Contributing Authors: Gene Barinholtz, CPA, Paul Wilkin, CPA, Lauren Clawson, CPA, Mitch Knopoff, CPA.
KRD - Kutchins, Robbins & Diamond, Ltd. is a CPA firm that offers a full range of client services: outsourced accounting, audit and assurance, tax strategy and preparation, business valuations and financial planning advisory services. Their team of 80 members has been serving clients in Chicago, the surrounding areas and nationwide for over 30 years.

Over the past two weeks, the SBA has approved and guaranteed over 1 million PPP loans to small businesses. Much attention and clarification was focused on determining eligibility for the loans and calculating the appropriate loan amount. Now that loans have moved to the funding stage, it makes sense to review the parameters for use of the loan proceeds and the loan forgiveness provisions. The information contained in this document is current as of April 20, 2020.  The CARES Act says the SBA has until 30 days after enactment, or April 27, 2020, to issue final guidance regarding loan forgiveness, although many banks are telling customers the date will be April 30, 2020.  

Can I Still Apply for a PPP Loan? 

• The Paycheck Protection Program is authorized to run through June 30, 2020. Small businesses are supposed to be able to apply up to that date.
• The initial appropriation in the CARES Act was $349 billion. As of this update, loan approvals under the program have reached that limit, and the SBA is no longer accepting loan applications from the approved lenders until additional appropriations are made to the program.
• The federal government has indicated a willingness to appropriate an additional $250 billion for the program. It is likely that funding for this program will be extended this coming week.  However, at this time, it is unknown when that appropriation will happen.  If you did not receive a PPP loan from the initial funding we urge you to be proactive with your bank to ensure they have your application and documentation ready when additional funds are appropriated.

Is the Program As Confusing As People Make It Sound?

Yes – but don’t worry, we are going to unpack all the details below. First, there are a few key terms that everyone who has either received or wants to apply for a PPP loan need to understand.

Key Definitions

Payroll Costs 

• Payments to U.S. legal residents for:
• • GROSS salaries, wages, commissions, tips, vacation pay, family or medical or sick leave pay, separation pay and bonuses;
  • Group healthcare benefits including insurance premiums (employer’s share only);
  • Retirement benefits (employer’s share only);
  • State and local taxes assessed on employee compensation (generally these are state unemployment taxes);
  • Self-employment income of partners in a partnership;
  • Owner Compensation Replacement for a sole proprietor or independent contractor, also known as net earnings from self-employment.
• Compensation, such as gross salaries, wages, net earnings from self-employment and partner self-employment income, is capped at $100,000 on an annualized basis for any individual, prorated for the eight-week period. This works out to 8/52 times $100,000, or $15,385 per person.
• Payroll costs do not include any amounts used to claim the Emergency Paid Sick Leave Credit or the Emergency Family and Medical Leave Credit.
• For a sole proprietor or independent contractor, healthcare insurance premiums and retirement benefits are not included.

Full-Time Employees and Full-Time Equivalents (FTE) 

• The definitions are the same as they were for determining Obamacare era penalties.
• Full-time employee:  an employee who is employed on average at least 30 hours per week or 130 hours per month.
• Full-time equivalent employee (FTE):  a combination of employees, each of whom individually is not a full-time employee because they are not employed on average at least 30 hours per week, but who, in combination, are counted as the equivalent of a full-time employee.
• • For example, two employees, each of whom works 15 hours per week, are the equivalent of one full-time employee.
• To determine total FTEs, take the aggregate hours worked by non-full-time employees in a month and divide by 130, then add that result to the number of full-time employees.

So I Received a Loan - What Can I Use the Money For?

During the eight weeks immediately following the initial loan disbursement, PPP loans can be used to pay:

• Payroll costs;
• • We recommend that any payments to partners made from the loan funds should be classified as guaranteed payments, so that there is no question that they constitute self-employment income to the partner.
  • We recommend that actual checks are written to partners in a partnership and that self-employed individuals write themselves checks over the 8 week period to prove payroll.  It is likely that a “book entry” will not qualify as sufficient documentation.
• Group healthcare continuation costs for employees on paid sick, family or medical leave.
• Mortgage interest on loans incurred prior to February 15, 2020.
• • Includes real or personal property.
  • Property must be used in the business.
  • Includes loans for vehicles and other equipment used in the business.
• Rent or leases in existence prior to February 15, 2020. This appears to include non-facility leases such as machinery and equipment leases and copier leases.
• Utility payments for services begun prior to February 15, 2020, which includes:
• • Gas, electric and water;
  • Telephone and internet;
  • Fuel for business vehicles.
• Interest on any other debt obligations incurred prior to February 15, 2020. Keep in mind that loan proceeds used for this purpose will not be forgiven.
• Refinance an Economic Injury Disaster Loan made between 1/30/20-4/3/20.
• At least 75% of the loan proceeds MUST be used for payroll costs. Stated another way, no more than 25% of the loan proceeds can be used for mortgage interest, rent and utilities and interest on any other debt obligations
• No prepayments are allowed on these costs.
• These costs must be incurred and paid during the 8 week period.  Therefore arrearages are not eligible expenses.
• Sole proprietors and independent contractors can only claim mortgage interest and utilities for their home office space if these are deductions taken on their Schedule C filings (Form 8829)

Will My Loan Be Forgiven?

• PPP loans will be forgiven to the extent that the proceeds are used to pay the above expenses during the eight weeks following the date of the loan, with the exception of interest on debt obligations other than mortgages.
• Borrowers will have to submit an application for forgiveness and related documentation such as payroll tax returns, cancelled checks, payment receipts and account transcripts, to their lender, who will be required to calculate the amount forgiven within 60 days. If you don’t apply for loan forgiveness, you won’t get it.  Forgiveness is a proactive process and not automatic.
• Reductions to the amount of loan forgiveness:
• • The amount forgiven is reduced based on the failure to maintain the average number of FTEs during the covered period (the 8 week period) when compared to a base period that the borrower gets to choose. (See below for the exception to this.)  The choices are:
  • • February 15, 2019, to June 30, 2019, or
    • January 1, 2020, to February 29, 2020.
  • The amount forgiven is reduced to the extent compensation for any individual making less than $100,000 per year is reduced by more than 25% when measured against the most recent full quarter that individual was employed.
  • If you have reduced your FTE’s between 2/15/20 and 4/26/20 as compared to your FTE’s on 2/15/20 there is no reduction in the amount forgiven if there is restoration of full-time employment and salary levels by June 30, 2020.
  • • You can re-hire or replace individuals to get back to the needed FTE headcount.
    • You must increase the compensation of the same individuals who took pay cuts back to pre-pay cut levels.
  • Payments for non-payroll costs in excess of 25% of the loan will not be forgiven.
  • Grants received under the EIDL program will reduce the amount forgiven to the extent of the grant amount.
  • Amounts used for interest on debt other than mortgage obligations will not be forgiven.
  • Any amounts used for any expenses not listed above will not be forgiven.

Forgiven PPP loans will NOT constitute taxable cancellation of indebtedness income for federal income tax purposes.

How Do I Prove What I Spent the Money On?

• We recommend you open a separate bank account for the loan funds.
• • Keep clear records of all checks written from the account – date, payee, purpose.
  • Keep receipts for items such as fuel for business autos and other utility payments.
  • Keep detailed records of payroll payments.
  • • If you have a separate payroll account into which you normally transfer funds for payroll from a general checking account, transfer only the exact amount of the pay needed on the pay date from the separate loan funds account, so that you have a clear trail of the payroll costs paid.
    • If you use a payroll service, the transfers should match the cash requirements reports they provide.
    • Payment of the employer portion of FICA and Medicare taxes is not a permissible use of the funds. If you have a separate source of cash, you should transfer the funds to cover those federal taxes to the payroll account from the cash not in the loan funds account.
  • Keep detailed records of changes in your workforce.
  • You may be able to set up and run special reports from your accounting software for the 8-week period.
  • Submit copies of all records along with bank statements to your lender.
  • It is possible that the forgiveness process will involve an audit verification.  It is unclear at this time what is involved in an audit verification.

If A Portion Is Not Forgiven - What Are the Terms?

• The interest rate will be 1% per annum.
• The term is two years.
• No payments of principal or interest for six months – interest still accrues during this deferment.
• No personal guarantees needed.
• No collateral required.
• No SBA or bank fees.

The documentation requirements for loan forgiveness are going to be extensive, and some of the calculations may be complex. This is not a time when you want to attempt to go it alone, only to find out that your lender refuses to forgive a significant amount of your loan because you don’t have proper documentation, or you didn’t understand the spending requirements. KRD has the expertise, the processes and the procedures to guide you through the PPP loan maze. Rely on KRD to help you get the maximum forgiveness on your loan.  Call us today to discuss your specific situation.

Robert Eisenstadt 
Kutchins, Robbins & Diamond, Ltd.
1101 Perimeter Drive, #760
Schaumburg, IL 60173
(847) 278-4422
reisenstadt@krdcpas.com