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PPP Loan Forgiveness or Fiasco?

We did not expect the SBA or the banks to make this easy, did we? Well it is not and now many PPP Loan borrowers are curious. Many are asking how much is forgivable, what do we have to do, and when do we have to apply for forgiveness? I have asked my lead operations guru Lisa to put together her thoughts and knowledge about the things we need to know to work through the loan forgiveness process. Bear in mind, that these “final” rulings are continually changing.

  1. The amount of your gross payroll cannot dip below 75% of the amount used in the calculation to procure the loan.

  2. Only 40% of the loan can be used for non-payroll costs like rent, mortgage interest, or utilities.

  3. Non-corporate owner-employees can only be forgiven for the lesser of 2.5 times their monthly wage or $20,833. C-corporation and S-corporation owner-employees are subject to other caps.

  4. Any portion of an employee’s pay that is over $100K (annualized) cannot be forgiven

  5. If a business is also using the federal tax credits for Federal COVID Paid Employee Sick or Parental Leave, they cannot also have those payroll dollars forgiven.

  6. If a business received an EIDL grant (up to $10,000 promised early in the program) that “grant” cannot be forgiven.

  7. The total number of Full Time Employees cannot decrease. If it does, you must be able to explain why. There are rules and exceptions on this too.

  8. We are finding that the owner-employee payroll cap might be troublesome. If you own your own business and have not hired back your employees (but continue to pay them), you may be in for an unpleasant surprise on the forgiveness end of things.

  9. The loan funds that are determined to be forgivable must be used (expended) either within 8 weeks or 24 weeks (borrower’s choice) following the borrower’s (your) receipt of the borrowed funds.

  10. Applying for loan forgiveness must occur within 10 months of borrower’s receipt of the funds. If you do not apply for forgiveness within this period, the whole amount borrowed is converted into a loan with the principal and interest payments beginning immediately.

All the details can be found in this link the “interim final” ruling: Don’t hold your breath, it will probably change. Yes, it must have been written by a lawyer, so I apologize in advance. There is serious accountant/legal-ese that might not make sense to many people.

Early on, several banks were recommending to “keep the PPP funds in a separate bank account and write checks from that account so that you can easily account for the forgivable items”. Surprise! This is in no way realistic or practical, and it creates a long list of logistical headaches for all involved. Payroll and payroll tax processing is typically done through an external system tied to a certain bank account. This account would have to be changed temporarily. In general, you cannot pay the taxes from the employee’s gross pay (forgivable) from a different bank account than the payment for the employer portion of payroll taxes (not forgivable.) Plus, it would be next to impossible to try to separate portions of paychecks to different bank accounts if a portion of those checks should not be forgivable. Welcome to the world of government funding! Good intent, but a logistical nightmare!

Our team has designed a simple spreadsheet to track payroll costs, utilities, and rents for clients so we can see when our clients will hit the target. We can modify this, and throw out various “what-if” scenarios to make sure we stay within the parameters for the 60% / 40% or not going below 75% of prior payroll, etc.

Once PPP funds are received, clients just transfer the PPP funds into their operating account, holding it as a loan on the balance sheet until forgiveness happens. Many of our clients are not even open yet, but they continue to pay their employees (the ones who are not on unemployment.) They will have to hire them back to get the forgiveness. All of this is tricky, and timing is critical.

The IRS has said that even though the forgivable portion of the PPP is not going to be considered “income“ per se, the expenses associated with the forgiveness cannot be counted as deductions on your year-end income tax. Your CPA may prefer to have payroll, utilities and rent expenses in the same bank or loan account on your general ledger where they have been in previous years. It makes sense to monitor the use of these funds on a separate document showing what expenses were actually forgiven. Your CPA can then exclude those from the tax return and move the PPP from a loan to “Other Income”.

Breaking news…. The Senate just voted to extend the PPP Program by five additional weeks until August 8, 2020. Less than four hours before the program was scheduled to end with more than $130 billion in loan money unspent, the Senate approved extending the application period. The legislation now heads to the House and will require President Trump’s signature for the program to continue.

Okay, I’m exhausted, and we are financial people. Worst case scenario? You have a portion of the loan proceeds that are not forgivable which is converted into a loan @ 1% interest rate. We would be happy to help you navigate this administrative fiasco. If you’re interested and want the help, give us a call, or schedule a free initial consultation

Please, be patient. As always, we’re here to help.


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