Paycheck Protection Program Loan Forgiveness

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.

PPP loan funds can be used for the following purposes:

  • Payroll—gross salary, gross wages, gross commissions, vacation, parental, family, medical, or sick leave, employer contribution for health care coverage and employer contribution for employee retirement plans
  • Mortgage interest—as long as the mortgage was in place before February 15, 2020
  • Rent—as long as the lease agreement was in effect before February 15, 2020
  • Utilities—such as electric, gas, internet, telephone, transportation and water as long as service began before February 15, 2020

Determine your covered period

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.

Which form to file?

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.

  • Form 3508S is used for loans $50,000 and less if the borrower and its affiliates did not receive PPP loans totaling $2 million or more
  • Form 3508-EZ is used for loans greater than $50,000 which meet one of the following:
    • Self-employed individual with no employees
    • Businesses with employees who did not reduce annual salary or hourly wages by more than 25% during the covered period as compared to January 1 – March 31, 2020; and did not reduce the number of employees or the average paid hours between January 1, 2020 and end of the covered period
    • Businesses with employees who did not reduce annual salary or hourly wages by more than 25% during the covered period as compared to January 1 – March 31, 2020; and was unable to operate during the covered period at the same level of business activity as before February 15, 2020 due to compliance with COVID-19 health directives
  • Form 3508 is used by businesses who do not meet the requirements for Form 3508S or Form 3508-EZ

Calculations Required

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:

  • February 15 to June 30, 2019
  • January 1 to February 29, 2020
  • For seasonal employers, a consecutive 12-week period between May 1 and September 15, 2019

There are several exceptions to the reduction for failing to maintain the number of FTEs during the Covered Period:

  • Loans of $50,000 or less are not subject to this reduction
  • Businesses unable to operate between February 15, 2020 and the end of the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with COVID-19 health directives such as a government order to reduce capacity or shut down
  • The number of FTEs is restored to the February 15, 2020 level no later than December 31, 2020
  • Business makes a good faith, written offer of rehire, and the employee rejects the offer
  • Employee is fired for cause
  • Employee voluntarily resigns
  • Employee requested and received a reduction in hours

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.

Documents Required to be Submitted

Payroll information required to be submitted to lender for all forms

  • Third party payroll records documenting the amount of cash compensation paid to employees OR bank account statements
  • Tax form(s) that overlaps the Covered Period
    • IRS Forms 941, 944, or 943
    • State quarterly wage and unemployment reports
  • For health insurance and retirement plan contributions, payment receipts, cancelled checks or account statements documenting amount included in forgiveness

Non-payroll information required to be submitted to lender for all forms

  • For mortgage interest payments
    • Copy of lender amortization schedule and receipts or cancelled checks verifying payments OR lender account statements from February 2020 and the months of the covered period through one month after end of covered period
  • For business rent or lease payments
    • Copy of current lease agreement and receipts or cancelled checks verifying payments OR lessor account statements from February 2020 and the months of the covered period through one month after end of covered period
  • For business utility payments
    • Copy of invoices from February 2020 and those paid during the covered period and receipts, cancelled checks or account statements verifying payments

When to Apply-Tax Considerations

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.

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