PPE Maximize Forgiveness

Paycheck Protection Program

Maximize Forgiveness

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. by Tom G. Porterfield, CPA, CFE

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.

Accounting for the PPP Forgiveness

Recipients should record the forgiveness to an easily recognizable account on the income statement. Do this to ensure that it is not taxable on your 2020 tax returns.

Yeah, this a little technical for most of us. Here’s what you need to do:

• Record the forgiveness in a separate “Other Income Account.”

• Work with your CPA specifically identifying the forgivable portion of the PPP loan.

• Review the M-1 section of your return reconciling your book income to the taxable income.

• Verify the forgiveness is removed from the book income (Line 5a Income recorded on books this year not included on Schedule K, lines 1 through 10), and

• Verify the same amount is added back to book income (Line 3a Expenses recorded on books this year not included on Schedule K, Line 1 through 12 and 14p).

The Remaining PPP Balance

The balance of the PPP loan at the end of the 8- or 24-week covered period converts to a 2-year term loan at a 1% interest rate. Payments on your PPP loan are deferred for 6 months from the loan origination date.

There is no prepayment penalty on the PPP loan. For that reason, recipients should consider how they will handle the unforgivable portion of the loan now in forecasting long-term cash flow.

Summary of the PPP Best Practices

First, understand the PPP loan forgiveness formula. Secondly, manage your expenditures during the 8- or 24-Week covered period to maximize the forgiveness. Then follow these steps: 1. Gather the FTE and Payroll information for the baselines noted above.

2. Segregate the proceeds in a separate bank account.

3. Transfer funds to operating and payroll bank accounts as allowable expenditures are incurred.

4. Create and maintain a projection of allowable expenditures.

5. Update the projection as allowable expenditures are incurred.

6. Scan and save supporting reports and invoices in a central folder to support the loan forgiveness calculation.

7. Record the forgiveness to a separate “Other Income” account.

8. Work with your CPA and review the 2020 M-1 Schedule ensuring the forgiveness is not taxable nor, the related expenses are not deducted.

Finally, follow these steps to maximize the loan forgiveness and create liquidity during this difficult business cycle.

Tom Porterfield, President and CEO of Porterfield & Company, has a passion for working with franchise owners and operators, which is grounded in his appreciation for operational excellence and the processes that achieve it. That’s what franchises are all about: delivering consistently high-quality goods and services to drive sustainable profitability through regional customer loyalty. With the franchise industry in mind we developed COMPASS (Complete Outsource Monthly Processes and Accounting Service System™) and SHaRP (Simplified HR and Payroll) products. We believe that franchisees should sleep better knowing that we are putting the best business practices, technology and accounting knowledge to work for them. For more information, call us at 844-309-4930 or contact us via our website at www.porterfieldcpa.com