Smart Tax Planning

Small businesses can apply for PPP loan forgiveness. These questions remain unanswered

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Key Points
  • Entrepreneurs can access a forgivable emergency loan via the Paycheck Protection Program and use the proceeds to cover up to eight weeks of wages, mortgage interest and other expenses.
  • Loans are supposed to be forgivable if at least 75% of the proceeds go toward payroll. Amounts that aren’t forgiven must be repaid in two years at a rate of 1%.
  • The Treasury Department and Small Business Administration released an 11-page forgiveness application that addresses some key concerns but still leaves plenty of questions unanswered for small businesses.
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Small-business owners who borrowed from the federal Paycheck Protection Program program can now apply for loan forgiveness.

Getting the balances erased may be easier said than done.

The PPP loan, which was established by the CARES Act, is intended to cover up to eight weeks of wages, mortgage interest and other expenses.

The amount borrowed is supposed to be forgivable if at least 75% of the proceeds are used to cover payroll, according to the Small Business Administration. Meanwhile,  any amounts that aren't forgiven must be repaid in two years at a rate of 1%.

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Accountants and attorneys have eagerly awaited additional guidance on forgiveness from the Treasury Department and the SBA.

The federal agencies gave some clarity to PPP borrowers on Friday night in the form of an 11-page forgiveness application. However, the document still falls short, tax professionals said.

"Yes, there's now some clarity and, yes, there are now more questions that have developed because of the form," said Erik Asgeirsson, president of CPA.com, the American Institute of CPA's business and technology arm.

An 11-page document

              See below for the newly-released forgiveness document.

Treasury and the SBA addressed a few key concerns for tax professionals who are guiding small businesses through the process.

For instance, accountants were worried about the fact that the eight-week period would begin upon the business owner's receipt of the loan proceeds. This could create an administrative nightmare for borrowers who get their PPP funding smack in the middle of a pay period.

"Everyone gets loans at different times and, unless you're a unicorn, your payroll won't align with the eight weeks," said Samantha J. Monsees, an attorney at Fisher & Phillips in Kansas City, Missouri.

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Sheila Bair on PPP lending and CARES Act

To help contend with that, Treasury and the SBA are giving some businesses — those with biweekly or weekly payrolls — a little flexibility in the form of an "alternative payroll covered period."

This allows business owners to start counting the eight-week clock on the first day of the first pay period after receiving the loan proceeds.

Treasury and the SBA also tried to address accountants' concerns around how "full-time equivalent" employees are counted.

The federal agencies allowed businesses to apply for the PPP based on the number of full- and part-time workers, but forgiveness was to be determined based on "full-time equivalents" on staff — a term that accountants said was unclear.

"They have partially answered how they'll calculate the full-time equivalents," said Lisa Simpson, AICPA's director of firm services.

The downside is that borrowers must use a complex calculation to hash out the "average full-time equivalency" they have during the eight-week period.

Complexity remains

While the document provides some clarity, it also triggers a pile of new questions and additional complexity for business owners — especially if crunching numbers isn't their specialty.

"I hope there will be more guidance because you'd really hate to calculate this and then it changes again," said Dan Herron, CPA and principal of Elemental Wealth Advisors in San Luis Obispo, California.

"And if you hire someone to do this for you?" he said. "You're being charged billable hours. 

A sign reading "Shop Local" with closed restaurants and shops on Main Street on April 10, 2020 in Livingston, Montana.
William Campbell | Getty Images

If you have cash and can afford it, you have a leg up."

The CPA group anticipates there will be further guidance from Treasury and the SBA on hashing out forgiveness. In the meantime, business owners ought to work closely with their accountants.

Entrepreneurs who took the loan should keep every document — a paper trail of how they used the loan proceeds — especially as guidance from federal authorities continues to evolve.

"It's important to reach out to your advisor and document the decisions you make today based on today's information," said Asgeirsson.