What you and your clients need to know about the Paycheck Protection Program loan
Note: The Paycheck Protection Program Flexibility Act (PPP Flex Act) was signed into law on June 5, 2020. The PPP Flex Act extends the availability of loans under the Paycheck Protection Program (PPP) and adjusts certain rules applicable to PPP loans. The information reflected here may therefore be outdated. We are working to update our resources to reflect these updates to the PPP, so be sure to check back soon. Please refer to the latest guidance from the SBA and Treasury to confirm current program rules and how they apply to your particular situation.
Note: 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. Information is current as of May 12, 2020.
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
A PPP loan is a 2-year loan at 1% interest, though both principal and interest payments are waived for the first six months. 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. We are still waiting for final guidelines from the Treasury and Small Business Administration (SBA) on loan forgiveness, and we do not have all the details on how the forgiveness process will work, so please check back with us. In the meantime, this article incorporates information published by the SBA and Treasury in the First PPP Interim Final Rule.
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 75% of the PPP loan proceeds must be used for eligible payroll costs.
Certain costs incurred, or payments made, during the 8-week period beginning on the “disbursement date” for your client’s PPP loan amount may be eligible for forgiveness.
The disbursement date is the date that the lender began the process of sending PPP funds to your client, and may be earlier than the date on which your client received the loan funds.
Your client doesn’t have to use all of the loan proceeds in the first 8 weeks. However, amounts spent after this 8-week period won’t be forgivable. At the end of the 8 weeks following disbursement, 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-year term 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 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 25% 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.
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 the 8-week period after 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. Most borrowers can choose which time period to use for comparison, but seasonal employers must use Feb. 15, 2019, to June 30, 2019.
Additionally, the loan forgiveness amount may also be reduced if your client decreases total salary or wages for any employee during the 8-week period after disbursement by more than 25%, as compared to the most recent full quarter before the 8-week period. 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 June 30, 2020. An exception to this reduction rule may apply 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.
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.
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 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.