Under the Paycheck Protection Program (PPP) created by the Coronavirus Aid, Relief and Economic Security (CARES) Act, loans may be forgiven if businesses use the funds received to maintain their payrolls and pay other specified expenses. Businesses must apply for loan forgiveness with the financial institution which granted the loan.
Your Covered Period is the timeframe when qualified expenses must be incurred or paid. The first step is to determine whether you will use the Covered or the Alternative Covered Period for payroll costs. The next stop is to determine the length of your Covered Period.
The Covered and the Alternative Covered Periods can be from 8 weeks up to 24 weeks. The Covered Period begins on the date you receive your loan funds. The Alternative Covered Period begins on the first day of the first pay period following the receipt of your loan amount. Only borrowers with a biweekly (or more frequent) payroll schedule may choose to use an Alternative Covered Period. Your Covered Period cannot extend beyond December 31, 2020.
Not sure if you should choose the 8-week or the 24-week Covered Period? The main factors to consider are whether you are self-employed or an owner of a partnership or corporation and whether you were able to spend your loan proceeds on eligible expenses in 8 weeks. The maximum amount that a self-employed individual, general partner or owner-employee can claim for forgiveness of their compensation in 8 weeks is $15,385 and $20,833 for 24 weeks.
In order to obtain loan forgiveness, businesses will need to fill out one of three SBA application forms and submit it and required SBA documentation to the financial institution which granted the loan.
Did you reduce employee salaries or wages?
Your loan forgiveness amount may be reduced if you cut employee annual salaries or hourly wages by more 25% for employees who earned $100,000 or less in 2019. You must compare each employee’s average pay during the Covered Period to the average pay from the full quarter prior to the Covered Period (first quarter of 2020 for most businesses).
Businesses can avoid having their loan forgiveness amount reduced if they restore the employee’s pay to the February 15, 2020 amount no later than December 31, 2020.
Did you reduce the number of employees?
Your loan forgiveness amount may be also be reduced if the average number of full-time equivalent employees (FTE) during your Covered Period is less than the average number of FTEs during one of the following reference periods selected by the business:
There are several exceptions to the reduction for failing to maintain the number of FTEs during the Covered Period:
Did you meet the 60% rule?
Businesses will see a proportional reduction in their forgiveness amount if they do not spend at least 60% of the loan proceeds on payroll costs. Payments to independent contractors cannot be included in the payroll costs.
Payroll information required to be submitted to lender for all forms
Non-payroll information required to be submitted to lender for all forms
There are tax considerations to consider when determining when to apply for forgiveness. The CARES Act provides that forgiveness of a PPP loan is excluded from the gross income of the business for federal tax purposes. However, IRS Revenue Ruling 2020-27 states that a business may not deduct expenses paid with PPP loan proceeds in the taxable year in which the expenses were paid or incurred if, at the end of the taxable year, the taxpayer reasonably expects to receive forgiveness. Several bills have been introduced in Congress to overturn the IRS Revenue Ruling; however, at this date, none have been passed by both chambers of Congress.
If your business qualifies to take the Section 199A Qualified Business Income deduction, you still might want to wait until 2021 to apply for forgiveness. Individuals over the threshold amounts need wages and/or unadjusted basis in property to take the full Section 199A deduction. Only 60% of the loan forgiveness needs to be payroll costs. Waiting until 2021 would allow you to determine what percentage of payroll to use in the forgiveness application and what percentage of other costs.
Businesses should contact their Jones & Company, Ltd. tax advisor to discuss these options and decide which course of action best fits their situation.