The late and great Kenny Rogers once famously sang, “You gotta know when to hold them, know when to fold them.” Well when it comes to Paycheck Protection Program PPP Loan, business owners need to know when to spend it and when to end it.
In March 2020, Congress passed the Coranavirus Aid, Relief, and Economic Security Act (CARES). Among its many provisions, CARES created the Paycheck Protection Program (PPP) loans for businesses. PPP loans can be at least partially forgiven provided business owners use the PPP loan funds for allowable uses. The Bill was intended to give American businesses a jumpstart to help them get through the COVID 19 epidemic.
How big is the loan?
The Paycheck Protection Program, loan a business can receive is up to 2.5 its average monthly wages. PPP loans cannot be larger than $10 million.
What are Allowable Uses?
Allowable uses include so-called “payroll costs,” heath care benefits, interest on mortgages, rent, utilities, and interest on debts incurred before February 15, 2020. At least 75% of the funds must be used to cover so called “payroll costs.”
“Payroll costs” include salaries, health insurance premiums, retirement benefits, state and local payroll taxes. Payroll costs do not include federal payroll taxes paid by the employer. There are also limitations regarding compensation to employees who earn more than $100,000 per year.
What Uses are not allowed?
The non-allowable uses include federal payroll taxes discussed above. There are also special rules for employees how earn more than $100,000 per year. Any sick or family leave that an employer grants to employees under the Families First Coronavirus Response Act. (This provision gives employers tax credits for giving leave to their employees). Payment to employees who reside outside the United States is also not allowable. Payments to independent contractors are not allowable as well.
When does my business have to spend the PPP loan funds?
Your business must spend the PPP loan funds within eight weeks of receiving the funds.
What about those employees that make over $100,000 per year? Tell me more.
If you have employees that make more than $100,000 per year (or $15,385 over the eight week period), the amount of their salaries that is not allowable is a pro-rated. If you have an employee that makes $150,000 per year, only two thirds of that employee’s salary would be allowable. If you had an employee that made $200,000 per year, one-half of that employee’s salary would be allowable.
Health insurance, retirement benefits, and other non-cash compensation do not count towards the $100,000 per year limit. If you have an employee that receives a salary of $99,000 per year, but gets $5,000 worth of medical insurance from your business, that employee will be treated as earning $99,000 per year, not $104,000 per year.
I only used my PPP loans for allowable uses. Will my full PPP loan be forgiven?
Even if you use every cent of your PPP loans for allowable uses and use at least 75% of the PPP loan for payroll expenses, you may not get full loan forgiveness if you lost full time employees. Loan forgiveness is based on the number of full employees your business retained during the covered period (February 15, 2020-June 30, 2020). If your business laid off workers, your loan forgiveness will be reduced by a fraction of the employees you retained.
To give an example, let us say your business had 40 employees before the COVID 19 pandemic hit. (We can look to the time period of February 15, 2019-June 30, 2019 or the time period of January 1, 2020-February 29, 2020 to determine how many full time employees you had). If you only have 30 employees during the covered period (February 15, 2020-June 30, 2020), your loan forgiveness will be reduced by 25%. This means if you took out a $100,000 loan, $75,000 of the loan would be eligible for forgiveness.
To give another example, let us say your business had 40 full time employees. If your business now only has 10 full time employees and you took a $100,000 loan, 25% or $25,000 of the loan would be eligible for forgiveness.
I have a sole proprietorship (Schedule C) business with a small payroll or no employees. How can the Payroll Protection Plan help me?
Sole proprietorships or Schedule C businesses can still take advantage of the Payroll Protection Plan loans. The sole proprietor’s net income (up to $100,000) is taken into account when determining loan amounts just as if the sole proprietor were another employee. The net income is based on the 2019 tax return, so make sure you get that tax return filed.
For determining whether an expense is allowable, the payment the sole proprietorship makes to its owner is treated as if it were a payment to another employee. It is subject to the $100,000 per year ($15,385 over the 8 week covered period) cap. Just like other businesses, sole proprietorships must use PPP loan funds only for the allowable uses like payroll costs, mortgage, rent, and utilities.
Sole proprietors are limited to rent, utility, and other expenses reported on their 2019 return. They are not allowed to “expand.” To give an example, a sole proprietor may have rented a small office space for $500 per month in 2019 and claimed $6,000 of rent expenses on her return. If the sole proprietor moves to a larger office space, which has a higher rent, that sole proprietor would be limited to $500 per month rent.
What about Partnerships or LLCs taxed as Partnerships?
Partnerships and LLCs taxed as partnerships must apply for PPP loans at the entity level. Individual partners and individual LLC members may not apply for loans. LLCs and partners may include up to $100,000 per year of self-employment income for LLC members or partners as if the income were compensation to an employee for determining the size of the PPP loan and determining allowable uses of PPP loan funds.
Published by Joe Cole