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Paycheck Protection Program Loan Forgiveness

June 10, 2020 Author: Matt Caras, CPA Compass Pointe CPAs

The CARES Act enacted by the government has been both complicated and ever-changing. Arguably the most impactful part of the Paycheck Protection Program (PPP) is the forgiveness aspect. We are now at a point in the PPP loan process where many businesses are approaching the loan forgiveness application. Section 1106 of the CARES Act allows for up to 100 percent of loan proceeds received under the PPP to be forgiven if certain criteria have been met. Recently the Paycheck Protection Program Flexibility Act was passed which added additional time to use the funds and added additional flexibility for forgiveness.

In order to qualify for loan forgiveness, the PPP loan proceeds must be spent on the following during the 24-week period after the loan is deposited into your account (the covered period):

• Payroll costs (subject to limitations), including benefits;
• Interest on mortgage obligations incurred before February 15, 2020;
• Rent (real estate or personal property), under lease agreements in force before February 15, 2020; and
• Utilities, for which service began before February 15, 2020.

Payroll costs and employee benefits costs include:

• Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee) to include paid time off for vacation and sick leave;
• Allowance for separation or dismissal;
• Payments required for provisions of group health care benefits including insurance premiums;
• Payment of any retirement benefit;
• State and local taxes assessed on compensation; and
• For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at the lesser of 2019 earnings or $100,000 as annualized.

Your loan forgiveness can be reduced under the following situations:

• Less than 60% of the proceeds were used for payroll costs;
• The number of full-time equivalent employees (FTEs) was reduced during the covered period when compared to either, at the election of the borrower, February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020;
• Annualized salary or an average hourly wage of employees during the covered period who made less than $100,000 during 2019 is reduced by more than 25% when compared to the most recent full quarter during which the employee was employed before the covered period.

There are safe harbors in place where the borrower can correct any reductions in full-time equivalents or salary and/or hourly wage and not have their forgiveness reduced.

At the end of the 24-week covered period, applicants must apply for forgiveness through the same lender who is servicing the loan. The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations.

Treatment of Amounts Forgiven

Amounts that have been forgiven will be nontaxable Federal income. Many states have yet to provide guidance on how they plan to handle to this forgiveness of indebtedness. Unless another act is passed, expenses paid using PPP funds will be nondeductible expenses.

Loan Term and Deferral Period

The PPP Flexibility Act has modified both the loan term and the deferral period for the PPP loan. New PPP loans will come with a 5-year term, however, loans already in place at a 2-year maturity may need to contact their lender in order to get their terms modified. The payment deferral period has been modified from 6 months to be until the date on which the amount of forgiveness is determined and remitted to the lender. If the borrower fails to apply for forgiveness within 10 months following the last day of the covered period then the borrower will need to begin making payments.

As the PPP program continues to change (as it does almost daily) and can be quite complex in many areas, please do not hesitate to your tax advisor at Compass Pointe CPAs.  

If you have any questions about the Payroll Protection Program, please contact us at Compass Pointe CPAs.