If you received a loan through the SBA Payroll Protection Program, congratulations! SBA guidance continues to come out on what will be needed to calculate the forgiveness component so this article focuses on a few tips to make the calculation easier. We’d all like to maximize forgiveness, although it is going to be difficult to achieve 100% forgiveness.
Recommended actions:
Open a separate bank account for the PPP loan funds to make it easier to track the spending.
The initial deposit of money should be treated as a loan on your Balance Sheet.
Plan how you are going to pay 75% of the funds during the 8-week period (this starts the day you receive the funds).
Track your payroll and other expenses paid by your PPP loan within your books (more on this below).
The goal is to spend 75% of the funds. There’s a catch in how your loan amount was determined (2.5 months) and the time period loan forgiveness is based on (8 weeks). If you have the exact same payroll expense as in 2019, you’re going to struggle to pay 75% of the PPP loan in wages. Here’s why:
2.5 months converted into weeks: [(2.5 months/12 months)*52 weeks=10.83 weeks]
Dividing the 8-week calculation period by 10.83 weeks: 8/10.83=73.85%
This means full loan forgiveness isn’t possible without increasing out payroll wages. If you don’t have payroll since you’re a sole-proprietorship it remains unclear if you’ll be able to obtain full loan forgiveness.
What can be included as wages paid?
Salary, commissions, or wages (per diem does not count)
Vacation, medical, or sick leave payments
State and local tax payments based on employee compensation
Healthcare coverage, including insurance premiums and retirement
It isn’t clear, but assume benefits were already set up as part of the employee compensation package. It also isn’t clear if we can prepay wages inside the 8-week period. The only prepaid expense barred within the CARES Act is business mortgage interest…
Be careful that prorated wages do not exceed $100,000 for any pay period to any employee. This would eliminate that employee from the forgiveness calculation.
Outside of wages, what can the funds be used for?
Business mortgage interest payments (not including principal or prepayments).
Rent (must have been established before 02/14/2020).
Utilities for the business location.
What costs DO NOT meet PPP loan forgiveness requirements?,
Wages for any employee with a prorated annual salary of $100,000 or more.
Payments made to 1099-MISC contractors.
Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020.
Pay attention to the last item, which seems like a mistake in the CARES Act language. The way it reads (and how most banks are going to calculate forgiveness) means you cannot include any federal taxes withheld, INCLUDING the employee and employer’s share of FICA tax and income taxes withheld. I hope this is corrected to only exclude the employer portion of FICA taxes.
Forgiven loan amounts cannot appear as a tax deduction!
Forgiven PPP loan funds will not be considered income and, therefore, cannot be included for any expense you apply them toward. This will be easiest to track if you create a new expense account for each line item to identify it as a PPP-funded expense.
After the bank determines your forgiveness amount, be sure to update these expenses to match and keep them marked as “non-deductible expenses”. Any amounts not forgiven can be expensed as they normally would (employee withholding and their half of FICA taxes are not ever deductible).
Keeping your books accurate is going to be difficult. Let us know if you have any questions and we’ll do our best to provide more clarifications. Of course, we expect more input from the SBA and IRS, so hold tight. Keep an eye on the SBA.gov site for the most reliable information as they continue to improve the understanding of the CARES Act.