You are definitely not alone in your confusion around the PPP and the newly issued PPPFA. There’s a tremendous amount of complexity, which we can clearly witness because the SBA has issued 17 Interim Final Rules helping to clarify the PPP and PPPFA. And they are not done yet because there are still a number of unknowns.
We’d like to share some thoughts and answers around the questions that we hear most frequently from our clients. Our hope is that we can create some simplified language and understanding.
Q: When do I need to decide if I want to use the 8 week or 24 week period for forgiveness?
A: It has been made clear that the loan deferral period has been set at 10 months following the 8 week or 24 week “measurement period”. Thus, if a business owner received PPP funds April 15, 2020 and the 8 week period ends June 10th, then the business has until April 10, 2021 to apply for forgiveness with their lender.
Thus, this provides the business owner sufficient time to determine whether they are better off utilizing the 8 week forgiveness period or the 24 week period.
The 24 week period has more time to “pay payroll” so it’s likely that even businesses who reduced payroll and/or headcount or had to close due to regulations will have time to ramp up and achieve 100% forgiveness of their loan.
Q: Can I continue to defer employer social security taxes until I actually receive forgiveness notice (or 12/31/2020, whichever is earlier), or do I have to stop deferring at either the 8-week or 24-week period, depending on which period I elect?
A: After the enactment of the Paycheck Protection Flexibility Act, PPP loan recipients will be able to take advantage of deferring employer social security taxes through Dec 31, 2020, without regard to whether the employer has a PPP loan forgiven or which period they select.
Q: Should I be paying some of our expenses early (like running a special payroll) to get them within the 8 week period?
A: The SBA made it clear in a recent Interim Final Rule that there is no need to pay bills or run payroll early as they will accept both “paid” and “incurred” expenses during the forgiveness period. So, if there are 3 days worked in the forgiveness period that won’t be paid until a date outside the forgiveness period, the SBA has stated that those 3 days can be “counted” because the expense was “incurred”.
We expect this to be a smaller issue with the expanded 24 week forgiveness period.
Q: When am I going to have to start paying this back?
A: First off, with the extended forgiveness period, we hope that significantly more businesses will get 100% forgiveness. With that said, the deferral period is now up to 10 months from the end of the forgiveness period (grace period to submit your forgiveness request) plus until the SBA remits forgiveness funds and/or a forgiveness denial to the lender (i.e. up to another 5 months). In other words, for amounts not forgiven, the first repayment date is the date you received your funds plus your forgiveness period plus up to 15 months.
Note that the SBA also clarified that banks can extend the repayment from 2 years to 5 years. From what we understand today, you will work directly with your bank to change the term of your note from 2 years to 5 years before or at the time of your application for forgiveness. Communicate with your lender directly sooner than later.
Q: What does “expenses for a forgivable portion of loan are not tax-deductible” mean?
This is confusing language, but not very complex. Essentially, under US tax law, if you receive tax-free income, then the expenses associated with tax-free income cannot be deducted for tax purposes.
So, if you have a $500,000 PPP loan, that is 100% forgiven, then you have $500,000 of expenses that you cannot deduct on your tax returns. So, at a 40% tax rate, then you will have an approximately $200,000 tax bill associated with your PPP loan. It is extremely important, therefore, to appropriately plan your cash forecast to pay these taxes.
Many business owners are planning & reserving cash for the potential impact of PPP on their taxes. With that said, there was discussion in Washington DC to create legislation to reverse the tax law for PPP loans so that the expenses could become tax-deductible. We are advising clients to be conservative here (have cash for taxes) rather than expecting the position to change.
Q: Can I use my PPP funds today for other purposes even if I haven’t brought back my employees yet?
A: Be cautious here. The SBA language is pretty precise on the authorized use of the funds, which are essentially the “forgivable expenses” such as payroll, benefits, rent or mortgage interest, and utilities. Many advisors (and lenders) are recommending setting up a separate, dedicated bank account so that the traceability of the use of funds can be done with significant precision. That’s not required, by any means, but make sure you can tie the PPP spending to the authorized types of expenses.
If you have any questions or additional topics for us to cover, please post in the comments or send an email to email@example.com.