When a business applies for forgiveness of second draw Paycheck Protection Program (PPP) loans, there are several factors they should consider that may not have been applicable when they submitted the forgiveness application for their first draw loan. Maximizing non-payroll costs may be critical to a business in reaching full forgiveness of their loans and preserving payroll costs for the Employee Retention Credit.
A significant factor is the addition of several categories of qualified non-payroll costs that a business may now use in the calculation of their PPP loan forgiveness. Initially, the eligible non-payroll costs were limited to mortgage interest payments, rent or lease payments, and utility payments. These costs remain as eligible, qualified expenses, but amendments to the Small Business Act have added the following expenditures to the list:
- Covered operations expenditures – These include payments for any business software or cloud computing service that facilitates business operations. This rather broad term “business operations,” includes product or service delivery, human resources, maintaining payroll, billing and sales functions, and accounting or tracking of supplies, inventory, records, and expenses. This could be beneficial to the many small businesses who were forced to transition in some capacity to remote operations during the COVID-19 pandemic, and as a result were forced to make some of the aforementioned expenditures to facilitate this type of work.
- Covered property damage costs – These are costs that were incurred due to property damage, looting, and/or vandalism caused during public disturbances that occurred during 2020. However, these costs are only eligible for PPP loan forgiveness if they are not covered by insurance or other compensation.
- Covered supplier costs – These are expenditures that are essential to a borrower’s operations made to a supplier of goods that are pursuant to a contract, order, or purchase order. For most covered supplier costs, the agreement must have been in effect at any time prior to the beginning of the covered period of the PPP loan (the loan disbursement date). One exception pertains to perishable goods, where the agreement may have been in effect either before or during the covered period.
- Covered worker protection expenditures – Any personal protective equipment and investments that were made by a business to comply and adapt to federal and state health and safety guidelines related to the COVID-19 pandemic. Examples of such expenditures include the purchase, maintenance, or renovation of assets that create or expand fixtures such as a drive-through window, air pressure ventilation or filtration systems, expansion of additional business space, and other personal protective equipment such as particulate filtering facepiece respirators, for example, N-95 masks.
One benefit that businesses may see from this expanded list of qualified non-payroll costs is that as of December 27, 2020, businesses that receive PPP loans are also eligible to claim the Employee Retention Credit (ERC), which, in short, is a tax credit against certain employment taxes. Previously, if a business received a PPP loan, they were not eligible for this credit. However, a caveat to the new rule is that the same wages may not be used in the calculation of both the PPP loan forgiveness and ERC calculations. A business eligible for both should consider going through the PPP forgiveness calculation process around the same time they plan to claim the ERC. Because of the inability to use the same wages for both, there are ways to maximize both the PPP forgiveness amount and ERC amount. In terms of the ERC, a company can claim a credit of 70% of an employee’s wages capped at $10,000 per quarter for the first three quarters of 2021 if the company qualifies for the ERC for the first three quarters of 2021. If an employee was paid at least $10,000 of wages for the first three quarters of 2021 that would equate to a $21,000 credit for that employee.
Originally, ERC was supposed to be in place for all of 2021. However, the ERC was eliminated for the fourth quarter of 2021 upon the passage of the Infrastructure Bill for all companies except for a Recovery Start up Business. For the PPP forgiveness calculation, the borrower is required to use at least 60% of the loan amount toward payroll costs allowing 40% of as non-payroll costs. With the introduction of new non-payroll costs for PPP forgiveness, it may allow a business to save their payroll costs for the ERC calculation by maximizing the 40% non-payroll costs for their PPP forgiveness (provided they maintain the aforementioned 60% requirement for payroll costs).
Another new feature that borrowers should be aware of if they received a PPP loan of $150,000 or less, they are now eligible to apply for forgiveness through the Small Business Administration’s Direct Forgiveness Portal, which opened on August 4th, 2021. This portal was created to help streamline the forgiveness process for the smallest of businesses. 96% of PPP loans in 2021 went to business with fewer than 20 employees, and introduction of the SBA portal allows these businesses to skip some of the administrative hurdles that come with the lender’s forgiveness process, which can have a tendency to get complicated.
If a borrower is unable to receive full forgiveness of their PPP loan, the life of the repayment period is dependent upon the date on which the loan was disbursed to them. Loans disbursed prior to June 5, 2020, have a maturity date of two years following the date of disbursement. Loans disbursed after June 5, 2020 (all second-draw and some, but not all, first-draw loans) have a maturity date five years following the date of disbursement. All PPP loans carry a 1% interest rate.
For federal income tax purposes, the IRS ruled that income resulting from the forgiveness of PPP loans is tax-exempt, and no deduction associated with PPP funds used shall be disallowed.
