The Payroll Protection Plan (PPP) seems to be in the news every day. Almost all the articles regarding this program, whether on the initial law or the many clarifications issued have concentrated on the borrowing end of these loans. Do I qualify for a PPP loan? What is the maximum loan amount I can apply for? What are the steps I need to take in order to apply? What documentation is needed?
Now that small businesses have begun to receive the funds, questions have started to pop up on the forgiveness end. Everyone’s main question is how do I have my loan proceeds forgiven?
I am positive that very soon you will start to see clarifications come out on the forgiveness end of things. I am going to start with what we know and then I will present some items that need to be clarified.
We know the following:
Expenses paid during the 8 weeks after receiving the funds can be used for the following:
- Funds can be used for payment of payroll costs. Payroll costs include wages, health and retirement benefits of employees, Schedule C earnings for sole proprietors and independent contractors (including single member LLCs filing as sole proprietors) and self-employed income for partners in partnerships (including members in multiple member LLCs filing as partnerships).
- We also know that funds may be disbursed for rent, mortgage interest and utilities of the business.
- We know that at least 75% of forgiven funds must be spent on payroll costs.
- If a small business receives PPP loan proceeds that are ultimately forgiven, meaning they do not have to be paid back and the loan proceeds are also not considered taxable income, then the expenses paid with these funds are not deductible. This rule is to prevent a double benefit of receiving money tax free (let’s say $20,000) and then receiving a deduction of $20,000 to offset taxable income earned by the small business. If a small business borrows money, pays expenses but part of the loan is not forgiven, then expenses paid by the funds not forgiven would be deductible.
Clarification required on:
- The definition of a utility. We all know utilities include gas, oil, electric and water, but how about telephone and internet? Are these utilities or just business expenses? The 2nd Interim Final Rule issued by the SBA mentions gas used for your business vehicle as a utility in an example.
- What is rent? Again, the SBA in it’s 2nd Interim Final Rule mentions rent on a warehouse or a vehicle you use to perform your business? What about desk fees paid by a realtor?
- How about individuals that work from home? Are these individuals allowed to deduct a portion of their rent, mortgage interest or utilities?
- We know there is a maximum amount that can be paid to those who earn $100,000 or more. This amount is equal to 8 weeks pay. This is calculated by taking the $100,000 dividing it by 52 weeks to come up with the weekly pay. The weekly pay is multiplied by 8 yielding a result of $15,385. What about the other employees? Do they have to be paid 8/52 of their 2019 payroll? Are they paid based on an equivalent period in a prior year? Remember some businesses may pay employees more wages depending on the time of year. Can you pay employees bonuses, and if so, is there a limit?
- What if a sole proprietor makes $100,000 and calculated their maximum loan amount to be $20,833, (This number comes from dividing $100,000 by 12 and then multiplying it by 2.5) hires an employee to use the funds. Let me explain it a little further. I just said the maximum payroll expense a sole proprietor who made $100,000 is entitled to is $15,385. This leaves $5,448 that cannot be forgiven unless the same sole proprietor also has rent, utilities and mortgage interest. Even if he/she does have those expenses they cannot be in excess of $5,128 because $15,385 must be at least 75% of the forgiveness amount. This means $320 ($20,833-$15,385-$5,128) cannot be forgiven. Can this be circumvented by hiring an employee to either make up for the lack of non-payroll expenses or to cover any difference such as the $320 I just explained? To be more practical. Can the sole proprietor hire his/her child and pay them $5,448 to cover the difference between $15,385 and $20,833?
- Does a sole proprietor, independent contractor or partner in a partnership have to cut a check on a weekly or bi-weekly basis? Many sole proprietors pay personal expenses from their businesses and classify them as withdrawals (non-business deductions). Ultimately, taxable income is determined by taking income less business deductions. My point is a sole proprietor doesn’t calculate their income only by checks paid to themselves.
- When does the 8-week clock actually start? The American Institute of Certified Public Accountants (AICPA) has proposed to the Treasury and SBA that the 8-week clock begin when businesses reopen. It doesn’t make much sense to hire people, take them off unemployment, pay them for not working, only to let them go when your business reopens because you have no money.
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Hang in there and stay safe,
Jeff Skolnick, CPA, M.S. Taxation