Join our multipart livestream series every Thursday to engage in the latest changes related to these uncertain times. You’ll hear strategies for navigating what these developments mean for you.
- Jessica Smith, HRCO Generalist, CLA
- Matthew Rambaran, Manager, CLA
- Rick Krueger, Principal, CLA
- Jennifer Rohen, Principal, CLA
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Questions and Answers:
If a company files for PPP loan forgiveness late (December 30, 2020), then any loan forgiveness would be in 2021?
There are a couple different ways to handle this, but the most conservative way to account for forgiveness will be to remove the loan and recognize the forgiveness when you are notified by the SBA. Assuming this happens in 2021, you will be allowed to deduct the expenses on your 2020 tax return but then will need to pick up the additional income in 2021 when forgiveness is granted.
As a 501(c)(3) nonprofit that received a PPP loan (less than $30k), will we need to complete the paperwork with our credit union to have the loan forgiven? On a previous CLA webinar, there was talk about a provision being discussed in Congress that NGOs and SBs that received PPP loans of less than $100k may be excused from completing the PPP Loan Forgiveness paperwork. Can you please explain if that provision was put into effect?
While we still expect there to be a streamlined forgiveness process for loans under $150,000, at this point the law has not been changed to provide for that process. If you want to submit for forgiveness before Congress passes the revised forgiveness language, you will need to complete either form 3508 or 3508EZ and submit all the required documentation to the credit union. Many banks and credit unions are not taking applications for loans under $150,000, so we would suggest you reach out to the credit union to see if/when they will accept your forgiveness application. At this point, the Democrats have presented a proposal that all PPP loans < $50,000 would be subject to certification by the organization that they qualified for full forgiveness, but would not be audited. This has not been approved by the Republicans/Senate/President to date.
I think we qualify for the EZ forgiveness form. With the alternative covered period, I can cover our entire PPP loan with just payroll. Given that, do I need to bother including medical and all the non-payroll costs along with all the documentation in the application for forgiveness?
You need to include all the payroll costs because of potential wage reduction and FTE reduction adjustments. However, if you don’t need to include eligible costs for rent, utilities, interest, and even health care and retirement costs to get full forgiveness, then you don’t need to include those on your application and therefore you won’t need to include all the supporting documentation.
The PPP forgiveness makes reference to pay period (weekly, bi-weekly, etc). Ours is bi-weekly with a monthly commission payroll also – a hybrid. How do we answer and apply in a situation like this?
I would suggest reflecting the pay period type that you are using to determine your covered period or your alternative payroll covered period. So, in your case, I’d likely reflect the bi-weekly payroll as your payroll method.
Is the forgiveness amount considered income after the forgiveness is complete?
The forgiveness amount is not reflected as “income” for tax purposes. However, currently the IRS has said that expenses paid for using forgiven PPP proceeds are not deductible, so in effect you are getting taxed on the income. This will generally occur in the year that you get forgiveness granted by the SBA. It is possible that Congress will overrule the IRS on this topic, as a number of senators and representatives have said that was not the legislative intent, but we will need to wait and see what Congress acts on.
Are owner-employees included in the FTE number that is calculated when the average FTE number is calculated for the worksheet-PPP Schedule A?
As owner-employees are presented down in line 9 on Schedule A and not in the tables for employees, generally owner-employees will NOT be included in the FTE counts (since those come from table 1 and table 2 for employees). Therefore, your FTE count for your pre-COVID reference periods (either 2/15 – 6/30/19 or 1/1 – 2/28/20) should be adjusted to remove owner-employees as well so you have an apples to apples comparison.
Can cell phone and internet allowances provided to employees (in the form of increased wages, but listed as a separate line item on the paystub) that were displaced from their offices and went to work from home, be eligible for PPP Loan forgiveness? These allowances only started with the onset of the employees working from home, and are only intended to continue until the employee returns to the office to work, but were part of the wages paid during the covered period.
As these amounts are included in employee wages they are eligible for inclusion. These amounts would be included in the salary and wage amounts that are subject to the $100,000 prorated limitation.
Has there been any guidance on companies merging, or being acquired, along with their PPP loans? Can the merger happen before forgiveness is issued by the SBA?
Unfortunately, the answer is “Not yet.” In testimony last week on 9/24 the SBA indicated that guidance would be coming “imminently,” but wouldn’t commit to a date. Hopefully something coming soon. We are seeing that banks are generally requiring that PPP funds be placed in escrow and then released once forgiveness is determined, with the seller getting the forgiven amount and bank getting the unforgiven amount.
We have more than $2 million PPP SBA loan that we hope to get forgiven. The SBA indicated that they will audit the loans over $2 million. Do you know if SBA would forgive the loan if we are qualified before the audit?
The SBA will only have 90 days to review the loan forgiveness application once submitted by the bank. We generally expect them to do their “audit” during that period. The SBA reserves the right to look at loans over $2 million for a period of up to 6 years. You should get forgiveness information within that 90 day period once the bank submits your application to the SBA.
Is there a risk that a small business that had a PPP loan will be passed over for future government contracts because of that loan?
There has been no indication that receipt of PPP funds would count against a company for future government contracts. The only situation I could foresee where that could impact you is if your organization did not get 100% forgiveness and then defaulted on the payment of the unforgiven portion. In that case the SBA would have to step in to make the bank whole and you would be in default of your obligations to the SBA, which could impact future contract grants.
At the time of loan application, we had 30 employees. At 12 weeks, we still had 30 employees, and were ready to apply for forgiveness. At 20 weeks, we furloughed 2 employees, leaving us with a total count of 28 employees. Will there be any employee reduction, since we still had 30 employees when we applied for forgiveness.
This is one area where we don’t have 100% clarity and are awaiting additional guidance. At this point, we believe that since you are applying for forgiveness using the 12 week period that you will not have to report an FTE reduction based on the fact pattern you communicated. You should use the average FTE count during the period you are including costs for (the 12 weeks) when determining your FTE reduction quotient.
I have a self-insured client who is uncertain how to calculate the allowable health-insurance expenses. Their payroll processor is telling them to use a COBRA premium approximation, which is incorrect. I do know that actual expenses reimbursed are used as the expense, but for what time period(s)?
We believe that a company should use the actual self-insured claims paid (net of employee reimbursements) during the covered period (or alternative payroll covered period). For the end of the covered period, they should be able to prorate assuming their CP or APCP doesn’t correspond with the end of a monthly claim cycle and include those amounts as well as long as that amount is paid by the normal due date following the end of the CP.
If we hold off on the forgiveness application until 2021, would the forgiveness be income in 2021 since expenses were claimed in 2020?
Great observation. We believe you are correct, that you would deduct the expenses in 2020 and then have an adjustment on your tax return in 2021 to disallow the expenses in that year, which effectively makes the income taxable in 2021. Hopefully Congress will act to overturn the IRS guidance on this topic.
If the PPP loan is not forgiven until 2021, do we pick up the revenue in 2021, or do we have to show revenue this year? Currently it is recorded as a loan.
For tax purposes, we believe that you will not be impacted until the year that the SBA communicates the amount of your loan that will be forgiven. So if forgiveness occurs in 2021 you will get to deduct the expenses paid for using the loan on your 2020 tax return but then have an unfavorable adjustment to reduce expenses in 2021 to back out the previously expensed costs.
If you report under GAAP, you have a couple different options. The conservative presentation, which we generally recommend, is to treat the loan as an outstanding obligation until you hear from the SBA and then record the loan forgiveness income at that time. However, there is another acceptable way to treat the PPP loan more in line with a grant. In that case, since the costs you are being “reimbursed” for are incurred during 2020, you could record the forgiveness in the same period the costs are incurred. This will be an accounting policy election that you will need to make. See link to Journal of Accountancy article on this topic for your reference.
We received PPP in March and come November we will finish our last construction project in California and unfortunately have to close down due to lack of jobs out there. Are there any breaks in forgiveness for this case?
Your forgiveness application will be based on either the 8 or 24 week period following the grant of your loan, so it is likely that the need to close the business down in November will not have an impact on your ability to request forgiveness. You will need to work with your bank to submit your PPP loan forgiveness application using payroll, rent, utility, and loan interest information for your covered period.
A number of banks are finally opening their portals for forgiveness applications. It is not clear whether SBA is accepting the approved applications from the banks. Do you have clarity on this? There is still no clarity on FTE calculations and other issues associated with filing for a period less than 24 weeks. What is your recommendation on proceeding with filing for a period of less than 24 weeks. Do you expect any further guidance on FTE calculations and a change in the deductibility for tax purposes of the forgiven expenses?
The SBA portal to accept bank-approved loan forgiveness applications has been open since early August and the SBA recently reported that nearly 100,000 forgiveness applications have been received thus far. However, the SBA also disclosed that they have not approved any applications they have received. With respect to the questions on timing, there are a number of factors to consider when determining when to file for forgiveness, so there is no “right time”. Things like M&A, loan covenant compliance, need for additional loans, expected partner retirements/liquidations, desire to make distributions, etc. could all come into play. With respect to future guidance, we hope that something will be coming from the SBA, but other than a recent comment that they will be providing guidance on the SBA’s policies with respect to M&A activity while PPP loans are outstanding there has been no commitment for additional guidance. Getting additional guidance can be a double edged sword, as some guidance has been beneficial (i.e., you can include interest on personal property like auto and equipment loans) and some not so beneficial (i.e., limits on related party rents), so you roll the dice on whether or not that factor will help or hurt you. There is also some tax and cash flow planning to consider on timing. Regarding tax matters, while many congressional leaders have said the IRS’s interpretation conflicts with their intent, none of the recent proposed legislation has contained anything regarding this matter. So unless Congress includes it in a future bill or tax extender legislation, it looks like the IRS’s interpretation will stand. On the planning front, putting off forgiveness until 2021 allows you to deduct the expenses in 2020. That will give Congress more time to act on this issue (if they decide to) and at a minimum allow you to keep the cash for the additional tax liability for another year.
I need to list the FTEs from the loan app date and from the forgiveness request date. At the end of the said 12 weeks I had two more FTEs, but now I am down one from the app date, and from the 1/1 to 2/29 period. I am now adjusting for the two owners who were in the app FTE but now we are not to include them in the forgiveness FTE. Do I list FTE at the time of the forgiveness request or from the time we were able to use the funds? Then in relation to that, if I apply a period such that we exceed expenditures, but reflect the less one FTE, are we able to still claim full forgiveness?
We believe that the time you submit the forgiveness application and the period you use for eligible expenses and FTE calculations are likely different. For instance, if you use a 12 week period and your loan was funded April 15, your period to accumulate costs and do FTE calculation would end say in mid-July, but at this point your application date would be some time in October. We have no idea what those employee counts in the front part of the forms will be used for, but we don’t think they will need to agree to amounts used for the FTE reduction quotient.