The CARES act was written in a very short time frame and the rush of business owners to get access to PPP (Payroll Protection Program) loan funds felt a little like the Gold Rush! Now, if you received your funds it is time to understand the rules of how to manage the funds that you received.
Here are the frequently asked questions regarding your PPP loan proceeds.
The important question is what do you need to do and what expenses qualify to have the proceeds from your PPP loan forgiven?
Forgiveness of the loan is not guaranteed. The borrower must submit to the lender an application at the end of the 8 weeks. The CARES Act states that if you do not submit the documentation verifying the correct payments you will not be eligible for loan forgiveness.
The 8 weeks starts the day you get your funds
You must spend your funds on payroll, rent, mortgage interest, utilities and those costs must be incurred during the 8 week period that starts the date you receive funds. There is no flexibility in the 8 week period.
If your loan proceeds are $100,000 you must pay at least $75,000 on qualified payroll expenses (75%) and the remaining $25,000 could be allocated to rent, mortgage and utilities.
Do the costs need to be incurred and paid? This is a big question because you need to determine when you increase wages and if the equation is based on pay period or the date paid. If the meaning of the code is that the expenses must be BOTH incurred and paid during the 8 weeks count that will be more restrictive. The more favorable interpretation is that you can use expenses that were incurred (based on pay period worked or rent per your lease) and expenses paid (meaning date wages were paid and date rent was paid). However, you cannot prepay rent for the purposes of loan forgiveness.
What is Qualified Payroll?
Payroll costs for the 8 week period are computed the same way you computed to determine your loan proceeds. However, the loan forgiveness can be reduced if you have fewer full time equivalent employees than early 2019 or early 2020 – see below.
Your first step is to compute your average full time equivalent employees for two time periods
Feb 15 – June 30, 2019 or January/February 2020 Determine which one is lower
If a business reduces employees between February 15 through April 27, 2020, but eliminates that reduction by June 30, 2020 the reduced forgiveness is restored. In other words, if you laid off employees but you re-hire no later than June 30, 2020 the business has restored the employees to the appropriate level and you will not be required to reduce the loan forgiveness.
Make a plan for how wages will be paid over the 8 weeks. Will you rehire your employees and what do you plan to pay each employee over the 8 week period. If you can’t keep your workers busy, can you find a different task for them to do? (ie marketing, cleaning, renovations of your location, etc) Can you hire your spouse or children?
What can be included in payroll cost?
- Wages, commissions, cash tips
- Paid sick leave (not subject to any federal credits)
- Separation allowance
- Group health insurance
- Employer retirement contributions to the SIMPLE IRA or 401K
- State and local taxes such as unemployment insurance and TriMet
You cannot include:
- Wages to one employee in excess of $100,000 annually. In other words, the wage cap per person for the 8 week period is $15,384 ($100,000 / 52 * 8)
- Federal taxes don’t count including the employer portion of social security
What expenses count for rent, utilities and mortgage interest?
You can include any payment of rent under a lease agreement in force before February 15, 2020. Many of you have “self rentals” which means that you own the building and you determine the rent the business pays to your LLC. You want to make sure that you have a very clear lease agreement in place prior to February 15, 2020.
Utilities include gas, water, transportation, telephone and internet access for services that began before February 15, 2020.
One additional allowable use of the PPP funds is interest paid on any other debt obligation incurred prior to the covered period. However, it is not clear if this expense can be included in the amount of loan to forgive. But this could be beneficial for some of you and we don’t want to forget this additional option if you are tight on your allowed expenses.
Is the Loan Forgiveness taxable income?
Sec 1106 (CARES Act) states that the amount of the PPP loan that is forgiven will be excluded from taxable gross income. What is not clear is if you will be able to deduct the expenses that were allocated to that loan to make it forgivable. Which makes the loan proceeds and the payroll/rent/utilities costs a wash – no income and no deduction. We are waiting for more clarification on this point.