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Forgiveness is Coming. Understanding the Paycheck Protection Program.

Updated: Dec 13, 2020



What is the Paycheck Protection Program (PPP)?

The Paycheck Protection Program (PPP) is a forgivable loan created to provide funding to small businesses as a part of Coronavirus aid.

Due to the speed with which the government rolled out the program, numerous questions about PPP persist, especially concerning forgiveness requirements.

Confusion about loan forgiveness may be the reason why PPP funding is still available.


Approximately $120 billion remains unallocated!


Who is eligible?

In general, most business entities that were affected by Covid-19 can apply for PPP. Eligible applicants include those who are self-employed and independent contractors, partnerships, corporations, and nonprofit organizations. Small businesses with fewer than 500 employees are eligible.


Where to apply?

Most applications are taken by the bank or credit union where the business has a bank account. If your bank was out of PPP funds by the time you requested a loan, you have a few options.

· Reach out to your bank to see if they have received additional funding

· If no new funding was allotted, consider reaching out to other banks or credit unions to see if they have funds available. The bank will likely require you to open a business account with them. Having a separate bank account for PPP funds may be advantageous since it forces a separation of previous business cash and PPP money, and may make record-keeping that much easier.


How is the loan amount determined?

PPP loans are determined based on the average monthly salary and wage costs of you and your employees.

For the self-employed Schedule C filers with no employees, the PPP amount is based on the net business profit from 2019. If there was no profit for 2019 then no PPP funding will be granted.


For other entities such as partnerships, LLCs, C corporations, and S corporations, the amount of PPP is primarily based on 2019 payroll costs. These costs include gross wages and tips, employee and employer pre-tax contributions to health insurance, retirement, or other fringe benefits, and payroll taxes. Sick leave is also covered by PPP funding.


As of June 4th, businesses are required to spend 75% of the loan on payroll costs.


What nonpayroll costs are eligible for PPP use?

· Business mortgage obligations

· Business rent or lease payments for real or personal property

· Business utility payments for the distribution of electricity, water, gas, transportation, telephone, and internet access

For each of the expenses listed above, the agreement or service must have been in place prior to February 15, 2020.


As of June 4th, businesses can use 25% of their PPP funding for these expenses.


What is the covered period?

The “covered period” is the 8-week period (56 days) for using the PPP loan. The first day of the covered period is the same day the loan is disbursed.


What is the alternative covered period?

The “alternative covered period” is still an 8-week (56 days) period for using the PPP loan, but the starting date can be different from the date the loan is disbursed. The start date for the alternative covered period can begin on the first day of the first payroll period following the loan disbursement date.


How is the loan forgiven?

When the business covered period comes to an end, the forgiveness process begins. The first step is to fill out the Forgiveness Application.

For the full loan amount to be forgiven a few rules to follow stand out:


· Funds cannot be used to pay compensation that exceeds $15,385 for anyone individual during the covered period or alternative covered period.

· The forgiveness amount may be reduced if employee salary or wages was reduced during the covered period/ alternative covered period compared to the period from January 1, 2020, to March 31, 2020.

· The forgiveness amount may also be reduced if the number of full-time equivalent (FTE) employees decreased during the covered period. The borrower has until June 30, 2020, to have its FTE employee levels to match the levels in the pay period that included February 15, 2020.


Updates as of June 4th, 2020:

Significant changes to the Paycheck Protection Program:

· Reducing the payroll expenditure requirement from 75% to 60%

· The option for current borrowers to extend their covered period from 8 weeks to 24 weeks. New borrowers would automatically have a 24-week covered period, not to extend beyond December 31, 2020.

· Extend the due date to restore the borrower’s workforce level (FTE employee levels) from June 30th to December 31st.

· Extend the repayment period for any loan amount not forgiven from 2 years to 5 years at 1%.


Impact on the Bottom Line:

Something that has not been extensively discussed about PPP is how the loan will affect businesses come tax time. On April 30, the IRS released guidance which stated that expenses paid for using the PPP loan will not be tax-deductible.


The IRS ruling will effectively increase a business’s taxable income and diminish the benefit of its PPP loan.


The following example comes from Kiplinger:

“Let’s say a small-business owner requests and receives $600,000 to cover payroll for the 10 weeks where he or she is covered by the PPP. If they can’t deduct that amount as expenses, that means their federal tax burden clocks in at a rate of 37%.

That equates to a $222,000 increase in their taxable income. Meaning the effective tax-free benefit of the loan is $378,000, not the $600,000 intended by the law.”


Legislation surrounding PPP is ever-evolving. The IRS may change course on this guidance, but businesses need to be aware of how their taxable income will be impacted by PPP.

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