Understanding PPP Loan Forgiveness: What Business Owners Need to Know

ACE Workforce Technologies and Tarlow & Co., a New York-based CPA firm, recently presented a webinar for business owners filing for Paycheck Protection Program (PPP) loan forgiveness. With  the application process now open, business owners have questions.

Having the right paperwork, knowing the forgivable portions of PPP loans, and understanding the five factors that can lead to forgiveness reduction can help small business owners keep more of what they earned in 2020.

Paycheck Protection Program (PPP) Loans: The Background 

On April 3, 2020, the federal government passed the Paycheck Protection Program as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Issued through the Small Business Administration and underwritten by U.S. banks, PPP loans provided paycheck protection and other relief to small businesses impacted by Covid-19.

PPP loans include 2-year or 5-year loans at a 1% interest rate, with up to 100% of the loan forgivable for many businesses.

Since April, the Federal government has issued changes to the legislation. The most notable is the covered period, which has expanded to 24 weeks from the date of loan disbursement, rather than eight.

“You can still opt to use the 8-week period if you received loan funds before June 5, but most people are taking advantage of the 24 weeks,” said Adam Venokur, CPA/PFS, CFP, Tarlow & Co. managing partner, in a recent webinar presented by Ace Workforce Technologies.

During the webinar, Venokur and his colleague Drew Benenson, CPA, CFP, another partner at Tarlow & Co., outlined what business owners should know when filing for PPP loan forgiveness.

PPP Loan Forgiveness: Understanding Covered Costs 

PPP loan forgiveness may cover costs for business owners in four areas:

  • Payroll
  • Utilities
  • Rent / Lease costs
  • Mortgage interest

For most business owners, the majority of covered costs come from payroll. “For some, payroll costs will be the only costs requiring forgiveness,” Venokur said.

Payroll costs fall into two separate buckets: Cash compensation and non-cash compensation. It’s important to note that forgivable payroll costs differ between employees and owners.

Forgivable Employee Cash Compensation

For employees, forgivable payroll costs include:

  • Employees’ gross wages
  • Tips
  • Vacation time
  • Family, medical, or sick leave (if not covered by statutory insurance)
  • Bonuses
  • Commissions
  • Severance

Forgivable costs do not include payments for independent contractors, wages used to obtain credits under the FFCRA, or federal taxes.

Forgivable payroll costs are limited to $46,154 for the 24-week period or $100,000 annually. But this limit does not apply to non-cash compensation.

“Non-cash compensation can help owners increase the payroll costs included for forgiveness,” Venokur said, adding that you can’t frontload 2020 profit-sharing to increase non-cash payroll costs. However, you can make 2019 contributions in 2020 to increase the forgivable portion of your loan.

Forgivable Non-Cash Employee Compensation

Forgivable non-cash compensation includes:

  • State and local employer tax assessments
  • Employer’s portion of group healthcare and retirement benefits (such as matching 401K funds)

Forgivable Owners’ Payroll Costs

Owners’ payroll costs are treated differently from employees’, with additional variations depending on the type of business entity. That’s just one reason you may want to consider consulting with a CPA before filing for PPP loan forgiveness.

The cash compensation rules for owners are as follows.

General partners in a partnership and members in an LLC – Capped at the lesser of $20,833 or 2.5 months’ worth of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties), multiple by 0.9235 or 8 weeks’ worth of the 2019 amount.

Owner-employees of S- and C-Corps with an ownership stake greater than 5% or independent contractors and sole proprietors – Capped at the lesser of $20,833 or 2.5 months’ worth of their 2019 compensation.

Covered Utility Costs

With the payroll forgiveness limits in place, many business owners will tap out their total loan costs through payroll forgiveness. However, if non-cash and cash compensation doesn’t max out your loan forgiveness, you can apply for loan forgiveness for money that covered other operating expenses.

Covered costs for utilities may include:

  • Electricity
  • Gas
  • Water
  • Phone
  • Internet
  • Transportation (Tolls)

Rent includes business rent or lease payments executed before February 15, 2020, or extended past that date. Forgivable lease and rent expenses can include equipment financed for company use.

Additionally, business owners can file for the forgiveness of interest payments on any business mortgage obligations. However, the amount of loan forgiveness for rent or lease payments cannot exceed the mortgage interest owed during the covered period.

Also, business owners cannot include household expenses for home-based businesses or business operation costs attributable to the business owners’ tenants or sub-tenants. 

How to Show Proof of Your Forgivable Costs

ACE Payroll Technologies is happy to provide its clients with payroll reports for the covered periods. In some cases, your loan forgiveness application may require tax forms. You’ll also need to show your average number of full-time employees or full-time employee equivalents.

If you’re also filing for non-payroll costs, you’ll need to show bills and payment histories for:

  • Utilities
  • Rent
  • Mortgages (to prove interest payments)

PPP Loan Forgiveness Reductions to Watch Out For

Loan forgiveness may be reduced due to any of five factors:

  • Unspent loan proceeds
  • Full-time equivalent (FTE) reduction
  • Salary / hourly wage reductions
  • Non-payroll expenditures
  • EIDL (Economic Injury Disaster Loan) program advances up to $10,000

Be aware that the SBA deducts any EIDL advance amounts, dollar for dollar, from the forgiveness amount paid to the lender.

Understanding FTE Forgiveness Reductions and Safe Harbors

Benenson noted that he’s seen business owners face a reduction in loan forgiveness due to a reduced number of FTEs during the pandemic. Businesses that laid off or furloughed their employees and did not bring them back cannot count those FTE salaries for loan forgiveness, even if they included them in the initial loan amount.

However, by understanding the safe harbor rules, you may be able to minimize forgiveness reductions and maximize loan forgiveness.

Safe Harbor Rule 1 – You can show that your business could not operate at the same level of activity between February 15, 2020, and the covered period as it was before February 15. The drop in activity must have occurred because you followed health and safety mandates to prevent the spread of coronavirus. For instance, a restaurant owner may have had to reduce operations to take-out only during the height of the pandemic, subsequently reducing its payroll and operating costs. 

Safe Harbor Rule 2 – You reduced FTE employee levels between February 15 and April 26 and then restored FTE levels before December 31, 2020, or the date you submitted the loan forgiveness application.

Additionally, you may qualify for an FTE reduction exemption if you presented offers for re-hire, in writing, which the employee denied, and you didn’t fill that position with a new employee.

You may also qualify for the FTE reduction exception under Safe Harbor Rule #2 for employees who:

  • Left voluntarily
  • Requested reduced hours
  • Were fired with cause

Act Now to Get the Wheels in Motion for PPP Loan Forgiveness

You must submit your loan forgiveness application before the maturity date of the loan. You’ll want to return your company to the same FTE levels it was at when you applied for the loan before you file your loan forgiveness application. 

But that doesn’t mean you should wait until loan maturity; between delays in application processing and ever-changing legislation, you should file as soon as your FTE headcount reaches the level it was at when you received the loan – or before that if you have no intent to increase your workforce to pre-pandemic levels.  

“I’ve seen people go back and forth with their lender three or four times because they didn’t have the right paperwork,” Benenson said. He pointed out that just because your lender approves the application doesn’t mean you’ve qualified for forgiveness. The application still has to go through the SBA process for approval.

“I don’t see why you wouldn’t apply now to get the wheels in motion sooner rather than later,” he concluded.

ACE Workforce Technologies and Tarlow & Co. are happy to help guide business owners through the process with the appropriate paperwork and business accounting expertise.

Listen to the full recording here and download the presentation here.

This article is not legal or financial advice. Please consult with your accounting firm or reach out to Tarlow & Co. for assistance with the PPP loan forgiveness application process.


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