What you and your clients need to know about the Paycheck Protection Program loan

What you and your clients need to know about the Paycheck Protection Program loan

Note: Paycheck Protection Program (PPP) borrowers may engage the services of an accountant to track the use of their PPP funds. However, only the borrower or an authorized representative who is legally authorized to make certifications on the borrower’s behalf may submit an application for loan forgiveness. Accountants should be aware of this limitation and ensure that an authorized representative of the borrower understands his or her obligation to complete, review, and certify to the contents of any loan forgiveness application.

The information contained in this article only applies to certain small businesses and other eligible organizations that have received Paycheck Protection Program (PPP) loans. For example, if a PPP loan recipient filed, or will file, a 2019 IRS Form 1040 Schedule C, other rules apply.

Now that your client has received a PPP loan under the CARES Act, how do you help them keep track of that loan in QuickBooks® Online, and help your client prepare to apply for loan forgiveness?

Note: PPP borrowers may engage the services of an accountant to track the use of their PPP funds. However, only the borrower, or an authorized representative who is legally authorized to make certifications on the borrower’s behalf, may submit an application for loan forgiveness. Accountants should be aware of this limitation and ensure that an authorized representative of the borrower understands his or her obligation to complete, review, and certify to the contents of any loan forgiveness application.

Terms of the loan and forgiveness

PPP loans issued prior to June 5, 2020, have a maturity of 2 years, and PPP loans issued after June 5 have a maturity of 5 years. All PPP loans have a 1% interest rate. Both principal and interest payments are waived for the first six months, but interest starts accruing immediately. Tracking how your client uses this money is important, because the PPP loan may be forgiven, in whole or in part, as long as your client meets specific requirements.

PPP loan funds may be used for eligible payroll costs, rent, mortgage interest, utilities, interest on certain other debt obligations, and refinancing an Economic Injury Disaster Loan (EIDL) made between Jan. 31, 2020, and April 3, 2020. Though, according to the SBA and Treasury, at least 60% of the PPP loan proceeds must be used for eligible payroll costs.

The loan forgiveness covered period

The loan forgiveness covered period relevant to the calculation of your total loan forgiveness amount generally begins on the date your client received your PPP funds from your lender.

For loans made on or after June 5, 2020, your client’s loan forgiveness covered period is 24 weeks. For loans made before June 5, 2020, your client may elect to use either an 8-week or a 24-week loan forgiveness covered period. Loans are considered to be “made” for this purpose on the date the SBA assigned a loan number to your PPP loan. Your lender can provide you with this information.

For example, if your client  received their PPP loan funds on Monday, April 20, the first day of their loan forgiveness covered period is Monday, April 20. Since their loan was made before June 5, 2020, they may elect to use either an 8-week or 24-week loan forgiveness covered period.

Your loan forgiveness covered period ends at the end of the 8 weeks or 24 weeks, but must end by Dec. 31, 2020 at the latest.

Note that your clients may be able to choose an “alternative payroll covered period” solely for the purpose of calculating their payroll and certain required reductions if your client is a borrower with a biweekly or more frequent payroll schedule. The client will need to choose an alternative payroll covered period that aligns with their payroll cycle. If your client chooses to use this alternative period, it applies only to payroll costs and certain required reductions.

Learn more about the Loan Forgiveness Covered Period, Alternative Payroll Covered Period, and their roles in forgiveness.

What factors can reduce my client’s forgivable amount?

Your client doesn’t have to use all of the loan proceeds during the loan forgiveness covered period in the first 8-weeks. However, amounts spent after their covered  period won’t be forgivable. At the end of the covered period, your client can apply for PPP loan forgiveness with his or her lender. If your client doesn’t use all of the PPP loan funds for costs and expenses that meet the SBA or Treasury criteria for loan forgiveness, or doesn’t use all of the funds as intended, your client may still be eligible for partial loan forgiveness as determined by his or her lender.

Any loan balance that is not forgiven will need to be repaid, according to the terms of the PPP loan, which has a 2- or 5-year term depending on the date of their loan disbursement, and an interest rate of 1%. Your client’s PPP loan has no fees, no prepayment penalties, and neither principal nor interest payments are required for the first 6 months. However, interest will accrue during the 6-month deferral period.

Payroll costs that may be eligible for forgiveness include:

  • Cash compensation capped at $15,385 if an 8-week loan forgiveness covered period applies, or $46,154 if a 24-week loan forgiveness covered period applies, for each employee making more than $100,000 annually, including:
    • Salary, wages, compensation, or similar compensation, as well as cash tips, or equivalent. Payroll expenses are calculated on a gross basis, without subtracting federal taxes that are imposed on the employee, or withheld from employee wages.
    • Employee benefits, including payment for vacation, medical, family, parental, and sick leave.
    • Separation or dismissal pay.
  • Payment required for the provision of group healthcare benefits and insurance premiums.
  • Payment of any retirement contributions.
  • Payment of state and local taxes assessed on compensation.

Excluded payroll costs:

  • Individual employee compensation in excess of annual compensation of $100,000 per year.
  • Compensation for employees whose principal place of residence is outside the United States.
  • The employer’s share of certain payroll taxes.
  • Qualified sick and family leave wages under the Families First Coronavirus Response Act (FFCRA).

In addition, up to 40% of the forgivable amount may be for eligible non-payroll costs, including:

  • Mortgage interest, as long as the mortgage was in effect prior to February 15, 2020.
  • Rent, as long as the lease was in force before Feb. 15, 2020.
  • Utilities (electricity, gas, water, transportation, telephone, or internet access), under service agreements dated prior to Feb. 15, 2020.

For a comprehensive list of included and excluded costs, please refer to the latest guidance from the SBA and Treasury.

In addition, reductions to employee head counts or wages may impact your client’s loan forgiveness.

The loan forgiveness amount may be reduced if the average number of full-time employees (FTE) employed by your client during their covered period disbursement is less than the average number of FTEs your client employed per month between either Feb. 15, 2019, and June 30, 2019, or Jan. 1, 2020, and Feb. 29, 2020. Seasonal applicants may choose either of the above reference periods or any consecutive 12-week period between May 1, 2019, and Sept. 15, 2019.

The loan forgiveness amount may also be reduced if your client decreases total salary or wages for any employee during their covered period after disbursement by more than 25%, as compared to the first quarter of 2020. This forgiveness reduction does not apply to reductions associated with employees who had salary or wages higher than $100,000 in 2019.

The forgivable loan amount will not be impacted by a reduction in FTEs, or salary and wages, occurring between Feb. 15, 2020, and April 26, 2020, as long as the reduction is eliminated by the date you submit your application for loan forgiveness or Dec. 31, 2020, whichever comes first.

There are two exceptions to the reduction rule that may apply:

#1: If your client offered an employee their job back after letting them go, but the employee declined the offer to return to work. Please refer to the latest guidance from the SBA and Treasury.

#12 Your business was unable to operate between Feb. 15, 2020 and the end of the covered period at the same level as before Feb. 1, 2020, due to compliance with certain federal requirements or guidance issued between March 1, 2020, and Dec. 31, 2020 related to maintaining standards of sanitation, social distancing, or other work or customer safety requirements related to COVID-19. Spreadsheets may be helpful for some calculations, such as documenting that FTEs were maintained between Feb. 15, 2020, and April 26, 2020, and prorating wages for employees making over $100,000 in cash compensation, but since QuickBooks Online is already an incredibly powerful tracking tool, take advantage of its features to track the use of your client’s PPP loan proceeds.

This information is provided as a courtesy. Nothing in these materials is intended to, and does not, create an agency relationship with Intuit® Financing Inc. (d/b/a QuickBooks Capital), or any right to fees from QuickBooks Capital for any services you may provide to borrowers. QuickBooks Capital will not compensate any person or entity assisting a borrower without first having executed a written compensation agreement with both the borrower and agent, and by providing this information, QuickBooks Capital does not agree that it will enter (or has entered) into any written compensation agreement with any person or entity.

Regulations and guidance from the SBA and the U.S. Department of Treasury on the PPP are evolving rapidly and the above information may be outdated.  Please refer to the latest guidance from the SBA and Treasury to confirm current program rules and how they apply to your particular situation.  The resources described above are made available to businesses within the United States of America.

This content is for information purposes only and should not be considered legal, accounting, or tax advice, or a substitute for obtaining such advice specific to your business. Additional information and exceptions may apply. Applicable laws may vary by state or locality. No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a client’s particular situation. Intuit Inc. does not have any responsibility for updating or revising any information presented herein. Accordingly, the information provided should not be relied upon as a substitute for independent research. Intuit Inc. does not warrant that the material contained herein will continue to be accurate, nor that it is completely free of errors when published. Readers should verify statements before relying on them.