For months, members have worked hard to do what’s best for their businesses and their people by pursuing forgivable PPP loans. With the SBA loan forgiveness application now available, it’s important to also remember that your forgivable loan isn’t your only recourse. There are significant tax-payment deferrals, cash refunds, and credits available from the IRS that can also help mitigate the impact of COVID-19.
As the updated tax deadline of July 15th approaches, now is the time to take a step back to broaden the focus and take a look at the provisions that could help at tax time. It’s our hope that the checklist below – combined with some basic guidance on your PPP loan forgiveness – will help you can continue to move forward with confidence.
In addition to the tax incentives and reminders below, you should also be aware of the newly released Paycheck Protection Program Flexibility Act, signed into law June 5, 2020. This act amends the Paycheck Protection Program to give borrowers greater freedom on how and when loan funds are spent, while retaining the possibility of full forgiveness. For more guidance on loan forgiveness, see below.
Key changes instituted by the Paycheck Protection Program Flexibility Act
- Provides 24 weeks to spend loan proceeds, an increase from 8 weeks
- Drops mandatory payroll spending from 75% to 60%
- Two exceptions allow borrowers to obtain full forgiveness without fully restoring their workforce. These include: the inability to find qualified employees and the inability to restore operations to Feb. 15, 2020 levels.
- Time to pay off the loan has been extended from 2 years to 5 years
- The act now allows businesses to delay paying payroll taxes, even if you took a PPP loan.
- Reminder: the June 30, 2020 application deadline for a PPP loan has not changed
Access the full text of the act at Congress.gov
To ensure your business makes the most of the CARES Act, consult with your tax expert on any of the below that apply to your business:
- Deferral of employer’s social security tax
This tax payment can be deferred for up to two years.
- Reinstated NOL Carrybacks make you eligible for a refund
The CARES act permits you to carry back net operating losses (NOL) from tax years between December 31, 2017 and January 1, 2021 to each of the five taxable years preceding the year where a loss occurs. This means if you have a tax loss from 2018, 2019, or 2020 you can potentially generate an immediate refund from the IRS, with the goal being to quickly get cash into the hands of taxpayers that have been impacted by COVID-19.
- Tax credits for paid sick leave to employees affected by COVID-19
There are several tax benefits and credits available that you can take advantage of. Take advantage of payroll and time tracking software to have applicable sick time information available.
- Employee retention credits
The CARES act has authorized a tax credit equal to 50% of qualified wages paid to retained employees, up to a $5,000 benefit per employee. While this credit can’t be “doubled up” with PPP forgiveness, if your business did not pursue PPP loans or if you will not be pursuing PPP loan forgiveness – it could be very useful.
- For employers sponsoring cafeteria plans, FSA’s, and Section 125 plans
The rules for changes in elections, qualifying expenses, carryover funds, and reimbursements have been extended and loosened considerably for 2020.
- Eased restrictions for accessing retirement plans
If you have money in 401(k), IRA, or other qualified retirement plans, you can access cash from those accounts, under relaxed rules with respect to penalties and taxation. For more information on this, consult your investment advisor.
Don’t forget state tax incentives. While these federal incentives can be a powerful way to get support from the tax system, you should also consult with your tax advisor regarding any applicable state incentives that you can be leveraged.
Applying for Loan Forgiveness
With PPP loans, it is the borrower’s responsibility to ‘prove’ that he or she qualifies for forgiveness. With this proof, your bank will then review the application and then recommend forgiveness to the SBA.
Next, the SBA will presumably conduct its own review, ask questions, and potentially ask for additional documentation, and has indicated an additional level of scrutiny for loans over $2 million.
Don’t forget: The borrower is required to keep all documentation for six years, implying that the SBA can audit the documentation even after forgiveness is granted. Keep the following in mind:
- The process is akin to completing a tax return. Expect detailed instructions, defined terms, and calculations flowing from one page to the next.
- The process could take some time (both to apply and for the banks to conduct their reviews). Members should be prepared for many questions from their bankers about the application and underlying data.
Be prepared for delays: The SBA has issued roughly two million PPP loans. If half apply for forgiveness, that’s one million applications bankers need to review manually. Be prepared for delays.
Take your time, and reach out for help if you need it. The SBA application is thorough, detailed, and dense. Take your time, and if you don’t know the answer to a question – consult your tax advisor. This will be worth it.
Understand how your FTE and other factors impact your forgiveness. The SBA has included specific guidance regarding the calculation of full-time equivalent employees, mortgages, interest, rent, etc., with some examples. Fortunately, these examples do make sense, but extensive documentation is required. Also note:
- The compensation of owners is to be detailed, owner by owner
- The forms indicate a proportional reduction in your forgiveness for reductions in FTE headcount
- “Hiring back” employees by June 30, 2020, to the FTE level at February 15, 2020, appears to “cure” a reduction in FTE headcount
When in doubt, refer to the SBA. In the coming weeks and months, there will be many assertions on how loan forgiveness forms work, what their definitions mean, and how to ‘maximize’ your loan forgiveness. Remember: the SBAs forms are still very fresh, there are no FAQs (yet), and nobody is an expert except the lawyers at the SBA who drafted the guidelines.
Tips for your application:
- Lean on your payroll service: Your payroll service will be very helpful with aspects of your application.
- You’ve already done some of the work: As part of your initial loan application, You’ve already submitted some of the required documentation. Reference this to save time and ensure consistency.
- Don’t go it alone: Before beginning, it will help to speak with your banker to discuss their individual timing and review process for forgiveness applications
If you plan to pursue PPP forgiveness, the sooner you assemble the required documentation and get in line, the sooner you will have a decision.
Download your PPP loan forgiveness forms from SBA.gov. This is the same form that your bank will provide you.