Dec 01, 2020
By Paula Rogers, CPA President and Partner at Terry Lockridge & Dunn
More than 70% of small businesses in America received loan proceeds from the Paycheck Protection Program (PPP) to help retain employees during the current pandemic. The entire amount of a PPP loan is eligible to be forgiven if the funds are used for qualified expenses. Loan forgiveness for funds used for payroll, utilities and rent can either be based on a 24-week period or an 8-week period.
How can you best position your company to fully benefit from PPP loan forgiveness?
Here are four tips to help meet the challenge:
Restore your staff. If possible, restore the number of full-time equivalent (FTE) employees to previous levels by the safe-harbor due date of December 31 (extended from June 30). Bring back furloughed FTEs as soon as you can. Of course, this should fit into your overall business plan. If an employee does not return, document the refusal. All these actions will help when the forgiveness formula is applied to your loan.
Pile on payroll costs. Run payroll and other remaining qualified expenses—including mortgage interest, rent and utilities—on the last day of the 24-week period. This will enable your business to maximize the amount of loan forgiveness allowed under the calculation.
Use the simplified application forms. There are three loan forgiveness forms - the regular form (Form 3508), a simplified version called Form 3508EZ and another, for loans of $50K or less, called 3508S. Review all forms before deciding which one is right for your situation. For instance, there are fewer calculations on the simplified forms with less documentation required. To qualify for the simplified Form 3508EZ, you must meet at least one of these requirements:
- You are self-employed and have no other employees.
- You did not reduce employee hours or reduce their wages and salaries by more than 25%.
- You lost business due to health directives relating to COVID-19 and did not reduce employee wages and salaries by more than 25%.
Document everything. Once you receive PPP loan funds, keep supporting documentation on everything related to the loan. Document when you receive the loan, each time you spend part of the loan and accrued interest expense on the loan. Also keep copies of receipts and invoices to document all loan expenditures, including bank account statements and journal entries.
As of the writing of this article, the IRS has stated any expenses paid for with forgiven PPP loan proceeds are not deductible for tax purposes. However, Congress may still pass legislation that would allow the deductions. We will keep you updated.
If you would like to discuss your specific situation, please reach out to Paula Rogers at email@example.com, or any of the accountants at Terry, Lockridge & Dunn. They can be reached in Cedar Rapids at 319-364-2945, or in Iowa City at 319-339-4884. We can meet via Zoom, conference call, or if necessary, in-person at either office.