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PPP Loans: The Latest on What Qualifies and What’s Taxable

Posted by Andrew Desiderio on Thu, Oct 29, 2020

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PPP Loans: The Latest on What Qualifies and What’s TaxablePaycheck Protection Program loans have now been around for seven months, and in that time, there have been many major rule changes and clarifications.

As your business works to prepare your forgiveness application and get your books in order for year end, here are the latest qualification changes and rules on tax deductibility you should know.

Covered Period Changes

The original covered period for when funds could be spent on eligible expenses was eight weeks.

This created a problem initially for businesses that were proactive in applying for loans and received their PPP funds before specific guidance was issued. The SBA continued to release guidance well into the summer which made planning for FTEs, salary reductions and employee headcount difficult.

The covered period was then extended to 24 weeks which enables the funds to be spread out over a greater length of time. Borrowers with loans prior to June 5 still have the option to use the original 8-week period.

Payroll Percentage Changes

Originally, 75% of the loan proceeds had to be used for payroll costs. In addition to payroll costs, eligible expenses included rent, utilities and mortgage interest.

Using 75% of eligible expenses on payroll presented an issue for industries that were negatively impacted by COVID and either had mandatory shutdowns or drastically reduced their workforce. The PPP Flexibility Act – signed into law on June 5 – lowered the payroll costs requirement from 75% to 60%. The combination of the expanded covered period and reduced payroll percentage requirement greatly improved the chances of qualifying for loan forgiveness.

READ MORE: SBA Makes Further Changes To PPP Rules in New FAQs

FTE/Wage Reduction Changes

One of the biggest challenges in planning for forgiveness are the full-time equivalent and salary reduction calculations.

The SBA’s most recent guidance eases those restrictions in two ways. First, companies now have until Dec. 31, 2020 to restore headcount and wages to pre-Feb. 15 levels.

Second, if you are unable to rehire workers or similar replacements or are unable to return to pre-Feb. 15 levels due to COVID-19 restrictions, you do not have to reduce your forgiveness for FTEs.

Important Tip: As you start applying for forgiveness, reach out to your payroll company to see if they offer FTE reports and make sure you document reasons why your FTEs were reduced.

Deferral Period/FICA Changes

Form 3508, the application for loan forgiveness, lists a current due date Oct. 31, 2020 but the SBA clarified that date was not accurate. The deadline to submit the loan forgiveness application is 10 months after the last day of the covered period.

For example, if the covered period ends on Oct. 30, 2020, the borrower has until Aug. 30, 2021 to apply for forgiveness. Additionally, the loan maturity date was extended from two to five years, dependent upon the borrower’s agreement.

Employers also are allowed to defer the employer portion of FICA, which is then required to be repaid 50% on Dec. 31, 2021 and 50% on Dec. 31, 2020.

Expense Tracking Changes

Once the payroll requirement was reduced to 60% and the covered period was expanded to 24 weeks, expense tracking became less important. The majority of applications we’ve submitted for clients ultimately included payroll only as it was easier to track and provide the documentation. A loan amount based on 8 weeks of eligible costs spread out over 24 weeks allows most business to use payroll only if they choose.

The one change worth highlighting is the disallowance of certain related party rents. If you plan to include self-rent as part of your eligible costs, we suggest looking at the latest guidance in detail to ensure it qualifies for forgiveness.

READ MORE: PPP Loan Forgiveness Application Preparation Tips

Applying for Loan Forgiveness

If you have not received the application from your lender, we suggest contacting them to determine when it will be available so you can plan accordingly. Lenders are required to review the application within 60 days and the SBA then has 90 days to decide.

There are currently three different applications, so it is important to review the guidelines for each and ensure you are filing the correct application.

Here are the three form types:

  • Form 3508: This is the full loan forgiveness application. This requires the most calculations and documentation and is required if you are not able to file the EZ or S application.
  • Form 3508EZ: If you meet any of the three qualifications below you are eligible to file the EZ form. The actual application goes into the requirements in greater detail, but you can generally use it if you meet any of the following:
    • Are self employed and have no employees
    • Did not reduce salaries or wages of employees by more than 25% and did not reduce the number or hours of employees
    • Experienced reductions in business activities as a result of health directives related to COVID-19 and did not reduce salaries or wages of employees by more than 25%
  • Form 3508S: The S form is the newest update and most beneficial for small businesses. If your loan is less than $50,000, you are exempt from the FTE and salary calculations. You simply need to certify the amount of loan forgiveness and provide certain documentation such as payroll reports. Essentially if you certify you had eligible expenses, the loan amount is forgiven.

Accounting for your PPP Loan

Until the PPP loan has been forgiven, that loan amount is recorded as a debt instrument. Once the loan amount is forgiven, the liability will be removed and it will be recognized as income.

We expect further guidance on the exact presentation for both financial statement and tax returns purposes. If a portion is not forgiven it will be treated similar to other loans.

Taxability of PPP Funds

As we approach year-end, the biggest unknown about PPP funds is their treatment for tax purposes. Currently, the loan proceeds are not included in taxable income.

However, the IRS issued a notice stating that while the proceeds are not taxable, the expenses paid using those proceeds are not deductible. Further clarification on this issue has not been made.

Bipartisan support exists to clarify that Congress’ intent was for the expenses to be deductible. At this time, there has been no actual congressional action to allow the deductions but we continue to monitor the situation and will keep you informed. Contact us with any questions.

Topics: COVID-19

Concannon Miller’s unique, holistic and intimate approach to financial health sets us apart from smaller CPA firms with more limited resources as well as mega firms where mid-sized clients struggle for attention. Contact us here to talk about improving your business.

This communication is designed to provide accurate and authoritative information in regard to the subject matter covered at the time it was published. However, the general information herein is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purposes of avoiding tax penalties.

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