UPDATE: Paycheck Protection Program Forgiveness Plan

May 4, 2020

The Paycheck Protection Program (PPP) is a small business loan program, created under the CARES Act, to provide an incentive for small businesses to keep employees on the payroll during the COVID-19 crisis.

The PPP has authorized up to $659 billion in forgivable loans to all businesses with 500 or fewer employees, including non-profits, veteran’s organization, sole proprietorships, self-employed individuals, independent contractors, and tribal business concerns.

The maximum loan amount that a business may receive from the program is equal to 2.5 times its average monthly payroll cost for the previous year, up to $10 million. These loans can be forgiven as long as (1) the loan proceeds are mostly used to cover eligible payroll costs (at least 75% of the loan must be used to fund payroll costs), with the remaining 25% of proceeds used to cover eligible non-payroll expenses, including business mortgage interest, rent, and utility costs over and the 8-week period after the loan is funded; and (2) employee and compensation levels are maintained during this time period.  If the number of full-time equivalent employees or compensation levels decrease when compared with prior periods, then the amount of available loan forgiveness will be reduced even if 100% of the loan proceeds were used for eligible costs.

Proper planning, documentation, and the help of your tax advisor can help you achieve maximum loan forgiveness.

UPDATE: According to the CARES Act, any amount of loan forgiveness is not considered taxable cancellation of debt income and is excluded from taxable income.  The CARES Act was silent as to the deductibility of the expenses paid by the forgiven PPP loan proceeds.  However, according to Notice 2020-32 issued last week by the IRS, no tax deduction will be allowed for any eligible costs paid with PPP loan proceeds which were subsequently forgiven.

Once the loan is funded, the borrower must use the loan funds over the 8-week period beginning on the date of receipt of the loan funds. It is important to document each expenditure made with the loan funds over that 8-week period for forgiveness of the loan.  Any loan proceeds paid toward ineligible costs will not be subject to forgiveness.  Any amount of the PPP loan not forgiven will continue to be treated as a 2-year loan to be paid back at an annual interest rate of 1%, with the first payment deferred until 6 months from the date the loan was issued (interest does accrue during the 6-month deferral period but accrued interest during the 8-week covered period is also eligible for forgiveness).  There are no prepayment penalties for early payoff of a PPP loan.

Please contact us if you have any questions.  We’d be happy to serve you!