To date, nearly 18.5 thousand Connecticut businesses have received forgivable loans under the Paycheck Protection Program. This note will briefly review some of the recordkeeping requirements of the program you should keep in mind if you anticipate being able to qualify for loan forgiveness.
The program requires that borrowers meet two tests for loan forgiveness:
- The loan proceeds are used to cover payroll costs, and most mortgage interest, rent, and utility costs over the 8 week period after the loan is made; and
- Employee and compensation levels are maintained
The loan proceeds may only be used for four categories of business expenses:
- Payroll costs, including benefits. Payroll costs include –
- Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);
- Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit;
- State and local taxes assessed on compensation; and
- For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee
- Interest on mortgage obligations, incurred before February 15, 2020;
- Rent, under lease agreements in force before February 15, 2020; and
- Utilities, for which service began before February 15, 2020
Payroll costs also include employee benefits such as parental leave, family leave, medical leave, and sick leave. Note, however, that the CARES Act, P.L. 116-136, excludes qualified sick and family leave wages for which a credit is allowed under section 7001 and 7003 of the FFCRA, P.L. 116-127. You can read an IRS summary of this credit here.
The CARES Act also excludes from payroll costs the following:
- Any compensation of an employee whose principal place of residence is outside of the United States; and
- Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employer’s share of FICA and Railroad Retirement Act taxes
Mortgage prepayments and principal payments are not permitted uses of PPP loan proceeds. Borrowers will need to request loan forgiveness from their lenders. The request must include:
- Verification of the number of employees and pay rates
- Payments made on eligible mortgage, lease and utilities
- Documentation that you used the forgiven amount to keep employees and make the eligible mortgage, lease, and utility payments
This documentation will generally take the form of:
- Payroll reports from your payroll provider
- Payroll tax filings, including Form 941
- State income, payroll, and unemployment insurance filings
- Documentation of retirement and health insurance contributions
- Documentation of payment of eligible expenses. This documentation should meet the same standards as your documentation of business expenses on your tax return. Invoices matched with cancelled checks, payment receipts, and account information
- Documentation that you used at least 75% of your loan for payroll costs
Lenders are expected to require forgiveness documentation to be provided in digital form, so borrowers should get scanning done in advance.
Lenders must rule on forgiveness within 60 days of the borrower’s request. In some cases, borrowers may be asked to provide additional documentation.
If you are not approved for loan forgiveness, your loan balance will continue to accrue interest at the rate of 1% annually for the remainder of the two-year loan period.
These notes review general principles only and are not intended as tax or legal advice. Readers are cautioned to discuss their specific circumstances with a qualified practitioner before taking any action.
Tags: Banking, Corporate, Joseph Pastore, Tax
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