Business-Preneurs,
I hope this note finds you all well and focused on the opportunities ahead!
Most of our clients and many other companies that we have had the opportunity to meet, have received PPP Loans. It is now time to get that money forgiven as the Grant that it was intended to be.
Please note, it will be between you and your bank to determine the amounts forgivable! The information and calculators that we will provide are examples to assist you with the information you need to provide and maintain an ongoing viewpoint of forgiveness.
I am attaching multiple links and attachments as reference for where we generated our information.
First, the SBA Houston link to their presentation on forgiveness dated 5-13 (The most current as of this email). Don’t be overwhelmed by the 50 page presentation as the first 18 pages are ‘feel-good’ slides about the SBA and you can skip right to slide 19 where the forgiveness guidance begins. To clarify, The PPP loans are funded by the Treasury Department but the oversight is through the SBA.
https://www.sba.gov/sites/default/files/resource_files/PPP_Forgiveness_May_13_ver_2_002.pdf
This is the link to the Treasury documents that provide detail on forgiveness in conjunction with the SBA documents. There is some cross over, and some areas that are only found in one document.
https://home.treasury.gov/system/files/136/PPP–Fact-Sheet.pdf
Here are a few bullet points to weed through the information:
What amounts shall be eligible for forgiveness?
The amount of loan forgiveness can be up to the full principal amount of the loan plus
accrued interest. The actual amount of loan forgiveness will depend, in part, on the total
amount spent over the covered period on:
– Payroll Costs including salary, wages, and tips, up to $100,000 of annualized pay
per employee (for eight weeks, a maximum of $15,385 per individual), as well as
covered benefits for employees (but not owners), including health care expenses,
retirement contributions, and state taxes imposed on employee payroll paid by the
employer (such as unemployment insurance premiums);
So…Payroll (75% MINIMUM) –
Wages, (Salaries, PTO, Vacation Pay, Commissions, tips) + Employer SUTA tax +
Employer paid insurance premiums +Employer Portion of retirement plans.
Then… Other Eligible Expenses (25% Maximum)
– Payments of interest on mortgage obligations on real or personal property
incurred before February 15, 2020, to the extent they are deductible on Form 1040
Schedule C (business mortgage payments);
– Rent payments on lease agreements in force before February 15, 2020, to the extent
they are deductible on Form 1040 Schedule C (business rent payments); and
– Utility payments under service agreements dated before February 15, 2020 to the
extent they are deductible on Form 1040 Schedule C (business utility payments).
What documentation will we need to provide to obtain forgiveness?
Work with your lender to determine exactly what they will require but be prepared to expedite this process. Remember, first payments to the loan are due 6 months after funding so you will want to secure forgiveness prior to that!
#1 – Payroll
– Payroll Reports
– 941s once filed
– SUTA Tax filings
– Statement of Insurance Premiums Paid (Remember only the employer portion is forgiven)
– Statement of Retirement Benefits Paid by Employer (Remember only the employer portion is forgiven)
VERY IMPORTANT – PAID NOT BILLED!!!
YOU CAN NOT ASK FOR FORGIVENESS FOR MONIES YOU HAVE NOT YET SPENT!!!
In addition to the borrower certification required by Section 1106(e)(3) of the Act, to
substantiate your request for loan forgiveness, if you have employees, you should submit
Form 941 and state quarterly wage unemployment insurance tax reporting forms or
equivalent payroll processor records that best correspond to the covered period (with
evidence of any retirement and health insurance contributions). Whether or not you have
employees, you must submit evidence of business rent, business mortgage interest
payments on real or personal property, or business utility payments during the covered
period if you used loan proceeds for those purposes.
#3. Are payments made with forgiven funds tax deductible?
Yes and No. Below are the statutes:
Here is the English – PPP Loans are tax free but you will not be able to take the expenses that are forgiven parts of the loans as expenses either.
I.e. – Loan – $50,000 – (Not income – No tax)
Payroll – $40,000 – (Not expenses in exchange for payment to the loan)
Rent – $10,000 – (Not expenses in exchange for payment to the loan)
There are people lobbying for the expenses to be acceptable as tax deductible expenses but no determination yet.
Statute Guidance: This is a big one. Section 1106 of the CARES Act states that amounts forgiven on a PPP loan “shall be excluded from gross income.” Easy enough. But Section 265 of the Internal Revenue Code provides that expenses “allocable to” tax-exempt income are not deductible; this prevents a “double dipping” of sorts, whereby a taxpayer would otherwise get both a deduction and tax-exempt income related to the same transaction or investment.
Historically, Section 265 has applied to items like interest expense incurred to generate tax-exempt interest income, but there’s no reason to believe it couldn’t apply to expenses paid with forgiven PPP proceeds.
In Manocchio v. Commissioner, an airline pilot paid for flight instruction and was ultimately 90% reimbursed under a federal program. The reimbursed payments were tax-exempt, leading the IRS to apply Section 265 and disallow any deduction related to the payment for the program.
Could the IRS apply a similar approach to forgiven PPP loans? Absolutely. After all, claiming deductions for amounts paid for by the federal government on a tax-free basis – and potentially generating a loss that can now be carried back to collect a refund of previously paid taxes – would be an extremely generous outcome.
But if an extremely generous outcome is what was intended, Congress could simply amend Section 265 to accommodate this situation. They’ve done it before, most notably in response to a previous Revenue Ruling that disallowed deductions of a Minister of a church who received a tax-free housing allowance under Section 107.
Calculators:
Attached is an awesome Forgiveness tool from our friends at First Financial Bank
Also, here is a link to the PPP calculator site for Paychex. https://www.paychex.com/business-loans/loan-forgiveness-estimator
We will be working with all of you to obtain the most forgiveness possible. Any monies not forgiven will either turn into a loan at 1% for 24 months with interest accruing from the day the funds were disbursed or you can prepay back any portion of the loan at anytime with no penalty.
In order to repay the loan with no interest accrued, you must do that by the 18th of May.
More to come!
David Mosberg