For many businesses that took advantage of the Paycheck Protection Program (PPP) loans offered under the CARES Act during the coronavirus pandemic in 2020, a critical deadline related to PPP loan repayment and forgiveness is fast approaching. Borrowers need to take action prior to the loan’s maturity date deadline if they want to prevent their PPP loans from converting to standard loans that require the borrower to repay the full amount of the loan plus an additional 1% of interest. Audits may be on the horizon for yet other borrowers. Below we look at what’s changing soon for PPP loan repayment and forgiveness and examine what may trigger an audit.
General PPP Guidelines
For those borrowers who have allocated their PPP loan funds in such a way that 60% are earmarked for payroll costs and 40% for other eligible non-payroll expenses, the PPP loan is generally 100% forgivable and does not require repayment. Mortgage interest, rent payments, utility costs, interest on other debt, certain operating expenses, and worker protection expenses are some of the items that are considered as eligible, non-payroll expenses.
As the PPP loan program expanded through the Consolidated Appropriations Act (CAA), the provision that required borrowers to deduct the amount of any Small Business Administration (SBA) Economic Injury Disaster Loan (EIDL) advance from their PPP forgiveness amount was eliminated. Borrowers were also no longer required to include any PPP loan forgiveness amounts as part of gross income. Furthermore, borrowers taking out PPP loans are allowed to deduct from gross income on their tax returns those expenses which would normally be considered as deductible, even if forgiven PPP loan proceeds were used to pay those expenses.
PPP Loan Repayment Deadline, Beginning Soon
At the time that PPP loans were first being offered, it had been established that borrowers had 10 months from the last day of the loan’s “covered period” to apply for PPP loan forgiveness. The covered period is defined as the eight-to-24 week period immediately following when the funds were disseminated and during which time they must be used. If a borrower fails to apply for PPP loan forgiveness before the 10-month window elapses, the loan payments will no longer be permitted to be deferred and the borrower will have to make PPP loan repayments to the lender.
For example, for those borrowers who secured their PPP loans when the program was first offering them with a covered period that ended in October 2020, then August 2021 would be the time by which that borrower would need to apply for forgiveness in order to avoid having to begin making PPP loan repayments.
The Process of PPP Loan Forgiveness
In order to apply for forgiveness, borrowers will need to complete and file forms with their lender that are determined by both the amount of the loan taken out and the type of business owner(i.e. a sole proprietor, independent contractor, or self-employed individual without employees). It’s the lender’s responsibility to then submit the necessary forms to the SBA.
In the event that the SBA chooses not to forgive all or part of the loan, the lender is responsible for informing the borrower when their first PPP loan repayment installment is due. Interest on the PPP loans are accrued from the time the loan was disbursed to the borrower until the time the SBA remittance to the lender of the forgiven amount is disbursed. However, the borrower only needs to pay the accrued interest on any amount that is not forgiven.
In some instances, businesses may have held off on filing their PPP loan forgiveness applications in order to maximize their employee retention tax credits. Wages paid after March 12, 2020, through December 31, 2021, that are taken into account for purposes of calculating the employee retention tax credit amount but cannot be included when calculating eligible payroll costs for PPP loan forgiveness.
Watching Out for Potential Audits
The SBA’s Office of Inspector General, in conjunction with the IRS and other Federal agencies, may audit borrowers who were issued PPP loans. While automatic audits are triggered for every loan in excess of $2 million as soon as the borrower applies for loan forgiveness, smaller loans may also be subject to an audit.
Although the SBA has established an audit safe harbor for loans of $2 million or less, that carveout applies only to the examination of the borrower’s good faith certification on the loan application that the “current economic uncertainty makes the loan request necessary to support the ongoing operations” of the business.
Matters relating to eligibility, loan amount calculation, use of PPP loan funds, and eligibility for forgiveness are still subject to audit. Penalties to borrowers on loan infractions uncovered during the audit may subject those borrowers to anything from PPP loan repayments to civil penalties and prosecution under the Federal False Claims Act for those who were fraudulent when applying for their loan.
Start Preparing In Advance
Borrowers who received loans over $2 million should begin working with their tax advisor to prepare for their audits, now, by pulling together all documents and information the auditors will require, including:
- Financial statements,
- Income and employment tax returns,
- Payroll records for all pay periods within the applicable covered period,
- Calculation of full-time equivalent employees, and
- Bank and other records related to how the funds were used (for example, canceled checks, utility bills, leases, and mortgage statements).
Knowing the PPP loan repayment and loan forgiveness deadlines are looming, borrowers would be wise to file their forgiveness application as soon as they are eligible to do so and assemble the necessary documentation for a potential audit, in advance. For help in navigating the process, please contact your Untracht Early advisor.