PPP Loan Forgiveness: Interpreting the Ambiguous

When the Paycheck Protection Program loans provided by the CARES Act became available this month, it felt a little like the Wild West. From one bank to the next, the application, required documentation, and calculation methods to determine loan amount differed widely. But as many businesses scrambled to get their applications in, one thing was clear: a PPP loan has the potential to be forgiven, meaning the businesses who receive the money might not be required to pay the funds back. 

Yes…”might” not be required to pay it back.

PPP loans are intended to be forgivable loans, but in order to have the loan forgiven, the funds must be used appropriately. Additionally, there is a degree of forgiveness – i.e. a loan may be determined to be partially forgivable if some guidelines were not followed.

We’re talking about a government-backed loan with, at worst, 1% interest. At best, it’s free money. As you can imagine, most business owners weren’t overly concerned. Cue the application stampede.

But even as the dust settles, the ambiguous legalese has yet to be sorted out.  If you’re banking on a PPP loan, there are a couple things to keep in mind to maximize your chances of loan forgiveness.

The Rules

The CARES Act, as most people know by now, was a method of putting into place emergency measures to stabilize the economy as many people were put out of work under the Covid-19 lockdown.

The portion of the CARES Act that outlines the PPP loans also includes the requirements that must be met for the loan to be forgivable. To summarize, forgiveness requires loan proceeds: 

  • are used to cover payroll costs, and most mortgage interest, rent, and utility costs over the 8 week loan period;
  • ensure employee and employee compensation levels are maintained;
  • do not exceed payroll costs capped at $100,000 on an annualized basis for each employee. 

In the scramble to obtain these “first-come, first-served” loans, the fine print may have been missed. If your business receives any PPP funds it’s important to ensure that you operate within the regulations, if you intend to apply for loan forgiveness. Additionally, for loans that do not qualify for forgiveness, loan payments are to be deferred for 6 months.

Understand Allowable Expenses

The CARES Act specifically lists the expenses that a PPP loan should be used for. During the 8-week period after receiving the loan, borrowers are permitted to use the proceeds for the following purposes:

  • to maintain payroll costs;
  • to pay interest on leases signed or mortgage obligations incurred prior to February 15, 2020;
  • for payments on utilities with service agreements prior to February 15, 2020

However, the primary focus of this funding is payroll costs. Therefore, in order for a PPP loan to be forgiven, at least 75% of the loan proceeds must be used to maintain payroll for the 8 weeks following the loan. 

That means no more than 25% may be used for the other two categories, lease/mortgage payments, and utility costs. If a borrower does exceed the 25% guidance on these expenses, the risk is that the loan will not qualify for forgiveness.

Note that using loan funds to prepay a mortgage is expressly excluded from “allowable expenditures”. Additionally, reducing an employee’s wages or salary may result in decreased loan forgiveness.

Keep Records of Expenditures

In order to prove that the loan funds were used for allowed expenses, it’s going to be important to keep records of business expenses. While the CARES Act does require that borrowers be able to document the uses of loan funds, the specific documentation that may be required is probably not yet specified by lenders. 

Don’t be caught off guard if you can’t find a list of required documents yet. Keep precise records of where loan funds are spent, so that you’ll be prepared for whatever is required when the time to document forgiveness comes.

Don’t Miss the Other Benefits

There’s more to the CARES Act than just the PPP loans. In fact, did you know that it amended the Tax Cuts and Job Act (TCJA) of 2017? Specifically, the CARES Act:

  • Extended the timeframe for businesses to deduct net operating losses (NOLs)
  • Enabled some taxpayers to apply excess loss deductions
  • Created more liberal rules on business interest deduction allowed
  • Provided earlier access to Alternative Minimum Tax credits

If you’re looking to minimize the damage to your company from the coronavirus shutdown, these expanded tax breaks could make a difference.

Remember to Apply for Forgiveness

As mentioned, forgiveness of these PPP loans is not automatic. Businesses will have to apply for them after the 8-week loan period has passed. At that time the banks will have 60 days to make a decision on each loan’s forgiveness.

These loans are also not required to be reported as income, as is often the case when debt is discharged. Even if forgiven, loan proceeds are not subject to federal taxation.

If you have applied or are thinking of applying for a PPP loan, remember that the guidance is being released on an ongoing basis. Maintaining good records of expenses, keeping up on new revisions or clarifications to the law, and using the funds as intended will serve to put your business in the best position possible, as we navigate this new territory.

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