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PPP Forgiveness: What Business Owners Need to Know

Financial advisers can help their small business owner clients understand updates to the Paycheck Protection Program loan conditions.

The CARES Act included several provisions to help individuals and businesses mitigate the financial impact of the COVID-19 pandemic. One provision for businesses was the PPP (Paycheck Protection Program) loan program.

There have been some updates to the program, including the loan forgiveness provisions. It's important that financial advisers work with their business owner clients who took advantage of the program to be sure they are up-to-date on the latest updates regarding PPP forgiveness.

PPP Loan Basics

Under the original provisions of the CARES Act, the Payroll Protection Program offered 100% guaranteed loans to small businesses. The program is administered by the Small Business Administration (SBA). The loans were distributed through commercial financial institutions, including some online lenders. The intent of the program was to help small businesses stay afloat and to keep as many of their employees on the payroll as possible.

The program outlined a number of permissible expenses for the loans including payroll, rent, mortgage payments, utilities and others.

As long as the business used the money appropriately and maintained headcount and wages within certain parameters, they could apply for forgiveness of the loan.

PPP Forgiveness

The forgiveness provisions have evolved. The criteria for forgiveness has evolved as well, but the main provision is that at least 60% of the loan was used for payroll costs in the 24 weeks after receiving the money.

Payroll and related costs include compensation not to exceed $100,000 on an annualized basis for any single employee.

Compensation includes items such as:

  • Gross wages, commission and tips
  • Vacation pay, as well as payments for family leave, medical or sick leave
  • Termination and severance pay
  • Employer contributions for health insurance and retirement plans
  • The payment of state and local taxes by the employer based on employee compensation paid

Beyond the 60% used for payroll and related expenses, the other 40% should have been used for business expenses such as:

  • Mortgage or rental expenses
  • Utilities
  • Operating costs like business or accounting software
  • Costs to cover uninsured property damage from recent civil unrest
  • Costs for essential goods obtained from suppliers
  • Expenses to protect workers such as the cost of PPE

During the period that the loan was being used, employers must have made a good faith effort to maintain pre-pandemic employment levels.

PPP Forgiveness Updates

Over the course of 2020, the rules related to PPP loan forgiveness have changed.

Some of these revisions include making the process easier for businesses with smaller loan amounts. The coronavirus relief bill passed in December of 2020 had two provisions that could be applicable to clients with smaller loan amounts.

For loans of $150,000 or less, the PPP revisions allow these borrowers to complete a modified one-page forgiveness application form. The form is still in process via the SBA.

For borrowers with loans of $50,000 or less, form SBA form 3508S is a simplified application form that for the most part requires the business owner to answer some questions.

Another change contained in the December 2020 stimulus bill surrounds Economic Injury Disaster Loans (EDIL) and their impact on PPP loan forgiveness. Originally if your client’s business had been the recipient of an EDIL grant, the amount of their PPP loan eligible for forgiveness would have been reduced by the amount of the grant. The latest bill does away this provision and PPP forgiveness is no longer impacted by having received an EIDL grant.

Perhaps the most important part of the December 2020 stimulus surrounds the ability to deduct the expenses that the PPP loan was used to cover for federal tax purposes. The IRS had previously opposed this referring to it as double dipping. This is a big deal for your clients and will potentially save them money at tax time.

While the latest stimulus bill resolved the issue of federal tax deductibility of these expenses, the ability to deduct these expenses at the state level was not covered. Each impacted business owner will need to review this issue based on their state’s rules.