We realize that the rules around PPPL forgiveness have been constantly changing and many banks have not begun accepting applications, but our message to you is don't panic – you have time to get this right so you can receive as much loan forgiveness as possible.
With that in mind, here is a list of some important considerations for your business as you put together your documents to apply for PPPL forgiveness.
1. Make sure at least 60% of the funds were used for payroll: As the rules currently stand, you must use 60% of the PPPL funds for payroll expenses. The remaining funds can be used for mortgage, rent, and/or utilities. However, there is nothing wrong with using 100% of the funds for payroll. If you are an independent contractor, sole proprietor, or single member LLC, make sure you document the transfer of funds from your business account to your personal account so you can show "payroll" and/or other covered transfers.
2. Both expenses incurred prior to your covered period but paid during the covered period and expenses incurred during your covered period but paid after the covered period count toward forgiveness: For example, if you received your PPPL funds on April 15 and your next payroll payment was on April 17, you can count the April 17 payroll payment toward your PPPL forgiveness. Similarly, if your covered period ended September 30 but your September utility bill was not paid until October 9, you can count this expense toward your PPPL forgiveness.
3. 8 week versus 24 week covered period: Businesses who received PPP loans before June 5 have the choice of using either an 8 week or 24 week covered period. Businesses who received PPP loans after June 5 are required to use the 24 week covered period. In our opinion, if you have a choice, it is typically best to use the 24 week covered period because this allows you to allocate more payroll expenses toward the forgiveness of your PPP loan.
4. Should I apply for forgiveness in 2020 or 2021?: IRS rules currently state that expenses paid for by a loan that is fully or partially forgiven will not be tax deductible. Therefore, it may behoove your business to consider waiting to apply for forgiveness until 2021. That way you can deduct all applicable expenses in 2020 and have time to plan for the potential that your 2021 expenses may be reduced by the amount of your PPPL forgiveness.
5. What happens if I received an Economic Injury Disaster Loan (EIDL) advance and a PPPL?: Unfortunately, the SBA will deduct the amount of your EIDL advance from the amount of your PPPL forgiveness. Therefore, if you received an EIDL advance for $5,000 and a PPPL for $75,000 the maximum PPPL forgiveness you qualify for is $70,000. The EIDL advance will become a loan at 1% with repayment deferred for 1 year. You should receive an email from the SBA at the one-year anniversary of receiving your EIDL advance funds with instructions on paying back the loan.
6. You have until the SBA remits its loan forgiveness decision to your bank or 10 months from the end of your covered period to begin repaying your loan: If you apply for forgiveness in a timely manner, you have until the SBA remits the loan forgiveness amount to your bank before repayments begin. If you have not applied for loan forgiveness, you have 10 months from the end of your covered period (either 8 or 24 weeks) until repayments begin. This is why we encourage you not to panic. You have time to get your documents together, decide on when to apply for forgiveness, wait for your bank, credit union, or other lender to open their forgiveness portal, and submit your application.
Bottom line, each business is going to have a slightly different set of circumstances when they apply for their loan forgiveness. Therefore, please make sure to consult your CPA, banker, and/or financial advisor to help you throughout the loan forgiveness application process.