Businesses have good reason to look forward to getting their Paycheck Protection Programs (PPP) loans forgiven—they represent a substantial debt during these rocky economic times. But businesses need to proceed with care and caution when submitting their applications. New guidance from the Small Business Administration (SBA) is frequently being released, which means the landscape is ever-changing.
And even if guidance was written in stone, there are significant pitfalls and complexities involved in your application. The last thing you want is to be stuck owing the full amount of your PPP loan.
Thinking ahead about your PPP loan is critical, even if you’re not looking to apply right now. In fact, you have time to strategize: Businesses need to apply for forgiveness within eight months after the covered period ends to avoid making a payment if full forgiveness is granted. So if your business received a PPP loan in early May, you would have 24 weeks or six months to use the funds, then you would need to apply for forgiveness within the next eight months.
Working closely on your PPP forgiveness application with your accountant can help smooth a bumpy road, but don’t go into the forgiveness process unaware. Here are the potential pitfalls that you need to watch out for while filling out your forgiveness application.
Pitfall #1: Officer Compensation
First up is the issue of officer compensation. PPP documentation has elicited some big discussions about who is considered an officer, how much of the loan funds can be utilized for officer compensation, and whether (and how) to use different calculations for different entity types.
Thankfully, there has been some clarification with the last SBA guidance. Here’s what you should know:
- Officer compensation limits go into effect when an individual owns 5% or more of the company
- PPP requires that recipients use at least 60% of funds on payroll to get full forgiveness. Under this, officer compensation is limited to the payroll amount of $20,833 for 24 week covered periods.
If you’re uncertain about what you need, remember that your accountant is your best ally in the forgiveness process.
Pitfall #2: FTE documentation
Maintaining levels of full-time equivalent (FTE) employees is essential in obtaining PPP loan forgiveness. However, business owners (and the SBA) know that it’s not a straightforward task. Many previous employees may have chosen not to return to work for health or family reasons. Here is a breakdown of a few of the notable reasons that could exempt your business from this requirement:
- Government restrictions on operating, such as in the case of gyms or restaurants, or
- An employee refusing an offer to rehire
If an employee takes a reduction in hours or voluntarily resigns, this also doesn’t count against FTEs.
- Being unable to hire similar employees to fill a vacant position
Documentation of FTEs is crucial for your loan forgiveness application. A written offer and any acceptance or rejection of the offer is the best approach. If someone declined to return to work by phone, write down those dates and times. If external factors, like government restrictions, are impacting FTEs, you need to be able to cite any orders that affect your business.
What it all boils down to? Being able to demonstrate the inability to maintain FTEs allocated for in the original loan amount is critical to receiving full forgiveness.
Pitfall #3: Salary and wage deductions can be tricky
Some businesses have elected to preemptively reduce pay to provide a payroll buffer. As part of receiving a PPP loan, businesses are supposed to maintain salary and/or hourly levels of at least 75% of the original amount.
Because there are several limitations when calculating qualified payroll costs for PPP loan funds, it can get pretty complicated. The key takeaway, though, that all salaries, wages, and hours should be thoroughly documented. Collect and organize records like:
- Payroll records,
- Bank account statements, and
- Tax forms
You should also include any documentation stemming from working with your payroll company. Note that if you do end up reducing wages in excess of 25%, you may be required to pay back part of your loan. Your accountant can help you determine what that might end up costing you.
Pitfall #4: Expenses paid with PPP funds
Payroll is the primary focus of the PPP loan, but the loan does allow for funds to cover a small, but important, number of other expenses: rent, mortgage interest, and utilities. While helpful, businesses need to bear in mind that these payments, including payroll, paid with PPP loans aren’t tax-deductible as it stands now.
However, some congressional representatives and professional organizations like the American Institute of CPAs (AICPA) have been lobbying to make sure businesses can deduct these expenses. Until then, though, businesses should proceed with caution—if the terms remain the same, this provision could ultimately result in an increased income and therefore, increased taxes.
A few thoughts to consider about your PPP loan forgiveness application. It may be more prudent to take a wait-and-see approach to forgiveness applications. Yes, people want to get the forgiveness taken care of and move on, but rushing the process could result in additional unnecessary costs.
Talk with your accountant to make sure you’re accounting for critical issues like officer compensation, FTE equivalents, wage and salary reduction, and expenses. Creating a strategy with them could do more than save you lots 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 Lupin & Co. and a licensed Certified Public Accountant in Florida. He specializes in helping clients in the retail, restaurant and construction businesses, as well as assisting small businesses. Nick is a member of the North Palm Beach County Chamber of Commerce and is a licensed Certified Valuation Analyst.