Your PPP loan can truly be "free money" if done right.
The debt forgiveness is excluded from gross income and is not considered taxable under the cancellation of indebtedness rules. Therefore it's truly free money if done right. However, there are a myriad of necessary strategies, adherence to requirements, and documentation that is necessary to ensure that your PPP loan will be forgivable.
Ensure that your PPP loan is forgivable
The biggest benefit of the paycheck protection program loan is it is forgivable. The portion of the PPP loan used for unauthorized purposes is not forgiven. You must comply with strict authorized expenditure rules, tracing rules and technical workforce retention rules. Then make application for debt forgiveness to your bank and the SBA. To pay tax protection program loans are only forgiven to the extent that you prove to your banker and the U.S. government that at least 75% of the funds were directly used to pay certain payroll costs, benefits, salaries, commissions, and no more than 25% of the funds were used to pay rent, utilities and mortgage interest on debt incurred prior to February 15, 2020. The amount not forgiven is a two year loan at 1% interest rate whereby payments can be deferred from six months to a year. Payments for authorized expenditures must be traced where they will not be forgiven.
When does your PPP loan become "unforgivable"
If the proceeds of the PPP loan are not traced directly to allowable expenses, but were actually used for unauthorized purposes such as the employer portion of payroll taxes or other business expenses, the PPP loan will not be forgiven.
PPP loan workforce retention requirements
One of Congress’s primary purposes for the PPP loan is for you to retain your current workforce during the 8-week period of time. Congress enacted rules to assure that the same number of employees are retained during the Coronavirus Pandemic, and the amount paid to workers remains relatively consistent. It also provides an exemption for a legitimate rehiring of your workforce that is fully completed by June 30, 2020.
The first rule is the Reduction in Average Number of Full-Time Equivalent Employees per Month Rule. To prove that your workforce has been adequately retained during the Coronavirus Pandemic, First, we compute the average number of full-time equivalent employees during the 8-week covered period. As we’re currently in the middle of the 8-week period, this is a running total. Second, we have to compute the average number of full-time equivalent employees per month either from: February 15, 2019 through June 30, 2019; or from January 1, 2020 through February 29, 2020---and we will use the higher of those two figures for comparison. In the event the average number of full-time equivalent employees drops, that decreases the PPP loan forgiveness by the percentage of reduction in your workforce. Our Computation of PPP Loan Forgiveness Schedule keeps a running total of the average number of full-time employees calculated on a per month basis.
Congress also wanted to assure that you will be paying your employee workforce the same rate during the 8 week period of time. This is the “Reduction of Wages in Excess of 25% per Employee Rule.” In the event that any employee’s wages are reduced by 25% during the 8-week period, compared to the most recent full quarter, you have a workforce reduction problem, and your PPP loan forgiveness will be reduced accordingly. In our planning, we will make sure that this does not cause a problem. Our Computation of PPP Loan Forgiveness Schedule keeps a running total of the average number of employees as well as their pay rates, to assure you get the maximum forgiveness of your PPP loan.
Since Congress desires for you to retain your workforce, there is an exception to the 2 rules I just mentioned. This is the “ReHire the Average Number of Full-Time Equivalent Employees & Eliminate the 25% per Employee Wage Reduction, to be completed by June 30, 2020 Rule.” This rule provides that if you rehire the necessary number of employees, and you increase wages so that there is no 25% reduction in wages, and both of these actions are fully completed by June 30, 2020, there will be no reduction in forgiveness based on these past 2 rules. However, you can’t wait until June 30, 2022 to rehire your employees, otherwise, you won’t be able to increase the average number of full-time equivalent employees per month or pay your employees enough to eliminate the 25% reduction in pay per employee during the past month, in time to meet the June 30, 2020 deadline. Therefore, as a practical matter, you need to rehire your workers by the beginning of June to count those newly rehired workers in the calculation of the average number of full-time equivalent employees per month. You need to rehire your workers at the beginning of June to actually pay them in June so that you don’t have a 25% reduction in wages per employee in the past month. In effect, rehire your workers by June 1, 2020. The re-hire rule only applies to employees laid off between 2/15/20 and 4/26/20. Employees fired before or after those dates cannot be “re-hired” for purpose of this analysis.
Congress gave SBA the authority to establish “de minimus” rules to help accomplish the purpose of the CARES Act. One de minimus rule that the SBA did enact was that if an employer makes a good faith, written offer to rehire an employee for the same salary & the same number of hours, yet the employee rejects the offer in writing, the employer’s loan forgiveness amount will not be reduced. If this happens to your business, please let me know ahead of time and with sufficient documentation, we can plan around this problem.
Strategies we must use to ensure your PPP loan usage is properly documented
Eventually, all borrowers must submit substantial documentation to their bank and the SBA. We will explain the tactical tracing rules and show you how to set it up so that we can directly trace your proceeds to allowable expenditures so that the entire amount of your PPP loan is forgiven. Allowable payroll includes salaries, wages, commissions, cash tips, vacation, parental family, medical or sick leave, allowance for dismissal of separation, group health insurance premiums, retirement benefits, and state and local taxes. We will ensure that the information to be submitted to your bank and the government does not include unauthorized purposes such as compensation in excess of 100,000 dollars per year for highly compensated employees. The employer portion of social security tax or compensation of an employee whose principal place of residence is outside the U.S. There was a huge number of PPP loan applications. Technical guidance is lacking. There was no opportunity for advanced planning. Banks in the SBA are overwhelmed.
How this tax law firm will ensure that your PPP loan is forgiven
We will assure that the information submitted does not include payments for qualified sick leave wages, which a credit is allowed under the Families First Act. We'll assure that it does not include qualified family leave wages for which a credit is allowed under 7003 of the Families First Coronavirus Response Act. And we will assure that it does not include payments to independent contractors, as those independent contractors are able to get their own PPP loan. This firm will submit your documentation to the bank, including payroll records, timing of payroll, proof of payment of allowable payroll, rent and mortgage interest expenses, and a certificate to get your PPP loan entirely forgiven.
Mistakes and errors that will sabotage your business and force you to pay back your PPP loan
Mistakes and errors are rampant. You rush to apply for the loan and now you need to protect yourself from erroneously using the proceeds for unauthorized purposes, not tracing the proceeds and not fully compliant with the complex workforce retention rules. Otherwise, the paycheck protection program long will not be forgiven. The most common mistakes include using the Paycheck Protection Program loan proceeds for the employer portion of social security and FICA taxes, principal payments on mortgages, payments on mortgages incurred after February 15th, 2020, and co-mingling the PPP loan proceeds with your general business bank account. Another problem is that the amount forgiven will be reduced for any employee cuts or reductions based on the complex workforce retention formula. They want to keep your full time equivalent employees retained. We will develop a PPP business plan for you that starts with a loan forgiveness template. Accounts for tracing your funds to approved expenditures, assure workforce retention of the same number of full time equivalent employees so that your entire PPP loan is forgiven.
Necessary business planning
We will also plan for sufficient liquidity needs for survival of your business. The plan will include balancing the at least 75% but not more than 25% rule reduction of salaries, not more than 25% paying people to be on call hazard pay and shift premiums. As part of the business plan, you may still have pain forgiveness if you rehire your previously laid off employees or make up wage reduction by June 30th. It's all about preparing an accurate and detailed business plan and facilitating the business plan in a timely manner.