PPP Loan Forgiveness FAQ – By Syed Nishat

Paycheck Protection Program Loan Forgiveness FAQ – by Syed Nishat

During the COVID-19 pandemic, the United States government enacted the Paycheck Protection Program (PPP) to provide small businesses with the funds to keep themselves afloat during a very challenging time. These funds can be used to pay rent, employee salaries, mortgages, and utilities. One of the most advantageous facets of PPP loans is that they have the potential of being completely forgiven if certain requirements are met. So here’s what you need to know to make the most of this program for your own business.

• Can I apply for loan forgiveness now?

Yes! You must first submit your completed loan forgiveness application to your lender, if they are currently taking applications. Upon approval, the lender will submit your claim to the Small Business Association (SBA) for their own review.

• Which forgiveness application should I use?

There are three potential applications you might use.

– For borrowers who took loans of $50,000 or less, use SBA Form 3508S.
– Employers who did not reduce employee hours, wages, or levels, including sole proprietors, self-employed individuals, or independent contractors, should use SBA Form 3508EZ.
– Any employer who does not qualify for either Form 3508S or 3508EZ should use SBA Form 3508.

• What is the application deadline for PPP loan forgiveness?

While the SBA has not set a hard deadline to apply, businesses have 10 months after the end of the covered period before they must begin making payments monthly to repay the loan. It may be smarter to apply sooner rather than later, in case there are additional documentation requirements and to ensure you have all of your requirements met.

• If my PPP expenses are forgiven, can I also deduct them from my taxes?

Short answer: no. A forgivable PPP loan is tax-free already, so to prevent any double dipping, the IRS does not allow expenses that were claimed for forgiveness under the program to also be deducted for tax purposes. To understand how this could affect your taxes, speak with a financial or tax professional.

• What contributions for retirement benefits will be considered payroll costs that are eligible for loan forgiveness?

According to the SBA, employer contributions for employee retirement benefits that are paid or incurred by the borrower during the covered period or alternative payroll covered period qualify as “payroll costs” eligible for loan forgiveness. The employer contributions for retirement benefits included in the loan forgiveness amount as payroll costs cannot include any retirement contributions deducted from employees’ pay or otherwise paid by employees. Forgiveness is not provided for employer contributions for retirement benefits accelerated from periods outside the covered period or alternative covered period. For more specific situations, the SBA website Loan Forgiveness Payroll Costs FAQ outlines the treatment of retirement benefits for owners.

• What are the conditions of PPP loan forgiveness?

To answer this, first let’s look at the terms of the loans. The funds from the PPP can be used for the following:
• Mortgage interest, if the mortgage was signed before 2/15/2020
• Rent, if the lease was in effect as of 2/15/2020
• Utilities, as long as they were in service as of 2/15/2020
• Payroll, which may include wages, salary, vacation, various types of leave, and health benefits

Loan amounts are based on a business’ average monthly payroll cost during 2019. The employer can receive up to 2.5 times that—basically, an amount to help cover 8 weeks of payroll. Any expenses under the above categories can be fully forgiven if they meet several further conditions.

Eligible expenses are those that are incurred over 24 weeks, from the day the first payment was paid by a lender. This doesn’t mean changing your business’ payroll schedule; all payroll over the course of those weeks remains eligible even if there was a payout date that falls outside the 8-week period.

The final cutoff date for expenses to be considered eligible is 12/31/2020. Keep in mind, if an employer took out a PPP loan after 7/16/2020, the full 24 weeks cannot be used. On the other hand, if you received your loan before 6/5/2020, you can still choose to use the 8-week period.

In addition, an employer must use at least 60% of the loan funds on payroll expenses, not including amounts paid to independent contractors. Otherwise, the amount of forgiveness will be calculated in proportion to what was spent on payroll. There are also rules concerning maintaining the number of employees, which includes rehiring those who were laid off or were on furlough, as well ensuring that 75% of employee salary amounts (compared to what they were paid in the most recent quarter) were paid over the 24 weeks. There may be exemptions that apply to a particular business, so it’s best to discuss your situation with a financial advisor or CPA who can guide you through these calculations.

• What documentation should be submitted with the application?

Good recordkeeping is vital to ensuring that you have everything in hand to provide when you apply for loan forgiveness. While particular lenders may have additional requests, these are the SBA-required documents:
– Documents showing utility, rent, and interest payments, which could include receipts, statements, or canceled checks
–  Documents verifying the business’ number of full-time employees and their pay rates for the periods chosen to verify the pay and staffing requirements, which could include payroll tax filings (Form 941), payroll reports from the business’ payroll provider, and documents verifying health insurance and retirement contributions
– Income, unemployment insurance, and payroll filings from the state
– Full financial statements for the end of the fiscal year
Lenders will expect employers to track both the eligible expenses and documentation over the 24-week period. Requests for the documents often require submission in a digital format. Both the SBA and the lender may audit a business’ financial records, so it’s in an employer’s best interest to make sure everything is kept neat and up-to-date for easy review.

• What if my loan forgiveness application is not approved?

If this happens, it doesn’t mean that your initial rejection was final. Your lender may reevaluate after you submit additional documentation. If this secondary review yields no approval either, the outstanding balance will accrue at 1% interest for the remainder of the 5-year period for repayment. You can pay off the remaining balance at any time with no penalty.

• What utilities count as eligible expenses?

In this case, gas, water, electricity, internet, telephone, and transportation are all considered eligible under PPP rules and can be claimed for forgiveness.

• If my bills are due outside of the 24-week covered period, can I claim them?

As long as they are paid on the next regular billing date, expenses that would normally be eligible, such as utilities and rent, and are not payroll can be claimed for forgiveness. However, they will be prorated to the end of the covered period.

• How long should I keep documentation after I get the PPP loan?

Supporting documentation should be kept for 6 years after the loan is either fully repaid or fully forgiven. These documents must be handed over to the Office of the Inspector General or the SBA if requested, so it’s best to know where they can be easily accessed. Again, digital retention is likely the best practice, along with keeping backups.

• Am I allowed to prepay my mortgage or rent?

Prepayment using PPP funds is not allowed under the rules. If an employer does this, those payments are not eligible for forgiveness.

• What counts as mortgage interest?

Eligible mortgage expenses covered under PPP and qualifying for forgiveness include any interest paid on mortgages for property used for business purposes. This could include auto loan interest on a delivery vehicle or mortgage interest on a storefront or a warehouse storing products/ equipment for your business.

• How can I calculate 8 weeks of net profit from 2019?

Looking at your Form 1040 Schedule C from 2019, take your net profit reported and multiply it by 8/52.

• Can I sell my business or ownership during the PPP loan forgiveness process?

Short answer: You may but SBA/Lender approval may be required. It depends on the type sale. You can review the full link here.

• How is the amount of owner compensation that is eligible for loan forgiveness determined?

Per the SBA website, the amount of compensation of owners who work at their business that is eligible for forgiveness depends on the business type and whether the borrower is using an eight-week or 24-week covered period. In addition to the specific caps described below, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at $20,833 per individual in total across all businesses in which he or she has an ownership stake. For borrowers that received a PPP loan before June 5, 2020 and elect to use an 8-week covered period, this cap is $15,385. If their total compensation across businesses that receive a PPP loan exceeds the cap, owners can choose how to allocate the capped amount across different businesses. The examples below are for a borrower using a 24-week covered period.

• S Corporations: The employee cash compensation of an S-corporation owner-employee, defined as an owner who is also an employee, is eligible for loan forgiveness up to the amount of 2.5/12 of their 2019 employee cash compensation, with cash compensation defined as it is for all other employees. Borrowers are also eligible for loan forgiveness for payments for employer state and local taxes paid by the borrowers and assessed on their compensation, and for employer retirement contributions to their employee retirement plans capped at the amount of 2.5/12 of their 2019 employer retirement contribution. Employer contributions for health insurance are not eligible for additional forgiveness for S-corporation employees with at least a 2% stake in the business, including for employees who are family members of an at least 2% owner under the family attribution rules of 26 U.S.C. 318, because those contributions are included in cash compensation. The eligible non-cash compensation payments should be included on lines 7 and 8 of PPP Schedule A of the Loan Forgiveness Application (SBA Form 3508), for borrowers using that form, and do not count toward the $20,833 cap per individual.

• Self-employed Schedule C (or Schedule F) filers: The compensation of self-employed Schedule C (or Schedule F) individuals, including sole proprietors, self-employed individuals, and independent contractors, that is eligible for loan forgiveness is limited to 2.5/12 of 2019 net profit as reported on IRS Form 1040 Schedule C line 31 (or 2.5/12 of 2019 net farm profit, as reported on IRS Form 1040 Schedule F line 34) (or for new businesses, the estimated 2020 Schedule C (or Schedule F) referenced in question 10 of “Paycheck Protection Program: How to Calculate Maximum Loan Amounts – By Business Type” ). Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness; health insurance and retirement expenses are paid out of their net self-employment income. If the borrower did not submit its 2019 IRS Form 1040 Schedule C (or F) to the lender when the borrower initially applied for the loan, it must be included with the borrower’s forgiveness application.

Even breaking it down like this, the PPP loan forgiveness can be a very complicated process with tax implications that could be far-reaching. To make sure that you are taking care of your business the right way, from applying for the loan, maintaining the correct documentation, calculating the requirements correctly, and getting the full loan forgiveness, it’s important to work with a financial advisor and a CPA who can guide you through the timelines and complexities so you come out of the 2020 challenge in a great place to keep your business successful.

“Securities offered through Securities America, Inc. Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Wall Street Alliance Group and Securities America are separate entities. Securities America and its representatives do not provide tax or legal advice; therefore it is important to coordinate with your tax or legal advisor regarding your specific situation.”

Source:

https://www.sba.gov/sites/default/files/2020-10/PPP%20–%20Loan%20Forgiveness%20FAQs%20%28October%2013%2C%202020%29.pdf

https://www.sba.gov/sites/default/files/2020-10/5000-20057-508.pdf