PPP Loan Forgiveness and Income Tax Implications

The SBA was required to issue guidance within thirty days of the enactment of The CARES Act on the exact ways for The PPP Loan to be forgiven. That deadline was April 26, 2020, which has come and gone without receiving anything of substance from The SBA. What I am about to say may change in the coming days, once our friends in government actually do what they were required to do, but this is what we know so far…
Loan forgiveness is based on certain costs over an eight week period. When does that period begin?
It begins on the date that the loan is disbursed to you. This has nothing at all to do with when your payroll period might begin or end.
What costs are eligible for loan forgiveness?
– Salary, wages, commissions or similar compensation
– Payments for vacation, parental, family, medical or sick leave
– Payments for group health insurance
– Payments for retirement benefits
– State & Local payroll taxes
What costs are not eligible for loan forgiveness?
– Payments to an Independent Contractor
– Compensation in excess of $100,000
– The Employer’s share of federal payroll taxes
What operating expenses can be included in the loan forgiveness?
– Rent payments under leasing agreements in existence on February 15, 2020
– Utility payments for electricity, gas, water,telephone or internet which were in existence on February 15, 2020
– Interest payments on a mortgage incurred in the ordinary course of business on real or personal property that was in existence on February 15, 2020
What are the limitations on loan forgiveness?
Not more than 25% of the amount forgiven can be attributed to non-payroll costs
What are the other factors that can affect loan forgiveness?
– The number of full time employees
– A reduction in wages by more than 25% per individual employee
We have less people working because we have either been fully or partially shut down. How can we still receive loan forgiveness?
Reductions in the number of full time employees, or reductions in salary or wages, that occurred between February 15, 2020 and April 26, 2020, will not reduce the loan forgiveness if, by June 30, 2020, the borrower eliminates those reductions.
What documents must be submitted with an application for loan forgiveness?
The CARES Act requires that the borrower submit an application to the lender. That application must include the following:
– Documentation verifying the number of full time employees on the payroll and pay rates for the covered period and the prior periods. This would also include Federal & State payroll tax returns.
– Documentation including cancelled checks, payment receipts, or account transcripts verifying mortgage, rent or utility payments.
– A certification from the representative of the business that the documentation presented is true and that the amount of forgiveness requested was used to retain employees and cover the appropriate operating expenses.
– Additional documentation as may be required by The SBA
Will I need to pay income taxes on the amount of loan forgiveness?
Yes. Did you really think that this was going to be free money? Any loan which is forgiven in the United States must be picked up as income on the appropriate income tax form given its tax benefit. I presume that the lenders will forward Form 1099B, as they would on any other loan forgiveness.
Is there a way that I can be relieved from paying income taxes on loan forgiveness?
Yes. If on the date of forgiveness, you can prove insolvency, then the tax attributes may be changed to make the loan forgiveness untaxable.
Let me leave you with this one thought…
We have definitely gone down the rabbit hole in the middle of this nightmare.
With the additional $600 paid to unemployed workers, there are many who are refusing to return to work. If this happens to you, what recourse is possible? The official IDES website simply says that the employer should notify them. It doesn’t say that the employee will be denied benefits. It just says that they should be notified.
Our elected officials have created a world where many workers are paid more by not working.
Many entrepreneurs are finding themselves at a crossroads. I’m not advocating anything illegal here, but what would happen if you were retirement age? Your business hasn’t been doing well for some time, and the government just dropped $400K into your checking account on a PPP Loan that wasn’t personally guaranteed? Are you going to reopen your business or are you going to find some cute little shanty town in Mexico where you can live like a king off of your social security check? No one is really talking about what recourse the government has if you just leave.
Our elected officials have created a world where many entrepreneurs would be better off if they didn’t reopen their doors.
I would never suggest that you do not honor your agreements. Never in a million years. But I’m sure that you can see where some would look at this and just hit the road.
Let’s also realize that many Entrepreneurs are looking at this as an opportunity to clean house. How many of you are going to hire back your workers that were bad? With the businesses that will close, there will be an enormous amount of good, unemployed workers out there looking for stable employment. But who is going to hire the bad workers? There won’t be enough businesses left open to need them.
Our elected officials have created a world where rampant unemployment will again be the norm.
Be smart about this. Use this nightmare to your advantage. Once this is done, there will be an enormous amount of new business out there to be had. You probably won’t have any problems finding good employees for a change. And if your smart, you won’t even need to repay the money that the government just gave you.
Keep your head up. There are opportunities out there. You’re going to get through this. We’re going to get through this thing together.
Accounting Solutions Ltd. stands ready to fulfill its mission to protect you, your family, and your business. If there is anything that you need, or even if you just need someone to talk to, we stand ready to serve. I’m here, and I remain,
Sincerely yours,
Chris Amundson
Accounting Solutions Ltd.
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