So finally, your clients were lucky enough to lay their hands on the money put on the table by the CARES Act in the form of PPP loans! Congratulations! By the way, those clients still wanting to get a piece of this cake, they do not need to worry, more funding is already approved, so your clients can keep on filing the PPP loan applications.
Let us not forget that this is actually not “free money”. Yes, there is a provision in the CARES Act known as “Loan Forgiveness”. Let us go over this provision so as to actually understand what makes this loan a “forgivable loan”.
Is the PPP loan forgivable?
- Yes. The amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest. That is, the borrower will not be responsible for any loan repayment if the borrower uses all of the loan proceeds for forgivable purposes described below, and the employee and compensation levels are maintained.
For what “forgivable purposes” can I use this loan money?
The eligible uses for the PPP loan funds so that it can be forgiven are as under:
- Payroll costs, including benefits (as described below);
- Interest on mortgage obligations, incurred before February 15, 2020 (but not prepayments or principal payments);
- Rent, under lease agreements in force before February 15, 2020; and
- Utilities, for which service began before February 15, 2020.
What if I use the PPP loan funds for purposes other than those mentioned above?
- The SBA will require repayment of such unauthorized uses of PPP loan funds.
- If such unauthorized use is done knowingly, then the borrower shall be subject to additional liability such as charges for fraud.
- If any of the borrower’s shareholders, members, or partners uses PPP funds for unauthorized purposes, the SBA will have recourse against such shareholder, member, or partner for the unauthorized use.
What items are included within the “Payroll Costs”?
The payroll costs includes the below:
- Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);
- Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit;
- State and local taxes assessed on compensation; and
- For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee. (For Schedule C filers, the amount which can be included in this computation is the 8-week average of the 2019 net profit amount as per Schedule C line 31, maximum being $100,000).
What items are expressly excluded from the “Payroll Costs”?
The Act excludes the following items from being counted as payroll costs:
- Any compensation of an employee whose principal place of residence is outside of the United States;
- The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary;
- Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and
- Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127)
Time period and ratio of use of PPP loan funds for potential 100% forgiveness:
- The loan funds needs to be used up over the eight-week period following the date of the loan disbursement.
- The ratio of allocation of loan funds in order to get potential 100% forgiveness is as under:
- Minimum 75% – Must be used for “Payroll Costs”.
- Maximum 25% – Can be used towards “Non-payroll Costs”.
Reduction in the amount to be forgiven:
- Amount eligible to be forgiven may be reduced if the employer:
- Reduces its full-time equivalent employees during the 8-week covered period when compared to one of the following periods (at the option of the borrower)
- February 15, 2019 to June 30, 2019, or
- January 1, 2020 to February 29, 2020.
- Reduces the salary or wages paid to an employee who had earned less than $100,000 in annualized salary by more than 25% during the 8-week covered period.
- The above-stated reduction in forgiveness amount can be avoided if the employer:
- Rehires employees that were previously laid off by June 30, 2020, OR
- Restores any decrease in wages or salaries by June 30, 2020.
- Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.
What happens to the portion of the loan amount which is not forgiven?
- The portion of the loan funds which becomes ineligible for forgiveness shall be required to be repaid along with interest.
- The maturity date of the loan is 2 years from the date of disbursement.
- The rate of interest is 1%.
- A repayment deferment is allowed up to 6 months following the date of disbursement. That is, you will not have to make any payments for six months following the date of disbursement of the loan. However, interest will continue to accrue on PPP loans during this six-month deferment.
- There is no pre-payment penalty in case the loan is repaid before the two-year maturity period.
When should the application of forgiveness be made?
- The forgiveness application needs to be made to the lending bank after the 8-week period is over.
- The lending bank shall determine the forgiveness amount within 60 days after the receipt of the application.
- Detailed documentation needs to be submitted to the lender which includes, among others, payroll documents/forms, utility payment receipts, mortgage payment documents, some certification from a representative of the eligible recipient authorized to make such certifications, etc. (This is not an exhaustive list).
- The forgiven amount will not be taxable. That is, the forgiven amount is not required to be included within gross income as “discharge-of-debt” income. The CARES Act specifically excludes this amount from gross income.
- Within the text of the “Interim Final Rule” published by the SBA, the agency have stated that it will be issuing additional guidance on the loan forgiveness. There are a lot of unclarified questions at present which hopefully shall be addressed in subsequent guidance by the SBA.
Sources of information for this advisory article:
- This article has been compiled based on the provisions stated in the “Interim Final Rule” published by the SBA dated 2nd April, 2020 based on CARES Act Section 1106.
How can Initor Global help the CPA Firms?
- We can assist you in preparing the loan forgiveness amount computation based on the documentation which you provide and by using the excel formats and templates which your firm usually follows. This will free up the paperwork and computation time on your part and give you an opportunity to utilize this time for getting more business from your clients, while we assist you in handling your back-office work. We can also assist you in maintaining complete accounting records for this purpose as well as on a continuous basis for the entire year.
The information contained within this article is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from a professional accountant.
Paycheck Protection Program Loan Forgiveness
Let us not forget that this is actually not “free money”. Yes, there is a provision in the CARES Act known as “Loan Forgiveness”.
Sanjiv Gohil, CPA