Small Business Relief and COVID-19

Small Business Relief and COVID-19

Obviously, much has occurred over the past two months in our communities and in the halls of Congress. Many of you have been busy with the hectic application process surrounding the small business Paycheck Protection Program (PPP) loan, however there is an abundance of other tax-related issues involving COVID-19 as well. This will be the first of several issues spotlighting various topics designed to benefit the small business.
 
Paycheck Protection Program Loans: Q&A

Basically, there are two pieces to the PPP program: obtaining funding and loan forgiveness. The latter involves an understanding of how the forgiveness process works and which expenses the funds are designed to cover. Based on what we are seeing, there appears to be plenty of questions surrounding these issues.  

Are PPP funds taxable? In short, no. 

Are PPP Loan Forgiveness Amounts Taxable? No. Amounts forgiven through the PPP program are not taxable as loan forgiveness income. 
 
Are the expenses paid with PPP funds still deductible? This issue is being debated as we speak. The IRS issued guidance (Notice 2020-32) that indicated expenses paid with the portion of PPP loans that are forgiven cannot be deducted. Under normal circumstances, expenses related to tax-exempt income are not deductible. However, these are not normal circumstances and the unusual events leading to the need for assistance and the purpose of the loan money would appear to deeply conflict with denying the deduction of payroll, health and utility costs. 
 
This position by the IRS has caused quite a stir with more than a few members of Congress. You can expect this issue to be taken up by Congress when they reconvene. 
 
Where do I apply for PPP Loan Forgiveness? The application will be filed with the same lender who provided the PPP funding. The application for forgiveness will be filed at some point shortly before, or shortly after the 8 week “lookback” period discussed below and will be directed by the lender.   

How does forgiveness work? In general, PPP loans are eligible for forgiveness in an amount equal to the payroll, business interest, rent and utility cost incurred and paid during the 8-week period beginning on the date the loan proceeds are received. Sole proprietors and partnerships who have no employees will follow a different, simplified computation which will be discussed in the next issue.   
 
PPP Loan Forgiveness and the 75% Rule. For those who have employees, in order to qualify for forgiveness at least 75% of the loan proceeds must be used on payroll-related costs which also involves an element of maintaining pre-COVID-19 payroll levels and employee count. This information will be certified by your lender with payroll tax returns and employee count over the 8-week period noted above. 

What are payroll-related costs?

• gross salary (there is a limit per employee due to the $100,000 per employee cap);
• employer share of group health benefits;
• employer share of retirement benefits (i.e. match); and
• state unemployment taxes

PPP Loan Forgiveness and the 25% Rule. You can use the loan to pay for other business expenses, but in order to receive full loan forgiveness, no more than 25% of the loan proceeds can be used to pay for business interest, utilities and rent. All of these must have been in place (note/lease/service agreement) before February 15, 2020.
 
How do I document expenses paid? Proof of payroll (payroll ledger and bank drafts), invoices and canceled checks or bank drafts documenting your rent, mortgage, utilities, or interest payments if you used the funds for those purposes.  
 
What about accrued expenses? No. Funds must be expended to be forgiven. 

What happens if all of the loan is not forgiven? Loan payback is based on an 18-month amortization beginning six months after the loan date.