Forgiveness of loan (Published by AICPA)
When does the 8 week period begin to determine the amount of the forgiveness for the PPP loan?
The 8 week period begins on the date the lender makes the first disbursement of the loan. The lender must make the first disbursement of the loan no later than 10 calendar days from the date of the loan approval.
What are the acceptable uses of the PPP funds for businesses other than self-employed individuals?
Payroll costs, health care benefits, mortgage interest payments, rent, utility, interest payments on debt incurred prior to February 15, 2020, and/or refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.
What is included in utilities?
The CARES Act defines utilities in Sec.1106(a)(5) as electricity, gas, water, transportation, telephone or internet access for service which began prior to February 15, 2020. Further guidance released added gas used when driving a business vehicle. Other common utilities such as garbage collection or security monitoring may also be classified as a utility, but a business should confirm with the lending institution.
When determining the potential reduction of loan forgiveness due to workforce reductions, what method is used to determine employees?
The CARES Act uses the standard of “full-time equivalent employees” to determine whether loan forgiveness must be reduced in the measurement period.
What are the acceptable uses of the PPP funds for self-employed individuals?
· Owner compensation replacement (calculated based on 8/52 of 2019 net profit from Form 1040 Schedule C)
· Employee payroll costs (as defined by the interim rule)
· Business mortgage interest payments on real/personal property
· Business rent payments
· Business utility payments
· Interest payments on debt obligations incurred before February 15, 2020
· Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020
Note that the individual must have claimed or be entitled to claim a deduction for the included expenses on 2019 Form 1040 Schedule C.
What amounts will be eligible for forgiveness for self-employed individuals?
The amount of the loan forgiveness will depend on the amount spent during the 8 week period on:
· Payroll costs as defined by the interim rule (does not include benefits for owners)
· Owner compensation replacement (limited to 8/52 of 2019 net profit and excluding any qualified sick or family leave equivalent amount for which a credit was claimed under FFCRA)
· Interest payments on mortgage obligations for real/personal property incurred before February 15, 2020
· Rent payments on lease agreements in force before February 15, 2020
· Utility payments under service agreements dated before February 15, 2020
*Note that for interest, rent and utility payments, the amounts must be deductible on Form 1040 Schedule C.
Are employee federal withholdings and employer payroll taxes on wages for the 8 week period included in payroll costs?
The employee federal withholding is included in allowable payroll costs for the purposes of determining the amount to be forgiven. The employer federal payroll taxes (i.e. FICA and Medicare taxes) imposed on the gross payroll are not eligible payroll costs for the loan forgiveness calculation.
What are the restrictions on determining the amount of loan forgiveness for businesses other than self-employed individuals?
At least 75% of the loan proceeds must be used for payroll costs. If salaries decrease by more than 25% for any employee who made less than $100,000 annualized in 2019 OR if the number of FTEs decreases, the forgiveness amount will be reduced. A loan calculator to assist in the determination of the forgiveness amount will be coming soon.
What about if the business had employees who left for their own reasons? Or need to be fired due to performance issues? Is the loan forgiveness still reduced for those employees?
More guidance is needed on this issue. As the statute is written in the CARES Act, the forgiveness is tied to employee count comparisons and also specific employees and whether their pay was substantially reduced.
FAQ #40 addresses the situation where a business lays off an employee, offers to rehire the same employee and the employee declines the offer. SBA and Treasury intend to issue an interim final rule that excludes laid-off employees that the business offers to rehire from the forgiveness calculation. The business must make a good faith, written offer to rehire and the rejection of the offer must be documented. It was also noted that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
Can you increase pay for employees during the forgiveness period (for example, hazard pay, bonuses or other salary increases)?
A decrease in wages of more than 25% will decrease forgiveness and wages is capped at an annualized rate of $100,000 per employee. The current guidance does not prevent an increase in pay in the form of a short term pay increase, hazard pay or bonus.
Can I use PPP fund to pay payroll expenses to employees when they are not currently able to work (due to business being closed or for any other reason)?
Based on current guidance, the covered 8-week period starts when the loan is funded. If the borrower is not able to operate or is operating at a limited capacity when the PPP loan proceeds are received, the borrower may choose to pay employees
who are not able to work. This choice may be made to help the borrower maximize loan forgiveness as current guidance states that not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.
Can a PPP loan be forgiven in whole or in part?
The actual amount of loan forgiveness will depend, in part, on the total amount of payroll costs and other eligible costs paid during the 8-week covered period. There are reductions in the amount of forgiveness based on the percentage of eligible costs attributable to non-payroll costs, any decrease in FTEs and decreases in salaries/wages per employee. See PPP Loan Forgiveness Steps for additional information. Also, the SBA is expected to issue additional guidance related to loan forgiveness.
Are the expenses when determining forgiveness on a cash or an accrual basis?
More guidance is needed on this issue. The guidance provided discusses “payments”, but further clarification is needed.
Can rent or other obligations be prepaid?
To be forgiven, the CARES Act states costs must be incurred and paid during the covered period. Further guidance specifically addresses that prepayments of mortgage payments is not allowed.
Are these expenses tax deductible if the loan is ultimately forgiven?
IRS Notice 2020-32 was issued on April 30, 2020 to state that no deduction is allowed for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan. The AICPA recently submitted a letter of support for legislation that would clarify that the receipt and forgiveness of Coronavirus assistance through the PPP does not affect the deductibility of ordinary business expenses.
Is the forgiveness of the loan taxable income?
No, the forgiveness of the loan does not constitute federal taxable income. States are providing guidance on state taxability that will be included in the AICPA state tax guidance chart.
Are payments to related parties (such as rent) included in amounts eligible to be used to determine forgiveness?
This has not been specifically addressed in guidance released as of April 29, 2020. Based upon guidance received to date, related party rents are allowed subject to the 25% limit for expenses other than payroll.
What documentation is required to be submitted to the lender for self-employed individuals to support loan forgiveness?
The following documentation is required:
· certification that the documentation provided is true and correct and the amount for which forgiveness is required was used to retain employees, and make interest, rent and utility payments
· If the self-employed individual has employees, Form 941 and state quarterly tax reporting forms or equivalent payroll processor records that correspond to the covered period
· Evidence of business rent, mortgage interest payments or utility payments for loan proceeds used for these purposes
· 2019 Form 1040 Schedule C
How should the forgiveness portion be recorded for financial statement purposes?
Visit the Coronavirus (COVID-19) audit and accounting resources page to find out more about the financial statement impact of the PPP loan forgiveness.