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PPP Loan: Applying for Forgiveness

How to Get the Most Out of the SBA’s Paycheck Protection Program

Attorney Marc Lopez recently followed up with certified public accountant Patrick Wanzer about the forgivable Paycheck Protection Program loans for small businesses. What follows is a lightly edited transcript of their conversation.

Marc Lopez
Hello, this is attorney Marc Lopez. I’m here with my excellent good friend and CPA, Patrick Wanzer. Patrick, say hello.

Patrick Wanzer
Hey, how’s everybody doing?

Marc Lopez
Hey, Patrick, you did an amazing service for everyone watching when you talked about the paycheck protection loan last month, and everyone was sending me messages—Thank you for getting this out to us. Everyone thought that the information you gave was amazing. So now I want you back for part two—which is, How do we get this loan to be forgiven?

Patrick Wanzer
Sure, sure. That’s actually a very important piece, because there are some specific rules that really need to be followed and information that needs to be out there so you can use the right expenses to make sure the loan is forgiven. You just need to follow some rules, and we can talk about that.

Marc Lopez
Absolutely, Patrick. So give us the breakdown—what is the percentage that needs to be spent on payroll? What is the percentage that has to be spent on other things?

Patrick Wanzer
Sure. So first, a couple of things before we even get to that. What are the expenses that you can use the money for? Okay—obviously payroll. That’s clearly the whole point is to use it for payroll. But you can use it for mortgage interest if you own the facility—and you can use it to help pay for the mortgage payments, but the interest would be included—rent (if the lease was enforced prior to February 15, 2020), and utilities, as long as they’re enforced prior to February 15, 2020.

But here’s the thing—75% of the proceeds from the loan need to be used for payroll. So you want to make sure—if you’ve got a million dollars, let’s say just to make the math easy—$750,000 at least need to be covering payroll, and then the other $250,000 can be used for those other expenses but you want to make sure you’re using at least 75% of the proceeds to cover your payroll.

Marc Lopez
That’s perfect. So that’s a general framework we have here. Let’s take it back even a step further. So my understanding—and if I’m wrong, correct me—is that once the money is disbursed, an eight-week clock starts ticking? Am I right about this?

Patrick Wanzer
Yes, absolutely. So here’s the thing—once the money is disbursed, you have eight weeks to make sure the expenses that you’re going to include in the forgiveness are paid. So it’s from the date the money is disbursed. Why is that important? Because people’s payroll dates are different. Some people pay weekly, some people pay monthly, some people pay every two weeks—that sort of thing. If for some reason, you pay monthly, and the loan is disbursed on a day, and you only get one payroll in—that’s all that’s going to be included in that eight weeks that can be forgiven, and if money’s used for other things, that might have to be paid back. So you want to make sure you work with your accountant—with your CPA or somebody—to make sure that the accepted expenses are paid within that eight weeks.

Maybe that means you accelerate a payroll period towards the end to make sure it’s included in the eight-week period, so you get that money paid to your employees—something like that. But you want to make sure that you get the expenses you’re going to use to be forgiven within that eight-week period, starting on the date of disbursement of money. So those who have applied for the loan, and let’s say they just got through the second round and they got their money disbursed last Friday—well, they have eight weeks from last Friday to have their expenses. If someone such as you, Marc—on April 13, you said you got your money. Your clock started on April 13, so that’s the difference—you’ve got to make sure the expenses are within that eight-week period from the date the money was disbursed.

Marc Lopez
So the eight weeks starts tick-tocking, and we have this countdown, and so people watching this video—they may be savvy businessmen, but they may not be dealing with the payroll ins and outs every single day. What is included with this payroll that has to be 75% of the total loan?

Patrick Wanzer
Sure. It is gross wages paid to the employee but does not include the employer portion of the FICA taxes. So what you pay to your employees—basically the gross wages are what’s going to be included. So that’s where you want to make sure that you are keeping track of that, and make sure that those expenses are paid to the employees. Now you also want to make sure that you aren’t reducing your employee salaries and you’re not letting people go, because that also will affect the amount of reimbursements. If you reduce salaries too much, then in the forgiveness calculation, they will calculate the amount that isn’t forgivable and you’ll have to pay that amount back. The idea is to make sure you keep people on payroll, and you keep them at the same payroll level they were.

Marc Lopez
Patrick, are the rules the same for part-time employees as full-time employees?

Patrick Wanzer
It’s full-time employee equivalent, so you want to definitely work with your accountant to make sure you’re calculating that correctly—to make sure that what you’re paying for part-time employees is covered and is covered correctly, because there’s an equivalence calculation that they’ll do to make sure that that works. But you’ll definitely want to work with your CPA or your accountant to make sure that calculation is done correctly on the application.

Marc Lopez
Patrick, what if there is a situation where an employee wants to use some of their vacation time? They’re not sick, and they’re not in danger, but they don’t want to be on the clock.

Patrick Wanzer
Sure. Vacation’s covered. I mean, they’re paid. They’re an employee. They’re on the clock. Just because they take vacation doesn’t mean that they aren’t covered by the forgiveness. The idea isn’t for Congress to say, Well, none of your employees can ever take a vacation. They have eight weeks, and everybody must work. They’re still employed, because you’ve decided to agree to let them take a week off for vacation—great. That’s fantastic. They need to do that. They’re still considered employed, and they’re still paid. So the money you’re going to pay them is for salary—it just happens to be a benefit that they’re exercising at that time.

Marc Lopez
That’s fantastic news. I’m in various groups and whatnot—particularly a lot of lawyer groups—and there’s a few situations . . . I have not experienced this, but some of my lawyer friends have experienced where their employees are making more on unemployment because of the $600 a week kicker, and so the employees do not want to come back. And now these firms—these businesses have gotten the money, and now they don’t have the employees to spend it on. Can you replace somebody, or do you have to use the original employees you had?

Patrick Wanzer
Well it can get a little bit interesting if you try to replace or try to hire new people, because basically what they want to do is—they want you to maintain payrolls, and if you have some people where they’re making more money on unemployment than they are working, it may be a situation where you want to definitely talk with your CPA and work through that. We don’t have a whole lot of guidance from the IRS or from Congress specifically on that—whether a new employee can be hired to take that place, or if somebody is on unemployment, they must come back. The idea was to keep them up on employment to make sure that they’re still here. So that may be something that you want to talk about with your CPA, but we don’t have a whole lot of guidance on that—but it is definitely better to have them come back from unemployment than to hire a new person.

Maybe it’s something where you up their salary a little bit, perhaps. Maybe that’s something that you might be able to do in the long run. Who knows? But that’s a decision that the employee will make on their own, as well, going forward.

Marc Lopez
That’s super interesting, and I’m so lucky to have not had that experience at this firm. So, Patrick, the non-payroll—you already mentioned rent. You already mentioned mortgage. You already mentioned utilities. Are there any utilities that wouldn’t be included? They just have to be in existence on February 15, you said?

Patrick Wanzer
Yes, as long as they’re in existence prior to February 15, 2020, you can use the money on utilities, and it’s basically just regular utilities that you can have—your heat, your gas or your electric, and your internet, and those types of things—those utilities are included. But again, non-payroll expenses can’t exceed 25% of the loan amount if you want to make sure all of it is forgiven. There’s a little bit of a fogginess on whether or not if you—let’s say you have $1,000,000, and you spend $700,000 on payroll and $300,000 on non-payroll expenses. Will they forgive just $700,000, or will they forgive $700,000 and some of the utilities? We don’t quite know. But if you spend $750,000 on payroll, then the whole million can be forgiven. So the best bet for people is to make sure that at least 75% of the money that they’re spending is on payroll expenses.

Marc Lopez
Patrick, I work downtown. My office is downtown. Parking for 10 employees—including myself—is expensive. Parking—is that one of the things I can spend it on?

Patrick Wanzer
It is not.

Marc Lopez
It is not?

Patrick Wanzer
Unfortunately not. You can spend the money on parking, it just won’t be forgivable. It won’t be included in the forgiveness.

Marc Lopez
Got you. Let’s talk process. So most of the folks that are watching this are going to do what they have to do, and they’re going to get their information to their accountant—Let me get you my stuff. What is the best way to manage the payback? Just give us some tips and tricks. I ultimately want to make your job easier, so you are able to spend good time applying for my application for forgiveness, as opposed to asking for 10,000 documents. So what can I do on a daily basis or a weekly basis to be ready to rock and roll with you?

Patrick Wanzer
Sure. The best thing is to keep excellent records on the money that is used from the loan to pay for acceptable expenses. The burden of proving that the money was used for those acceptable expenses is on the taxpayer, so it is important for the business that they have to be able to show that the money they received from the loan is used to pay those acceptable expenses. There was some talk, and there’s kind of an unclear idea of whether or not a separate bank account should have or should be opened for the PPP loan. Some people say that a separate bank account should be open just because you have the money over there and it’s easier to track that you’re using it for a separate expense. You either pay it out of your general account, reimburse you from the separate account, or pay it directly out of that separate account—that sort of thing.

If you put the money all in your operating account, you need to keep excellent records on the expenses that were paid, and it might be something where in your bookkeeping—just in your bookkeeping—you have a separate account set up showing that the expenses were paid from your PPP loan, and you need to keep the documents proving that those expenses were paid within that eight-week window. It is the responsibility of the taxpayer to be able to prove—they have the burden of proof—that the expenses paid are within the eight weeks and are acceptable expenses.

Marc Lopez
That’s perfect. Patrick, what question am I not asking you that you think’s important? Any parting words or takeaways?

Patrick Wanzer
Yes. The IRS has just come out with guidance and this is something that is . . . We expected that to happen—we were hoping that it wouldn’t—but expenses that are paid with the PPP loan that are forgiven are not deductible on your taxes next year. So if you get $1,000,000, and you spend the $1,000,000 on payroll and expenses, you then can’t deduct that $1,000,000 on your payroll and expenses, because the PPP loan is not taxable income to you, either. You’re not going to be taxed on it, but then you can’t double-dip and say, I’m not paying tax on the million, but I’m going to take a $1,000,000 deduction over here. 

We were hoping for that. In a baseball analogy, that would have been like hitting a grand slam to win the World Series. But the IRS has just come out with guidance saying that expenses—PPP money used to pay expenses—that those expenses aren’t deductible next year on the tax return.

Marc Lopez
Anybody hearing that obviously would have loved to have been able to deduct expenses that they got a forgivable loan for, but—at the end of the day, before anyone gets upset and they start saying, Oh, this is ridiculous—they’re still looking at a net positive from the Paycheck Protection Program—

Patrick Wanzer
Absolutely. Oh, absolutely.

Marc Lopez
I mean, that would have been nice, but you’re still better off . . .

Patrick Wanzer
Oh, sure. Sure. I mean, yeah, you’re not deducting the money, but it’s a cashflow benefit to you, because you weren’t having to worry about having the money to pay the employees and still going to be in benefit and you’re not taxed on it. It’d be one thing if you were taxed on that forgivable money because generally loans or debts that are forgiven are taxable, but this is specifically written in the statute that it is not taxable. So that’s why it’s better. If it were taxable, we’d have a huge beef with the law, but it doesn’t work that way.

Marc Lopez
Patrick, thank you so much for spending some time talking with us. What is the best way for folks to reach you?

Patrick Wanzer
Best way to folks to reach me would be basically by email, pwanzer@somersetcpas.com—that’s S-O-M-E-R-S-E-T-C-P-A-S .com. Or call me on my cell phone, area code 317-413-7120. Again, we’re not working from the office right now, so if you call my office phone, you just have to leave a message. Feel free to call my cell phone, and we can go from there. Somerset CPAs is absolutely ready and willing to help anybody prepare their forgiveness application. Even if you didn’t have us help with the calculation of the loan application in the first place, we definitely can help with the forgiveness application.

Marc Lopez
One last question: Once the eight weeks is up, what is the timeline to apply for forgiveness?

Patrick Wanzer
That’s a good question. We don’t know exactly what the timeline is. I believe it’s basically—you can probably submit the application for forgiveness pretty soon. I know that there is a six-month window where you aren’t going to be having to pay back any of the loan. So it’s not like once the eight weeks is up, you have to submit it in two days, or else it all has to be paid back. You have a six-month window, so even if you owe any of it back, you still have six months to start making those payments.

So that’s probably the window, but you want to get that application in quickly just so you have it in your mind: a) how much you’re going to get forgiven, maybe all of it, and b) if you do have to pay some back, you can then begin to strategize how you’re going to get that money set aside to pay back. The interest rate right now is 1% on those loans, and it’s capped at 4%, so it’s a pretty good deal on those loans, even if you have to pay some of it back.

Marc Lopez
Amazing deal. Thanks so much, Patrick.