The Pitfalls of Pay Check Protection Program Forgiveness
There is good reason for businesses to look forward to canceling their Paycheck Protection Program (P3) loans – they represent a significant debt in these tough economic times. But companies should proceed with care and caution when submitting their claims. New guidelines from the Small Business Administration (SBA) are released frequently, which means the landscape is constantly changing.
And while the tips were set in stone, there are significant pitfalls and complexities involved with your application. The last thing you want is to have to pay the full amount of your PPP loan.
It is essential to think about your P3 loan in advance, even if you are not looking to apply now. In fact, you have time to strategize: Companies should request a rebate within eight months of the end of the period covered to avoid making a payment if the full rebate is granted. So if your business received a P3 loan at the beginning of May, you would have 24 weeks or six months to use the funds and then you would have to request a forgiveness within the next eight months.
Working closely on your PPP forgiveness request with your accountant can help smooth out a bumpy road, but don’t go into the forgiveness process without knowing it. Here are the potential pitfalls you should watch out for when completing your forgiveness request.
Trap n ° 1: Compensation of agents
First, there is the issue of agent compensation. The PPP documentation has sparked much discussion about who is considered an agent, how much of loan funds can be used for agent compensation, and whether (and how) to use different calculations for different types of entities.
Fortunately, there have been some clarifications with the latest SBA guidelines. Here’s what you need to know:
- Executive compensation limits come into effect when an individual owns 5% or more of the business
- PPP requires beneficiaries to use at least 60% of payroll funds to achieve full pardon. Under this, executive compensation is limited to the payroll amount of $ 20,833 for covered periods of 24 weeks.
If you are unsure of what you need, remember that your accountant is your best friend in the forgiveness process.
Trap 2: ETP documentation
Maintaining full-time equivalent (FTE) employee levels is critical to securing a PPP loan forgiveness. However, business owners (and the SBA) know this is no simple task. Many former employees may have chosen not to return to work for health or family reasons. Here is a breakdown of some of the notable reasons that might exempt your business from this requirement:
- Government restrictions on operation, such as in the case of gymnasiums or restaurants, or
- An employee refusing a rehire offer
If an employee takes a reduction in hours or quits voluntarily, that also does not count towards FTEs.
- Not being able to hire similar employees to fill a vacant position
Documenting FTEs is critical to your loan forgiveness request. A written offer and any acceptance or rejection of the offer is the best approach. If someone has refused to return to work over the phone, write down those dates and times. If external factors, such as government restrictions, impact FTEs, you should be able to cite all orders that affect your business.
What does it all boil down to? Being able to demonstrate the inability to maintain the allocated FTEs in the original loan amount is essential to achieve full forgiveness.
Trap # 3: Payroll and Payroll Deductions Can Be Tricky
Some companies have chosen to preventively cut wages to provide a payroll buffer. As part of obtaining a PPP loan, companies are expected to maintain salary and / or hourly levels of at least 75% of the original amount.
Since there are several limitations when calculating qualified salary costs for PPP loan funds, it can get quite complicated. The key to remember, however, that all wages, salaries and hours must be carefully documented. Collect and organize records such as:
- The payslips,
- Bank account statements, and
- Tax forms
You should also include any documentation arising from your collaboration with your payroll company. Note that if you end up reducing your salary by more than 25%, you may have to pay off part of your loan. Your accountant can help you determine what it might cost you.
Trap # 4: Expenses paid with PPP funds
Payroll is the primary goal of the PPP loan, but the loan allows funds to cover a small but significant number of other expenses: rent, mortgage interest, and utilities. While useful, businesses should keep in mind that these payments, including payroll, paid with P3 loans are not tax deductible as it is.
However, some representatives of Congress and professional organizations like the American CPA Institute (AICPA) have lobbied to ensure that businesses can deduct these expenses. Until then, however, companies should proceed with caution – if conditions remain the same, this provision could ultimately lead to increased income and therefore higher taxes.
Some thoughts to consider about your PPP loan forgiveness request. It may be safer to take a wait-and-see approach to forgiveness requests. Yes, people want to be forgiven and move on, but rushing the process could lead to unnecessary additional costs.
Talk to your accountant to make sure you take into account critical issues such as agent compensation, FTE equivalents, reduction in wages and salaries, and expenses. Creating a strategy with them could do more than save you a lot of money in the long run, it could save your business.
This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.
Nick Gutzmer is a Supervisor at Smolin Lupine & Co. and a Certified Public Accountant in Florida. He specializes in helping clients in the retail, restaurant and construction industries, as well as helping small businesses. Nick is a member of the North Palm Beach County Chamber of Commerce and is a Chartered Chartered Appraisal Analyst.