3 minute read
Demystifying the Payroll Protection Program
by Expert Contributor Jack Del Pizzo, CPA, Owner of Del Pizzo & Associates
The Payroll Protection Program (PPP), part of the CARES Act passed by Congress and signed by the President in March 2020, offered loans to small businesses suffering financially from the mandatory shutdown due to the coronavirus pandemic, so they could continue to pay employees and be ready to reopen when the pandemic ended.
To fund the PPP loans, the U.S. Treasury was authorized to use one of the Small Business Administration’s lending programs. Businesses qualified if they had opened prior to February 15, 2020, and had no more than 500 employees. Sole proprietors, independent contractors, certain nonprofits and some others also qualified.
When the $349 billion initially approved by Congress was quickly exhausted, an additional $310 billion was authorized. Surprisingly, as of the August 8 deadline for applying for a PPP loan, approximately $130 billion had not been borrowed.
A unique aspect of the program is that a PPP loan can be entirely forgiven if the funds were used for payroll, rent, utilities or mortgage interest and if certain other requirements were met. Any funds not meeting those requirements must be repaid over 2 to 5 years, at principal plus 1% annual. Each borrower must apply to the SBA for forgiveness and must provide the required documentation and certifications to enable the SBA to calculate the forgivable amount.
The SBA’s recently published 10 pages of “Frequently Asked Questions” regarding PPP loan forgiveness show that the calculation rules are, not surprisingly, extensive and complex and contain opportunities and pitfalls for the unwary. A borrower who makes the wrong choice on the application could get less than 100% forgiveness and also a significant financial hardship. Because it’s been estimated that it will cost each business $2,000 or more to apply and due to the administrative burden of processing millions of low-dollar applications, Congress is considering a proposal to automatically forgive PPP loans of $150,000 or less and require minimal documentation from borrowers in that category.
Although Congress mandated that PPP loan forgiveness not create taxable income for the borrower, the Internal Revenue Service has announced that typically deductible business expenses (payroll, for example) will not be deductible if they were paid for by PPP funds that were later forgiven.
Here's an example: A small business used their entire $100,000 PPP loan for payroll, and their entire PPP loan gets forgiven. When that business calculates its 2020 Federal income tax owed, the IRS says it won’t allow the business to deduct the $100,000 payroll expense. So if that business is in the 30% tax bracket, they will be hit with an unexpected tax bill for $30,000. Professional organizations including the American and Pennsylvania Institutes of Certified Public Accountants are protesting the IRS position because it does not not comply with what Congress intended when it passed the Cares Act.
The tax issues created by Payroll Protection Program’s loan forgiveness need to be clarified by Congress.
Expert Contributor Jack Del Pizzo, CPA, Owner of Del Pizzo & Associates
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