There still are funds left for this PPP program.  If you haven't applied for your piece, now is the time.  (The funds won't appear for 10 days or so.) Even if you are in Northern Virginia, NYC/LI, SFO, or LAX where the quarantine won't end for two weeks yet. That goes for restaurants- because the funds will help you weather the restricted openings that should alleviate some (not all) in 8 to 10 weeks.  (My blog tomorrow will provide you further data on such scenarios.)

Hey, folks.  I hadn’t thought about this wrinkle that is part of the PPP process.  It makes perfect sense, but it never really dawned on me. (My bad!)

What?  You forgot for what PPP stood?  That’s the Payroll Protection Program, that is part of the CARES program, the series of 3 trillion buck tranches that Congress appropriated to help individuals and business folks that have been decimated by the pandemic.  (We are going to need at least one more to weather this COVID age.)

 

Let’s do a quick review…

The PPP program lets business folks (it was supposed to be “small” business, but hotel chains, public corporations, and the like yanked the bulk of the first tranche of funds- but the IRS, Treasury, and Congress are beginning to claw back that money) keep their employees on board.  For the two months AFTER being funded by the PPP, employers are expected to pay their staff their normal wages.  As long as 75% of those funds (or more) are remitted to the employees, the loan will be forgiven.   Let’s see how one gets the loan in the first place.  (You can refer to my blog for more data.)

Let’s assume SmallCo has a monthly payroll of $ 10,000.  (The same rule applies, with a few separate wrinkles,for Schedule C solopreneurs under the PPP program.  The primary difference is the social security/Medicare payments soloprenuers pay, versus conventional employers.)   This means the cost per month for the employees is $ 10,000 plus 7.65% ($765) for the employer’s portion of social security/Medicare taxes, plus (this number varies by employer, because unemployment taxes are a function of the stable employment each firm provided) 1.73% [federal and state unemployment, $173] or $ 10938.  According to the PPP rules, the firm can apply for a $ 27345 loan, which is 2.5X the extended payroll costs.  (If you provide health care, those costs are also includable in the PPP.)

Now, the rules also stipulate that as long as SmallCo pays out AT LEAST 75% of the loan for payroll ($ 20508.75) for the 8 weeks after receiving the funds, with the rest applied to rent and/or utilities, the US government will forgive the loan.

So far that sounds like a fantabulous deal, right?

But (this still doesn’t stop it from being a fantabulous deal)…

 

If SmallCo uses the whole loan to pay its staff and the taxes, it also means that SmallCo does NOT have $ 27345 of deductible payroll expenses in 2020.  You see- that payroll for 8 weeks and the taxes paid on that payroll are no longer a deductible expense, because the Fed’s forgiveable loan paid those expenses, not SmallCo.

If SmallCo uses the 75% level, with the rest of the loan covering rent and utilities- those payroll costs of $ 20508.75 (75% of the loan) are not deductible, nor would the rent and utilities expenses of $ 6836.25 (the rest of the loan) be legal expenses in 2020.  Because the Fed’s PPP loan covered those costs– not SmallCo.

This means SmallCo may actually owe more in taxes for 2020.  (If it’s a pass-through, the owners will have a higher tax bill.) Because if (not including the loan) SmallCo generated $ 75,000 in profit in 2019, that same business volume and expenses will mean that 2020 taxable profit will now be $ 102345 ($75000+$27345 of the forgiven loan).

Note that even if SmallCo took a hit of 19% of its profits (for the 10 weeks of lockdown out of 52), it will still have about $13K in additional profits that will be subject to taxation.  If it’s  a C Corp, that works out to $2714- or about a 20% annual interest rate on that “forgiven” loan.  If it’s a pass-through, one would expect the recipient to be in at least a 22% bracket, which means an even higher imputed interest rate.

 

 

 

 

Loan Forgiveness:

In late 2020, when the loan comes due (with the 1% interest), we are going to have to ask our bank to forgive the loan.  The bank doesn’t ask us if we followed the rules for forgiveness.  And, we have to document what we did with the loan proceeds when we request loan forgiveness.  (If you are our clients, don’t worry.  We will prepare said documentation in a contemporaneous fashion and save the proof for when the loan comes due. Unless you are a solopreneur- the documentation will only be fulfillable when your personal taxes- with Schedule C- are filed.  We will modify the Schedule C to substantiate your reasoning for loan forgiveness.)

Now, it probably won’t surprise you to know that the process of loan forgiveness has not yet been detailed.  So, I will only provide my answers based upon what is clear as of now.  As the rules get developed, I will provide further guidance- unless my guess on how it will work in the future is correct, and you can use this blog for requesting forgiveness.

One of the key questions that’s just been answered is whether firms are penalized if employees don’t return to work.  The rules now state that as long as the firm has submitted a written offer to said employee, stating their wages and position are the same- and they refuse to report to work- there will be no penalty imposed on the employer/loan recipient (i.e., loan forgivenesss still obtains).

But, there are still other questions that (despite the fact that the law stipulated that regs must be issued by 27 March- they haven’t) we can only surmise.  Like- can we provide our employees paid time off while we wait to open our business?  The answer seems to be only if they normally took paid time off this time of year.  (Yeah- that’s a dumb response.  But, given the fact that TheDonald refuses to wear a mask, why would you expect a reasonable response from his cabinet?)

But, paying severance for a discharged employee does count.  Why? Because payroll costs always include allowances for separation or dismissal.

And, paying your salespersons commissions akin to what they made last year will count towards loan forgiveness- as long as you don’t count those payments as advances against future commissions.

Time Frame for Loan Forgiveness and Payment Terms  

Our bank (the SBA vehicle that provided the loan)  is required to approve- or disapprove- loan forgiveness within 60 days of our request.  Any portion (or all) of the loan that is NOT forgiven is subject to a 1% interest rate, and must be totally repaid within two years.  The first loan payment comes due 6 months AFTER the loan is deposited in your bank.

Hope this PPP makes it a breeze for your biz to survive the pandemic.

(More about this program tomorrow!)