There has been a lot of uncertainty brought on by the changes in business and the economy due to the impact of coronavirus. An area of heightened concern for businesses is navigating the programs contained in the Coronavirus Aid Relief and Economic Securities (CARES) Act, and specifically the loan forgiveness aspect surrounding the Paycheck Protection Program (PPP).
What is the PPP?
The PPP is a major relief component of the CARES Act. It is a loan package designed to infuse millions of businesses with cash to pay employee wages and meet critical obligations.
The PPP was created to enable businesses to continue to operate and employ individuals during the coronavirus pandemic. There are two key features of this particular program that stand out from other loans a business can receive:
- If the borrower spends the funds received on qualified expenses, then the amount is eligible to be 100% forgiven and the loan amount that is forgiven is tax free, which means the debt cancellation does not create taxable income to the borrower.
- Any portion of the loan that is not forgiven must be repaid after a six month deferral period over two years at an interest rate of 1%.
Which expenses are eligible for loan forgiveness?
In broad terms, the qualified expenses include payroll costs, rent, utilities, and mortgage interest. These expenses must be incurred and paid during the covered period of 8 weeks from the date of the PPP loan origination. Additionally, the Small Business Association (SBA) clarified that only 25% of PPP proceeds can be deployed for non-payroll expenses.
As you dive into each area of expense, more eligibility criteria come to light. For example, rent, utility and mortgage interest amounts must be related to obligations that were incurred prior to February 15, 2020. Qualified payroll costs include:
- Salary, wages, commissions, or tips for employees up to $100,000 on an annualized basis per employee
- Employee benefits including vacation, sick leave, healthcare premiums and retirement benefits
- State and local payroll taxes
- Wages, commissions, income or net earnings from self-employment capped at $100,000 on an annualized basis per employee
Where do we go from here?
On Friday, May 15th, the Small Business Administration (SBA), in consultation with the Department of the Treasury, released the Paycheck Protection Program (PPP) Loan Forgiveness Application and detailed instructions for the application. This application has helped provide some clarification and guidance on how PPP loan forgiveness will be handled in practice, that was otherwise a bit ambiguous when the program was first announced.
The loan forgiveness form and instructions include several measures to reduce compliance burdens and simplify the process for borrowers, including:
- Options for borrowers to calculate payroll costs using an “alternative payroll covered period” that aligns with borrowers’ regular payroll cycles
- Flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving their PPP loan
- Step-by-step instructions on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness
- Borrower-friendly implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30
- Addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that was declined
If you have any questions while completing your application, or to review your specific situation, it is best to reach out to your CPA for guidance. The Department of the Treasury’s FAQ page has also been a great resource.
As always, the professionals at Harris CPAs are here to assist you. Please do not hesitate to contact us if you have further questions.
By Caitlin Wambolt, Harris CPAs
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