These past few months have been hard for so many and I am glad to see that businesses are starting to see the loans they applied for come in. However, these are loans which means there are rules to follow. Here is some guidance that will help you understand what is next.
If you are among the businesses that have received SBA funds under the PPP (Paycheck Protection Program), then you are probably already thinking about loan forgiveness. Forgiveness comes from how you spend it and your record keeping.
Once the money is in your bank account, you have 8 weeks to spend it on qualified expenses such as payroll (not including taxes), rent payments on leases, utilities payments on service agreements, and mortgage interest. These expenses had to have been in place before Feb 15th to qualify. Keep in mind that you can only spend up to 25% of your total loan amount on non-payroll expenses.
If you received an EIDL (Economic Injury Disaster Loan) advance, that amount will be deducted from the PPP loan forgiveness amount.
When asking for the loan forgiveness, you will need to provide documents to show what you spent in on. Make sure you are keeping good records because good documentation covering the eight weeks from receiving PPP funds is key. Here is a list of documentation you most likely need:
- Payroll tax filing reports
- Payroll reports for each pay period within the same eight weeks which should include the employees by name, gross wages, PTO/vacation/sick time, and health insurance premiums paid by the company under a group health plan that are deducted from the employee’s paycheck
- Invoices for group health insurance plan
- Documentation of retirement plan funding by the employer
- Lease agreements and proof of payment
- Utility service agreements or bills and proof of payment
- Copies of statements of interest paid on debt obligations incurred prior to February 15, 2020 indicating payment amounts and proof of payment
Ultimately, it is up to the lenders to decide what will be forgiven and what documentation will be required. These lenders are depending on further guidance and clarification from the SBA that has not come yet.
The PPP is a much-needed infusion to businesses and loan forgiveness is the goal. Any funds that are not forgiven will convert into a 1% loan for a 2-year term. So be mindful of how you spend the money and carefully document everything you use it for.
While we do not know for sure what it will take for full forgiveness, we do know the IRS has ruled that the expenses that are paid with PPP funds will not be deductible. This is because these funds are being treated as a grant and are not taxable income. “This treatment prevents a double tax benefit,” the IRS said in a notice published Thursday. Therefore, it is important to track your expenses in your accounting to match what you received.
While there is still much uncertainty, we are here to help guide you and assist you as needed, do not hesitate to contact us.