Business owners, congratulations to those of you who received Coronavirus Aid, Relief and Economic Security (CARES) Act Loans—either Paycheck Protection Program (PPP) and/or Economic Injury Disaster (EID) loans. If you were one of the lucky businesses to receive a PPP loan, you currently have eight weeks to use the funds appropriately to meet the criteria for loan forgiveness or face repayment. There is still PPP money available from Round 2 of congressional relief, so if you haven’t yet applied and still need the money, please do so immediately.
There is no “official” guidance issued by the American Institute of Certified Public Accountants (AICPA) to account for CARES revenue recognition for the loan forgiveness. The IRS has not issued specific tax codes for loan forgiveness and deduction of the expenses incurred. We are relying on IRS “notices” and the CARES Act for guidance on how to account for the loan forgiveness and the deduction of expenses for tax purposes. In the next few sections of this article, we provide accounting and tax guidance for transactions for CARES PPP and disaster loans received, expenses paid and loans forgiven.
The information included below is from articles and accounting and tax standards, and attempts to provide the most accurate information to date.
Accounting Guidance: Borrowers May Request Loan Forgiveness
The IRS, in Notice 2020-32, explained that you cannot deduct a typically deductible expense if paying that expense allows you to qualify for the Paycheck Protection Program loan forgiveness. The Small Business Administration (SBA) forgives up to 80 percent of PPP loans if a company’s workforce remained intact and at the same pay. At least 75 percent of the borrowed funds must go to payroll; the remaining 25 percent can be used for certain eligible expenses like utilities and rent.
Borrowers must certify that the documents are true and that they used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on forgiveness within 60 days.
Record Keeping and Required Documents for Forgiveness
These are the required documents you will need to collect to provide with your PPP forgiveness application. (your lender may have additional requirements):
- Documents verifying the number of full-time equivalent employees on payroll and their pay rates for the period used to show you met the staffing and pay requirements
- Payroll reports from your payroll provider
- Payroll tax filings (Form 941)
- Income, payroll, and unemployment insurance filings from your state
- Documents verifying any retirement and health insurance contributions
- Documents verifying your eligible interest, rent, and utility payments
The 75/25 Rule
At least 75 percent of your loan must be used for payroll costs. Payments to independent contractors cannot be included in the payroll costs.
A New Exemption on Re-Hiring Employees
Employees who were laid off or put on furlough may not wish to be rehired onto payroll. If the employee rejects your reemployment offer, you may be allowed to exclude this employee when calculating forgiveness. To qualify for this exemption:
- You must have made a written offer to rehire in good faith
- You must have offered to rehire for the same salary/wage and number of hours as before they were laid off
- You must have documentation of the employee’s rejection of the offer
- Note that employees who reject offers for reemployment may no longer be eligible for continued unemployment benefits
You must maintain at least 75 percent of total salary. This requirement will be individually assessed for every employee who did not receive more than $100,000 in annualized pay in 2019.
If the employee’s pay over the eight weeks is less than 75 percent of the pay they received during the most recent quarter in which they were employed, the eligible amount for forgiveness will be reduced by the difference between their current pay and 75 percent of the original pay.
Rehiring Grace Period
You can rehire any staff who were laid off or put on furlough and reinstate any pay that was decreased by more than 25 percent to meet the requirements for forgiveness. You have until June 30th to do so.
Guidance on Keeping Track of Loan Spending
Please make sure you clearly break out your PPP expenses paid for two reasons. One, your bank will want to see what the funds were used for, and two, for tax preparation purposes. If you received $X in PPP funds, then your financial statements must also clearly show $X in PPP expenses.
Each expense should be clearly labeled “PPP.” For example: PPP—Officer Salary; PPP—Rent; PPP—Telephone. This will allow everyone a clear view of what the funds were used for.
Our doors are always open to lend a helping hand during these times. Please reach out for a consultation to address your tax, advisory, accounting or payroll needs.