COVID-19 & TAXES UPDATE April 15th

COVID-19 & TAXES UPDATE April 15th

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We previously informed you of the Paycheck Protection Program SBA loan and how to request a loan.  Hopefully, you have your PPP loan applications either submitted, approved or even better, have your loan funded already.  Just so you are aware, once the loan is approved by the SBA, the bank must fund the loan within 10 calendar days.  The date of funding begins the next phase, which includes how the loan proceeds may be used and how to get your loan forgiven. 

Allowable Loan Usage

You are allowed to use the loan proceeds to pay the following:

  1. Payroll costs, including group health insurance paid by your Company, state and local payroll taxes and retirement benefits.  Payroll includes the gross pay of the employees, but not the employer matching FICA tax that must be paid.  Thus, matching FICA is still the employer’s responsibility to pay.
  2. Rent paid under any lease agreement in place before 2/15/2020.
  3. Utilities paid, including telephone and internet, for which service began before 2/15/2020.
  4. Interest paid on any mortgage loan owed by your Company that was incurred before 2/15/2020.
  5. Interest on any other debt obligation owed by your Company that was incurred before 2/15/2020.

You may not use the loan proceeds for any other purpose, so other business expenses must be paid with other funds available to your business.

Loan Forgiveness

Any of the items (1) – (4) above, paid in the eight weeks after funding, qualifies for loan forgiveness so long as you meet two other criteria.  However, not more than 25% of the loan forgiveness amount may be attributed to items (2) – (4), meaning that 75% must be used for payroll costs. In addition, any amount of gross pay above $15,385 paid to any one employee in the eight-week post-funding period cannot be considered for forgiveness.  Even though item (5) can be paid with the loan proceeds, it does not qualify for forgiveness.  The eight-week period begins the day of funding so make note of that date. 

Remember, the government wants you to keep your employees on your payroll so there are two other criteria for forgiveness:

  1. Your average number of full-time equivalent (FTE) employees in the eight weeks after funding must be the same as your average number of FTE employees prior to funding.  For example, if your average FTE pre-funding was 40 and your average FTE post funding is 30, then only 75% of your loan will qualify for forgiveness (30 / 40 = 75%), meaning you must repay the other 25%.  The law gives you two options to calculate average FTEs prior to funding.  You can look at either the period of 2/15/2019-6/30/2019 or 1/1/2020-2/29/2020.  You can choose whichever period is most advantageous to you.  If you have already decreased employee levels, you have until 6/30/2020 to restore your FTEs to pre-loan levels.  However, realistically you need to do it sooner so that you can spend the loan proceeds on payroll costs during the eight-week forgiveness period.
  2. If an employee’s compensation level post funding is less than 75% of their compensation pre-funding, then the reduction in excess of 25% will not qualify for loan forgiveness.  For example, you paid Employee A $5,000 per month pre-funding, but only $3,000 per month in the eight weeks post-funding.  75% of $5,000 is $3,750, so the $750 per month reduction below 75% does not qualify for forgiveness ($1,500 for eight weeks) and must be repaid. 

Keep in mind, even though you can cut employee pay rates up to 25%, only the amount spent in the eight weeks post-funding counts towards forgiveness.  If you cut pay too much, you may not be able to spend the entire loan amount in the eight weeks allowed.  Any amount not spent must be repaid.  Your goal should be to spend the entire loan amount on qualified expenditures in the eight weeks post funding to qualify for full forgiveness.  The forgiven amount is tax-free.  Any amount not forgiven must be repaid within two years of the loan at 1% interest. 

To qualify for forgiveness, you will need to supply your bank with proof you spent the funds appropriately.  For payroll, this will include a schedule of gross pay by an employee for the eight weeks post-funding as well as copies of health insurance premium invoices, payment of state payroll taxes and any retirement benefits.  For rent and utilities, you may need copies of invoices supporting amounts paid.  Lenders might require lease agreements or similar invoices prior to 2/15/2020 to prove the rent and utilities were in existence.  Mortgage interest statements may also be required.  Your bank will provide details on specific items required to support forgiveness.

The SBA and US Treasury haven’t provided many details or guidance on the calculation of FTE employees pre or post-funding, or if they will allow de minimus exceptions to the FTE calculation or pay rate requirements.  For example, if you had 40 FTE employees pre-funding, but only 39 post-funding, will you still qualify for full forgiveness or only 97.5% forgiveness.  As additional guidance is forthcoming, we will provide it to you.  Remember to visit our blog page at www.cpawyo.com for updates. 

As always, call or email us with any questions and please be healthy!!

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