Outside the Box: How to cut through PPP-loan confusion and avoid leaving money on the table

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As a grueling 2020 ends, companies across the country that received some of the $525 billion in coronavirus loans through the Paycheck Protection Program (PPP) are grappling with how and when to apply for forgiveness.

The official forms, calculations and conflicting advice can make this a daunting and complex prospect. Add to that the shifting tax guidance and the prospect of additional political action, and it’s not surprising that I’m seeing a lot of mistakes and misconceptions in the PPP forgiveness applications that cross my desk. 

In my view, businesses can make the process easier on themselves and avoid unnecessary reductions in forgiveness by following three basic guidelines: 1. Choose the simplest application for which you are eligible; 2. Make sure to take full advantage of the rules to maximize forgiveness; and 3. Do the application now rather than next year.

The bottom line is that businesses should be striving to get as much forgiveness as possible. Businesses need to take it upon themselves to make sure they understand the rules and are counting every dollar of eligible expenses to maximize their forgiveness.

Keep it simple

Choosing the right Small Business Administration application form can make the difference between a relatively simple process and an unnecessarily painful one.

The simplest path runs through the 3508S form for businesses that took PPP loans totaling $50,000 or less. The beauty of this form is that it doesn’t ask questions about full-time equivalent (FTE) employees, reductions in hours, or salary/hourly wage cuts, meaning the business is automatically exempt from those factors. But there’s a common misconception that the forgiveness calculation can be skipped. That is not the case, so make sure you read and follow the instructions.

The 3508EZ form is for businesses that took more than $50,000 in PPP loan funds, provided they can show they met a two-pronged test. First, the business must certify it did not reduce salaries or wages of those earning less than $100,000 in 2019 by more than 25%. Second, the business must certify either: A. that it didn’t reduce the number of employees or the average paid hours of employees in 2020; or B. that its business activity declined due to government orders related to the pandemic. This EZ form provides a simpler forgiveness application because it doesn’t require all of the FTE calculations or calculations on salaries and wages, but it also provides an easier path to full forgiveness.

It is important to understand that you can still qualify for the EZ route if your employees’ total cash compensation fell more than 25%, but the salary or hourly wages did not. For example, many restaurant workers saw their incomes plunge due to reduced tips and fewer scheduled hours during the pandemic. But as long as the business didn’t cut hourly wages by more than 25%, and the business activity was impacted by government orders (e.g. to restrict seating or close for a period of time), it can qualify still qualify for the EZ form.

Those who don’t qualify for the “S” or the “EZ” forms have to brace for the more complex calculations of the full 3508 form.

Take full advantage

One of the biggest mistakes I’m seeing is businesses are not taking full advantage of the available forgiveness on payroll expenses. Some businesses are not counting all of their payroll expenses, believing they had only eight weeks to spend the funds.

In fact, the eligible period for all PPP expenses was expanded to 24 weeks by the Flexibility Act enacted in June. That gives businesses a lot more leeway in eligible wage expenses. For example, an employee earning $100,000 a year would have been paid $46,154 over the full 24-week period allowed, more than double the 2.5 months of PPP funding provided for that employee. By counting the full allowable payroll amount for that individual, businesses have a much better chance of reaching full forgiveness, even if they will have reductions in forgiveness because they furloughed or cut the pay of some of their workers.

If payroll expenses are insufficient to demonstrate full use of the PPP loan funds and achieve full forgiveness, make sure you track all of your eligible non-payroll expenses, too. Businesses can include rent, lease, and interest expenses on both the business real estate and automobiles or other equipment the business has leased or financed. By counting every possible dollar of expenses, you can ensure that reductions for salary/hourly wage cuts or reductions in FTEs have little or no effect on your overall forgiveness.

Act now

A lot of businesses have been left confused over when to file for forgiveness, partly due to a flurry of media articles advising them that they have nothing to lose by waiting until next year. In reality, the benefits of waiting have now been taken away.

The IRS recently made clear that the expenses paid by PPP loans cannot be deducted when calculating the business’s taxable income and this higher taxable income must be applied to the 2020 tax return, no matter when the loan is forgiven. Since 2020 tax payments are due next March or April, knowing how much of the PPP loan will be forgiven will ensure you file an accurate return and don’t risk adding penalties and interest to your tax bill.

Although businesses have up to 10 months from the end of the covered period to apply for forgiveness, applying earlier also means smaller repayments on any remaining loan amount. Leaving it until later could result in some very hefty monthly repayments that you weren’t prepared for, especially after adding SBA processing times of up to three months.

A final note

Many small businesses are confused by the rules relating to Economic Injury Disaster Loans (EIDL) and how they affect PPP forgiveness. Most companies that applied for an EIDL loan also received an EIDL advance (or so-called “grant”) of up to $10,000. The advance was typically received shortly after the business applied for the EIDL loan and was deposited directly to the business checking account without having to sign a note or loan agreement. In contrast, the EIDL loan was for a larger amount and the business had to sign a 30-year note and other loan documents before these funds were received.

To avoid double-dipping, Congress ruled that PPP forgiveness must be reduced by the amount of the EIDL grant. So, if a company applies for $12,000 in forgiveness, but received a $3,000 EIDL advance, the SBA will automatically reduce the forgiveness amount to $9,000. Businesses that received an EIDL advance need to report the amount of the grant and the associated EIDL loan number (also known as the “application number”) where indicated on the PPP forgiveness application. But they should not reduce their forgiveness amount. If they do, SBA will accept their lower forgiveness amount and will deduct the EIDL Advance a second time.

Maximizing forgiveness could save your business a lot of money, so make sure you spend the time to get it right.

Mark Abell is senior vice president and SBA division director at NBH Bank, which serves clients through Community Banks of Colorado, Bank Midwest and Hillcrest Bank.