Small-business owners who have borrowed from the Paycheck Protection Program program can now apply for loan forgiveness. But keep in mind that getting the balances erased may be easier said than done.
According to the Small Business Administration (SBA) the amount borrowed is intended to cover up to 8 weeks of wages, mortgage interest, and other expenses. The amount borrowed may be forgivable if at least 75% of the proceeds are used to cover payroll, while those that aren’t forgiven must be repaid in two years at a rate of 1%.
Federal agencies gave some clarity to PPP borrowers in the form of an 11-page forgiveness application. However, as tax professionals have expressed, the document still falls short. The information available includes step-by-step instructions for determining forgiveness eligibility and clarifications for small business owners struggling to rehire their employees or calculate their payroll expenses.
Treasury and the SBA addressed a few key concerns
For instance, accountants were worried about the fact that the eight-week period would begin upon the business owner’s receipt of the loan proceeds. This could create an administrative nightmare for borrowers who get their PPP funding smack in the middle of a pay period. To help with this issue, Treasury and the SBA are giving some businesses — those with biweekly or weekly payroll — a little flexibility in the form of an “alternative payroll covered period,” allowing business owners to start counting the eight-week clock on the first day of the first pay period after receiving the loan proceeds.
Treasury and the SBA also tried to address accountants’ concerns around how “full-time equivalent” employees are counted. The federal agencies allowed businesses to apply for the PPP based on the number of full and part-time workers, but forgiveness was to be determined based on “full-time equivalents” on staff, a term that accountants said was unclear. The document partially answers how to calculate the full-time equivalents, but it is a complex calculation.
While the document provides some clarity, it also triggers a pile of new questions and additional complexity for business owners — especially if crunching numbers isn’t their specialty. It is expected to be further guidance from Treasury and the SBA on hashing out forgiveness. In the meantime, business owners ought to work closely with their accountants.
Entrepreneurs who took the loan should keep every document and a paper trail of how they used the loan proceeds, especially as guidance from federal authorities continues to evolve.