It’s All About Forgiveness (PPP that is…); and Accounting…

Hopefully at this point you have received your PPP funds if you applied for them (if still waiting, there are a few banks still taking applications, let me know).  And now you are wondering about the forgiveness side of the equation and how the heck do we account for the funds received and hopefully forgiven.  You are not alone.  Guidance was supposed to be forthcoming near the end of April, but they are still struggling with the front end.  The below and attached are some links and resources that seem to be pretty well thought out and informative (with the caveat that the rulings and FAQ they are based on keeps changing).  Also, thanks to RH Hunnings, CPA, Murphy Business Sales – Jacksonville, for his assistance and input!

Good-Faith Certification

First, with regards to the noise about “The SBA’s review of borrowers’ required good-faith certification concerning the necessity of their loan request.”  This is related to the news that a large dollar amount of the PPP funds went to large, and sometimes public, companies, as opposed to the small businesses that it was intended to help.  In the FAQ released yesterday (5/13)(attached) #46 clarifies (emphasis added), “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans.”  In short, if you received less than $2 million in PPP, it is assumed that the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” is true a statement by the very nature of being a small borrower.

Forgiveness

Now on to forgiveness:

• If you have any specific questions, you are encouraged to talk to your lender as they will be processing your forgiveness application.
• Still waiting on further guidance from the SBA, but anticipate that you will need documentation similar to what was need in the application.
  • For expenses incurred in the 8 weeks following the first disbursement of funds:
    1. Number of employees and their pay rates
    2. Documentation of payroll expenses covering the 8 week period after receiving funds
    3. Payment documentation on eligible mortgage, rent and utilities
    4. Attestation that all documents are true and the requested forgiveness amount was used for eligible forgiveness purposes.
• At least 75% of proceeds must be applied to payroll costs.
• Up to 25% of proceeds may be applied to other covered costs (mortgage interest, rent, utilities). Note that mortgages, leases, and utility service agreements must have been in place before Feb. 15, 2020.
• Any use of funds for purposes in amounts other than those currently outlined by SBA guidance may make part or all of your PPP loan ineligible for forgiveness.
• Proration for forgiveness will be based on FTE (full-time equivalents) comparing headcount before to after (employees rehired by 6/30/20 count).  There appears to be a couple ways/time-frames that you can use for this measurement (see the CARES Act, Section 1106 (d)(2)).  Also note, employees that were laid off, and decline to come back, do not count against you if you made a good faith, written offer to rehire (see FAQ #40).  You can also hire new employees to replace other employees, it doesn’t have to be the same person, just an FTE.
• Some specific cost categories
  • Payroll costs
    1. Any amount of the PPP can be used for payroll
    2. W-2 wages, salaries, commissions, tips, severance pay, bonuses, “hazard pay”, and so forth (reduced by the portion of any employee’s annualized pay exceeding $100,000 per year) and without adding any employer related Federal taxes (FICA Unemployment etc.), although state and local payroll taxes paid by the employer appear to be allowed.
    3. No sub-contractor or 1099 qualified payments are allowed to be included.
    4. SBA has not specifically addressed the question of accrual versus cash basis for including qualified payments. One suggestion is that every effort should be made to pay as much qualified payroll as possible before the expiration of the 8-week period. You may even want to consider an early disbursement of some payroll. For instance, if your 8- week deadline is on Thursday and your normal payday is Friday, then consider paying on Wednesday. If a payroll service is involved, then you should start working with them as soon as possible so you can maximize your eligible payroll. The law seems to imply that disbursements will be allowed if the expense was incurred and disbursed during the 8-week period. This would limit the ability to prepay payroll that is not incurred, and it should apply to other qualified expenses too. It tells me that you can’t prepay the rent or health insurance.
  • Health Care Benefits — Pay this type of expense according to the normal business practice and don’t attempt to prepay premiums.
  • Mortgage/Commercial interest payments — At this point it appears that all loans secured by real estate or personal property are acceptable debt as long as it was incurred prior to February 15, 2020. But notice, only the interest expense portion is allowable.
  • Rent and utilities — They qualify if service began prior to February 15, 2020.
  • The proceeds can also be used for refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.

Some additional resources:

American Institute of CPAs – PPP FAQ

American Institute of CPAs – PPP Loan Forgiveness Calculation Steps

INC Magazine Article On Forgiveness — Asking the Experts

Accounting for PPP

Finally – how the heck do we account for the loan, the cash, and the forgiveness?

• If you have any specific questions, you are encouraged to talk to your accountant as they will be preparing your tax return.
• First, as of right now, the GAAP (regular accounting) and tax accounting are going to be different.  Why?  The IRS came out with a recent notice, Notice 2020-32, that the “otherwise deductible expenses paid with Paycheck Protection Program (PPP) loan proceeds that are eventually forgiven are not deductible for tax purpose.”  Some members of congress have indicated this was not what was intended, perhaps that will get changed in upcoming legislation, perhaps not.  Note, the forgiven amount is not taxable income.
• For the tax side, keep track of the expenses that are paid with PPP funds as you will need to separate those out come tax time as non-deductible expenses (as of now).  Your forgiven amount of PPP will be non-taxable income.
• Here is the best step-by-step set of instructions that I have seen thus far for GAAP (not tax basis) put together by Mowery & Schoenfeld:  Accounting for Your PPP Loan