On May 15th the SBA issued Form 3508 "Loan Forgiveness Application" as well as instructions on what constitutes forgiveness. Here are the highlights. Please consult your accountant should you need further clarification.
On June 5th the President signed the Paycheck Protection Flexibility Act, which changed many rules for forgiveness in the taxpayer's favor. Guidance is still needed on these exact changes.
One June 17th the SBA issued Form 3508EZ, a simplified version of Form 3508 for those who did not reduce their workforce or hours by more than 25%.
- You have 24 weeks from the day you receive the funds to spend the money in order for it to be forgiven. If you are running bi-weekly or more frequent payroll, you can start your 24 weeks on first pay date after you received money.
- At least 60% of the amount received must be used for payroll. 40% can be used for utilities, rent, and mortgage interest.
- Utilities, rent, and mortgage interest payments must have been in service before February 15, 2020.
- Utilities include electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020
- "Payroll costs" is a formula of compensation + employer provided health insurance + employer provided retirement + employer state and local taxes.
- Compensation for payroll calculation includes gross wages, bonuses, commissions, vacation pay, etc. Anything that would go on a W-2 as wages.
- The maximum amount per employee (non-owner) that will count towards compensation is $46,154 ($100,000 * 24/52).
- For self employed individuals and partnerships - "payroll" for owners will be 2.5/12 of their 2019 self employment income, with a limit of $100,000. The max per self employed individual during this time is $20,833 ($100,000 * 2.5/12).
- Forgiveness will be reduced if 75% is not used for payroll, if you reduce the size of your workforce in comparison to the number of employees you had from Jan 1, 2020 to Feb 29, 2020, or if compensation was reduced by more than 75% per person.. You can hire back employees up until December 31st. Also if an employee leaves on their own or does not want to be rehired you can exclude them from the reduction calculation. The Flexibility Act also added a few additional exclusions, including the demonstrate an inability to hire similarly qualified employees before December 31st or inability to return to the same level of business activity as such business was operating at prior to February 15, 2020. Please see Form 3508 for detailed instructions.
- We do not believe you need to have a separate bank account for the loan forgiveness expenses. We believe you will need to show the bank payroll reports and receipts in order for the loan to be forgiven.
- IRS Notice 2020-32 states that all expenses that are forgiven are not deductible for tax purposes.