-15-20.

Items 7, 8 & 9 above combined cannot exceed 25% of the total PPP costs forgiven.

What can you NOT spend PPP loan proceeds on?

Compensation to an employee whose principal place of residence is outside the United States
Qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act
Federal employment taxes imposed or withheld between February 15, 2020 to June 30, 2020, including the employee’s and employer’s share of FICA and Railroad Retirement Act taxes and income tax required to be withheld from employees
Wages in excess of $100,000

Why do FTEs and Wage Reductions Matter?

The forgiveness of the loan is reduced if the employer pays less in wages or has fewer employees during the 8-week period of loan spending compared to an earlier period. There are two numbers that are important when it comes to payroll (wage cost and the number of full-time equivalent employees). In addition to measuring gross wages, you must measure full-time equivalent employees (FTE) during the 8-week period of loan spending as compared to your choice of one of two lookback periods.

How does the reduction in forgiveness based on reduced FTE work?

You must compute the average FTE for the 8-week loan period.
Compute the average FTE for either Feb 15, 2019-June 30, 2019 or Jan 1, 2020-Feb 29, 2020.
The employer should choose the lesser of these two numbers.
Compute FTE as of June 30, 2020.

Each of the above can be used in different parts of the calculation. One area of the law says you can restore employees laid off by June 30 to keep from a reduction in forgiveness. In addition, there is no reduction in loan forgiveness if you laid off an employee, offered to rehire the same employee, but the employee declined the offer, as long as you have it in writing.

How does the reduction in forgiveness based on payroll cost reductions work?

Forgiveness is reduced by the amount of any reduction in wages during the 8-week period in excess of 25% of the wages of the employee during the most recent full quarter the employee was employed.

ACTION ITEMS:

Confirm your loan funding date with your lender. We have seen lenders use either the date the SBA loan number was assigned, or the date funds were available to you, as the loan funding date. This date is critical as it starts the 8-week period.
Document every dollar spent. The banks will require documentation of funds spent on qualifying forgivable expenses. Required documentation will likely include payroll reports and tax filings, lease statements, loan statements, and utility bills. The final details on documentation have not been released.
Retain and follow all directions as provided by your lender. Just as we have seen Lenders apply their own guidelines to the loan application process, lenders are providing their own guidelines as to the forgiveness calculation and required documentation.
Track down copies of loan and lease documents. Since the rules for leases and loans refer to leases and loans that were in effect on 2-15-20, we recommend having these documents available.
Consider adjusting payroll periods. Switching to weekly or bi-weekly payroll to make sure you get the full 8 weeks of “incurred and paid” payroll costs. Monthly filers will most likely miss out on some payroll expenses. Weekly filers will ensure the maximum payroll deduction.
Evaluate the timing of company retirement contributions. If you normally wait until the end of the year to make retirement contribution, you should switch to paying these costs on each pay period.
Self-employed health insurance for 2% or greater S-corporation shareholders. If you normally wait until the end of the year to record these payments, you should switch to paying/reimbursing these costs on a pay period basis.
Evaluate accepting rent deferrals. Accepting rent deferrals until after the 8-week period could reduce the amount of paid rent that can be included in the forgiveness calculation.

LATEST UPDATE:

It was initially presented that the monies forgiven from the PPP would NOT be taxable, while technically the answer is yes, the reality is much different. While you do not have to pick up the forgiven loan as income, you are also NOT allowed to deduct the expenses associated with the forgiven portion of the loan. What does all this nonsense mean…effectively the forgiven portion of the loan with increase your taxable income!

This reduces the incentive to use the PPL loans over unemployment if you really have nothing for people to do. As well as this will make tax planning an even greater priority this year!