PPP Loan Forgiveness Traps
Many businesses have applied for and received PPP loans. The loans are extremely helpful but you also want to be careful so they are forgiven.
The Paycheck Protection Program loan or PPP loan is equal up to 2.5 times your monthly payroll. For the loan to be forgiven you must spend the money on payroll, rent, interest and utilities over the eight weeks that followed your receiving the loan. Be careful! There are other parameters as well. Following are traps to be aware of that may impact your loan forgiveness:
Headcount Reduction Trap
If you reduce headcount of full time equivalent employees your initial eligibility for forgiveness amount is also reduced. The headcount adjustment allows a business to compare its current employment to employment between February 15th, 2019 and June 30th, 2019 or to employment between January 1st, 2020 and February 29th, 2020.
Pay Rate Reduction Trap
Loan forgiveness is impacted for any employee whose pay rate is reduced by more than 25% if they make $100,000 or less. The reduction in the amount available for forgiveness is also impacted by a drop in commission pay.
Rehiring Window Trap
If a business has laid off an employee between February 15th, 2020 and April 27th, 2020 it must attempt to rehire that employee by June 30th to avoid or reduce the reduction in forgiveness. To avoid or reduce the reduction, it must be a good faith written offer at the same pay rate and for the same number of hours. If the employee rejects the offer, the rejection must be documented.
Pay Cut Reversal Window Trap
If a business has instituted pay rate cuts in April, May or June they may reverse this reduction by June 30th to eliminate the requirement to reduce the initial eligibility for forgiveness loan amount.
Good detailed documentation is required for the PPP loans. A list of included items is in the statute; it covers specific verification of payroll and other appropriate expenses. Part of the required documentation is also proof that the PPP loan was used for these expenses. Don't let poor documentation result in your loan not being forgiven!
Non-Payroll Expenses Trap
For your PPP loan to be forgiven at least 75% of the loan must be spent on payroll costs. Business closures may shift your usual balance of expenses. If you spend 25% or more of your loan on non-payroll expenses it will result in a reduced loan forgiveness amount.
Receiving a loan that is reflective of more than your actual payroll expenses may also impact your loan forgiveness.
Only partial PPP loan forgiveness is given to a self-employed Schedule C business. For these businesses the loan is equal to a maximum of 2.5 times monthly payroll costs, but the forgiveness is limited to eligible expenses for an eight-week period. Another consideration when determining eligible forgiveness is that the ratio of expenses is typically quite different for these businesses.
Play it safe. View the PPP loan as just that, a loan. It can be very inexpensive financing during these very difficult times. Any loan forgiveness that you do get is then a big and very welcome bonus. That being said, be aware and be careful of the traps. Be careful and exact with your documentation. Get help navigating the PPP loan and loan forgiveness process by contacting Shoffner & Associates.
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