The massive economic stimulus law – the Coronavirus Aid, Relief and Economic Security (CARES) Act – provides a wide range of relief to small businesses, including Paycheck Protection Program (PPP) loans supervised by the Small Business Administration (SBA).
Now is the time to apply for PPP loan forgiveness. If you qualify, you won’t owe any federal income tax on the forgiven debt.
But be aware that you must meet certain requirements to avoid being taxed on any forgiveness.
PPP loans are forgiven if the loan proceeds are used over a 24-week period to cover payroll costs or other qualified expenses like employee benefits, mortgage interest, rent and utilities. At least 60% of the money must go to payroll.
Normally, loan forgiveness results in taxable income. The CARES Act creates an exception for forgiven PPP loans.
But the SBA has created confusion by issuing murky guidance on when PPP loans can be forgiven. Consider the following points:
- If your business received a PPP loan and retained or recalled employees and paid at least 60% of the loan proceeds for payroll, the entire debt is forgiven – without any federal income tax consequences.
- A loan can be partially forgiven based on a complex calculation. For example, if you use 50% of the proceeds for payroll and 50% rent and utilities, you still qualify for forgiveness on a big piece of the pie. Leave the number crunching to your tax pro.
- For these purposes, payroll costs are limited to $100,000 of annual wages per employee on a pro-rata basis. The IRS has clarified that this amount includes hazard pay, commissions, bonuses, etc. paid to furloughed employees.
- The beginning date for PPP loan repayments is postponed for six months, but time can fly by for a struggling business. Under the latest guidelines, your bank has 60 days to review forgiveness applications, but the SB can take another 90 days.
- The IRS has stated that qualifying expenses other than payroll costs must be paid or incurred during a 24-week period or before the next regular billing date to qualify for loan forgiveness.
How can you improve your chances for PPP loan forgiveness? Take the following three-step approach.
- Rally the troops. Restore the number of full-time equivalent (FTE) employees to previous levels by the safe-harbor due date of December 31. Bring back furloughed FTEs as soon as possible.
- Stack up payroll costs. Run payroll and other remaining qualified expenses – including mortgage interest, rents and utilities – on the last day of the 24-week period. This allows your business to maximize the amount of loan forgiveness.
- Pay out bonuses. Reward employees with bonuses to ensure that your business meets the requirement of 60% of payroll costs. The bonuses can even go to family members like your spouse or child. Reminder: You can only count up to $100,000 of an individual’s prorated wages as payroll costs, including any bonus for the calculation.
As of this writing, the government is debating more small business relief.
Small Business Tax Strategies