Covid-19 is driving a lot of rapid changes for businesses and regulations that govern them. The Payroll Protection Program (PPP) loan forgiveness is one of them. It’s critical to fully understand your benefits as well as obligations associated with the PPP loan so you’re not left standing when the music stops and the loan amount needs to be repaid.
Basis of the PPP Loan Program
The PPP loan program was created to provide quick, economic support for small businesses by providing a potentially forgivable loan equal to 2.5 months of average payroll for businesses. The key word in this is “potentially”. So important small business owners understand their obligation under this program or the loan will NOT be forgiven.
What records should I keep to make sure the PPP loan is forgiven? Keep the following detailed records for the 8-week period following the loan origination date:
- Keep all records of payroll payments.
- Keep all records of employee benefits paid related to employee health care.
- Keep all records of payments made for interest on mortgage obligations
- Keep a record of payments for rent and utilities during the 8-week period.
PPP Loan Forgiveness Payroll Obligations
Retain a total of all payroll expenses for the 8-week period and divide that total by the total PPP loan you have received. If the percentage of payroll costs, compared to the total loan is 75% or more, then you will have satisfied the loan forgiveness requirements.
PPP Loan Forgiveness Rent Obligations
Total all rent expenses, utility payments and covered mortgage interest and divide the total by the total PPP loan you have received. If the result is 25% or less than you will have satisfied the loan forgiveness requirements.
PPP Loan Forgiveness Combined Expenses
Add your total payroll obligation AND total rent obligations and compare that total to the total amount of your PPP loan. If the total equals or exceeds your total loan amount, then you will have satisfied the loan forgiveness requirements.
Aside from ensuring you are keeping necessary records to have your loan forgiven, what else should you plan for? The loans forgiven would normally result in taxable income to the taxpayer / employer. However, the loans forgiven in this special program are NOT taxable.
Finally, the expenses that were paid from the forgiven loan for payroll, mortgage interest, rent or utilities are NOT deductible for tax purposes. Keep records of all these loan expenses and remember to reduce each expense category when preparing for your 2020 taxes.
There is no doubt that a lot is going on with this program and there may even be other programs announced. If you need guidance to make sure your business is using all available benefits and ensuring you have appropriate documentation when it comes time to repay the loan, contact our office.