As borrowers face deadlines and near the end of covered loan periods, many questions are being asked about PPP loan requirements and forgiveness eligibility. There’s still much-needed clarification awaited by the U.S. Small Business Administration (SBA), but here’s an up-to-date rundown of what you need to know about the PPP loan program and forgiveness application process. Stay tuned for updates as they become available.
Snapshot of Loan Forgiveness Requirements
Earlier in June, Congress passed the PPP Flexibility Act, which modified a number of provisions initially released in the CARES Act. The Flexibility Act gives business owners more leniency in the loan forgiveness process and made adjustments in favor of helping small businesses attain full forgiveness of their loans.
The PPP Flexibility Act made the following key changes:
- New expense ratio for loan forgiveness is now 60/40 (under previous law it was 75/25). Businesses must allocate 60 percent of funds to payroll and the other 40 percent to allowable expenses such as mortgage, rent, utilities, etc.
- Extended forgiveness period from 8 weeks to 24 weeks. If you signed up for a loan before June 5, 2020, you have the option of taking either one. If you signed up after June 5, 2020, your forgiveness period will automatically be the shorter of the two following options.
- 24 weeks
- From the date of the loan to December 31, 2020
- The deadline to rehire workers has been extended to December 31, 2020.
- Businesses now have five years instead of two years to repay any necessary loan amount, but the Flexibility Act did not make this extension retroactive on loans received prior to its passing.
When to Apply for Forgiveness
Some businesses are looking to apply for forgiveness before their loan period ends. That’s fine, and it comes with a few advantages, but if you’re not careful, you could end up paying more than necessary.
Here’s why. The new guidance says that if you apply for forgiveness somewhere in between the 8-week and 24-week covered period (before your covered period is over), and you’ve reduced any employee’s salary/wages by more than 25%, you must account for the excess salary reduction for the FULL 24 weeks. This means that the forgiveness amount will be reduced as if the salary reduction happened for the entire covered period.
The Small Business Administration (SBA) gives the following example: “A borrower is using a 24-week covered period. This borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period, with an FTE of 1.0. In this case, the first $250 (25% of $1,000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $1,200 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by 24 weeks). If the borrower applies for forgiveness before the end of the covered period, it must account for the salary reduction for the full 24-week covered period (totaling $1,200).”
In this example, the employer will be required to pay the excess salary deduction for the full covered period regardless of any early loan forgiveness or future employee pay.
On the other hand, an employer may have good reasons to apply for forgiveness early. If your business did not impose a reduction of 25% or greater on employee wages, then the abovementioned scenario will not apply to you. Also, some businesses may wish to remove the liability from their financial statements for GAAP reporting purposes, and others may want to simplify their tax reporting and keep loan amounts contained within the same tax year.
The good news is you don’t have to decide right away which period you’d like to choose. When you fill out your PPP Forgiveness Application, you can select either 8 weeks or 24 weeks by entering the appropriate dates in the covered period. And even though there’s no formal deadline to complete the forgiveness application, you’ll have to start paying the loan back 10 months after the date your covered period ends, so be sure to complete the application before the 10-month time period is up.
How to Avoid an Audit
The SBA provides a safe harbor for businesses that accepted PPP loans under $2 million and will not be subject to an audit. Businesses above the $2 million threshold will be subject to an audit and a series of tests based on the liquidity of the borrower and the ability to obtain funds elsewhere. The SBA reports that 86.5% of all PPP loans were less than $150,000, so we do know that the money is being directed toward smaller businesses and not in the deep pockets of large corporations.
If you have accepted a PPP loan, documentation is key. In an effort to prepare your business for the forgiveness application, it is important to have streamlined accounting records, strong controls, and separate records and accounts for federal loans to track expenditures. Be sure to monitor costs associated with the PPP loan programs and have open and consistent communication with your lenders and advisors.
Next Steps
We’ve been keeping up with the PPP and the interim guidance as it becomes available, so be sure to reach out if you have any questions or would like us to get started on the loan forgiveness number crunching for you. Contact me at stu@erocktax.com or call the office line at (781) 247-5569.
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About Stu: With more than 30 years of experience as a tax professional, Stu Steinberg brings a broad depth of knowledge to his work with his clients. Stu founded Erock Tax to help provide tax and financial planning strategies to individuals, families and small businesses and is passionate about empowering his clients through education about their money health. Stu is highly energetic and brings a sense of optimism, creative problem-solving and a deep level of commitment to every Erock client.