You have received your “Paycheck Protection Program” (PPP) loan. Now what? As of this writing, we still do not have the final Small Business Administration (SBA) rules on how the forgiveness provisions will work, but we do have the statute to give us some level of guidance. To quote leading tax expert Tony Nitti: “We don’t know what costs are forgiven. We don’t know what will determine which costs are allowed — is it incurred, paid, or both? We don’t understand the time frames. We don’t know if we can deduct the expenses paid with forgiven dollars. We have no idea how to compute the reduction in forgiveness related to lost employees or reduced salaries, or how to restore that reduction if it occurs. And lastly, NONE of it may matter, because the banks are going to make the rules, and they don’t know what the hell they’re doing.”
We are going to attempt to at least provide some best practices in the short term until clear guidance is available. Remember, this is for the 8 week period after the funds hit your account.
- Create a PPP File. Maintain all correspondence, receipts and support.
- Segregate the PPP Loan Proceeds (Not SBA Required). Put the PPP funds in a separate bank account and consider either paying costs directly from this account or drawing from this account to your operating account to pay authorized expenditures.
- Track Payroll Costs. During the 8 week period, payroll costs must make up at least 75% of loan proceeds. Reminder, gross wages are capped at $100,000 annualized per employee.
- Track Non-Payroll Costs. During the 8 week period, the loan proceeds cannot be used for more that 25% on non-payroll costs. These costs include mortgage interest, on loans originating before February 15, 2020, rent, under lease agreements in force before February 15, 2020, and utilities, for which service began before February 15, 2020.
- Keep Documentation of the Use of PPP Funds. Whether it is the bank or the SBA, we know documentation will be required. Exactly what is still in question. Create a file to keep documentation for all allowable expenses. This might include:
- Payroll summary reports
- Copies of mortgage statements showing interest paid
- Copies of utilities bills, including electricity, gas, water, transportation
A couple of other items to keep in mind:
- The amount of your loan that is forgiven is equal to the amount you spend during the 8 weeks following loan origination toward eligible expenses
- Funds received that are not forgiven are considered a loan with repayment terms and can have unintended or unanticipated consequences
- “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” #PPP FAQ#46
The IRS issued Notice 2020-32 that says any otherwise deductible expenses that result in forgiveness of a PPP loan pursuant will not be deductible in computing the taxpayer’s income. The Notice also reaffirms the position that forgiven amounts will not be considered cancellation of indebtedness income for federal tax purposes.. Unless further action is taken by Congress, this guidance will hold true.
Contact us directly should you have any further questions. At this time, the majority of our staff are currently working from home, which means the best means for contact is via email. We continue to work hard to ensure your personal and business needs are met during these tumultuous times. Stay safe and healthy!
Walter & Shuffain, P.C.