Payroll Protection Program Forgiveness Process and Tax Implications
Small businesses have been hit hard during the COVID 19 pandemic. Unfortunately, many didn’t survive. Of those that have, some were lucky enough to qualify for the Payroll Protection Program. The funding provided by this program may have been the difference between surviving the economic impact of the pandemic and closing their doors forever. While the Payroll Protection Program (PPP) allowed business owners to breathe a sigh of relief, there are a few things they need to be aware of or follow up on after receiving those funds.
Payroll Protection Program Forgiveness
Although one of the most attractive features of the Payroll, it’s not without a little time, effort, and paperwork on the business owner’s part. If you neglect to apply for PPP forgiveness or follow the rules set by the program properly, you will be required to make repayment.
The first step to PPP forgiveness is to follow the spending guidelines. To be granted forgiveness, at least 60 percent of the amount received must be spent on employee payroll. Employers must continue to pay employees their normal salary for the covered 24 week period following the loan origination. For businesses that received a PPP loan before June 5, 2020, the covered period is 8 weeks.
Although they are not required to rehire employees laid off prior to receiving funding, employers must maintain their original average full-time employee headcount. This means they will either have to rehire previously laid-off employees or hire new ones to meet this requirement. Otherwise, they will not be eligible to have the entire PPP loan forgiven. The amount forgiven will be prorated. Once the 24 week period has ended, employees may be laid off if necessary without jeopardizing PPP loan forgiveness.
The remaining 40 percent of the PPP loan can be used for other business expenses such as mortgage interest, rent, and utility payments. All of these expenses must have originated before February 15, 2020. While this includes the normal utility expenses such as electricity, water, gas, and sewer bills, the PPP guidelines extend to include landlines, cell phones, internet, and transportation. When calculating transportation expenses, follow the same guidelines used when claiming transportation expenses as an income tax deduction.
Once you’ve complied with all the spending guidelines, you must fill out an application for Payroll Protection Program Forgiveness. This must be done within 10 months after the 8 or 24 week period following the loan origination ends. The application must be submitted to the lender who provided the loan and they will be making the determination about your eligibility. If you didn’t maintain your original full-time employee headcount or fail to meet any of the spending guidelines, your forgiven amount will be reduced or forgiveness could be denied.
Are PPP Loans Taxable?
The simple answer is no – Payroll Protection Program loans are tax exempt. However, using a PPP loan can reduce the number of deductions you can claim on your business taxes. Because the PPP loan must be used for expenses like payroll, rent, and utilities which are normally deducted from your income taxes, you will not be able to claim these for the covered period. This could cause you to end up owing money at tax time.
Beyond the Payroll Protection Program
If your business didn’t qualify for the Payroll Protection Program or it wasn’t quite enough to keep your business moving forward, CFG Merchant Solutions may be able to help. We offer a variety of funding options to help maintain your cash flow and keep your business on track. Whether it’s a merchant cash advance, invoice factoring, equipment financing, or any of our other funding options, we will guide you in choosing the perfect solution for your individual business needs. Our team brings to the table more than 60 years of institutional investment banking experience in the credit, commercial finance, and capital markets. Contact us or apply online today.