Paycheck Protection Program
Maximize Forgiveness by Tom G. Porterfield, CPA, CFE
It is important that small businesses receiving the Paycheck Protection Program (PPP) loans manage the loan proceeds. For that reason, we are sharing some best practices for managing PPP loans.
Payroll and Full Time Equivalents (FTEs) PPP loans are forgivable, but reductions in employees, work hours and total payroll decrease the forgiveness. To manage this, recipients determine the baseline FTE and payroll amounts to calculate the forgiveness. This requires the average FTEs for the periods: • February 15, 2019 to June 30, 2019 for Option 1 and • January 1, 2020 to February 29, 2020 for Option 2. The other baseline is the total allowable payroll for the most recent quarter prior to the loan origination. You will need to gather the payroll expenses for employees during that first quarter. Track payroll expenses during the “covered period” by employee excluding employees earning over $100,000 annualized. The covered period has now been revised allowing recipients to choose an 8-week or 24-week period. Because the recipients must spend no less than 60% of the loan proceeds on payroll, it is important to track and monitor this from the start. Start by asking your payroll provider or CPA to help you gather this information.
Segregate PPP Proceeds Open a new bank account to deposit and manage the PPP loan proceeds. Then pay the allowable expense from your existing bank accounts and transfer the funds from the PPP account to cover the expenses. This is important because the balance left in the PPP account should approximate the unforgivable balance at the end of the covered period.
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Maintain 8-Week and 24-Week PPP Projections and Logs Because recipients have the option of choosing 8 weeks or 24 weeks from the loan origination date to make the allowable expenses, it is important to project allowable expenses. Project and track the allowable expenses as actual expenditures are made over the 8- and 24-week periods. Set up a folder to save the reports and invoices supporting payroll, group health care benefits, retirement and other allowable expenditures.
Communication Because the PPP loans are new, it is important to communicate with your banker throughout the expenditure period. It’s also important to understand the banker’s expectations for this process. Also keep abreast of any changes or clarifications of the PPP loan process. Taxability of the PPP Forgiveness There is a saying – “It’s better to ask for forgiveness than permission.” When it comes to the PPP loans, forgiveness is written into the CARES Act. This forgiveness is specifically exempted from federal income taxes. Sounds like a great deal, and it really is. It appears that someone reached out to the IRS and asked for permission. And while the IRS did not kibosh the tax free forgiveness, they clarified the deductibility of the related expenses in Notice 2020-32. While you are not taxed on the forgiveness, you can’t deduct the expenses paid by the forgivable portion of your PPP loan. So some think of this as bad news. It’s really a neutral event from a tax standpoint. Recipients are not taxed on the forgiveness on one side of the equation. On the other side, the related expenses are not deductible. So in the end, the tax effect of the PPP forgiveness is tax neutral.
