PPP Use of Funds, Forgiveness and Tax Considerations

Published by BradyRenner CPAs | May 13, 2020

Good day! Like you, we have found the details of the SBA’s Paycheck Protection Program (PPP) both confusing and constantly changing. Nonetheless, we’re working closely with our accounting colleagues and banking partners to offer the most precise and accurate support that we can to each of you.

With that in mind, here are some important updates on the PPP program worth noting. Please note that this information is based upon recent clarifications from the SBA and, while intended to be generally reliable, could still be subject to additional changes or adjustments. Please consult with us as questions arise.

Understanding PPP Use of Funds

The cornerstone of the Paycheck Protection Program (PPP) is its intention to provide support for up to eight (8) weeks of payroll costs, including benefits. Funds can be used for selected other priorities but in order to qualify for loan forgiveness, at least 75% of the loan proceeds must be used to cover payroll costs. This has caused enormous debate and calls for reducing the percentage requirement, but as of now, the 75% threshold stands.

There are also activities you should not consider using PPP funds for, including paying down debt outside of mortgages; paying bonuses; paying items that could be considered questionable or unnecessary; and anything else that could be questioned.

PPP Forgiveness for Self-Employed Persons

Sole proprietors and 1099 contractors are indeed eligible to participate in the PPP program. However, the parameters applicable to them are different than those for traditional enterprises. In the case of sole proprietors and contractors, the loan is not based upon average payroll expenses but is rather determined by the net profit from 2019 divided by 12, which results in a monthly average profit. This number, multiplied by 2.5 times, determines the PPP loan amount. Put another way, it generally provides you with the equivalent of 8-10 weeks of net profit.

Since sole proprietors and contractors do not have traditional payroll expenses, the loan forgiveness process is different. In this case, the calculation is called Owner Compensation Replacement, which consists of the reported net income you reported in 2019 on your Schedule C, multiplied by 0.154. Once that amount is defined, the remainder of the PPP funds you receive must be spent on eligible business expenditures like mortgage interest, rent, utilities, etc. Note that this can include home office expenses when properly defined and categorized.

Tax Considerations for PPP Loans

It is important to understand the tax implications of the PPP program. First off, the PPP loan forgiveness is already tax-free, which is extremely important and positive to note. It is equally important to be aware that you cannot deduct expenses you claim against your PPP loan on your taxes, because that would constitute ‘double-dipping’ (i.e. receiving funds tax-free, then deducting the expenses funded by those dollars against one’s taxable income). Significantly, several members of congress plan to introduce a bill to make PPP expenses tax deductible. They are saying that these expenses were always meant to be tax deductible and the IRS is overstepping its authority. That being said, no law has currently been passed.

In addition, there are limitations as to what can be deferred or deducted as it relates to payroll taxes. The CARES Act specifies that employers may defer depositing their Social Security contribution (typically 6.2% of wages) from the date of the act’s signing into law, through the end of 2020. However, the 1.45% Medicare tax is not deferrable, so please make a note of this distinction. Also, with the Social Security defferal, an employer must immediately resume Social Security contributions once the entity receives PPP funding.

As always, these are just a few key points and all noted items are still subject to change, modification, clarification or adjustment. Nonetheless, these updates should allow you to increase your confidence and clarity about how to make the most of this program during these most unusual times.

Please let us know if we can be of assistance in any way with your PPP loan or any other aspect of your business operations and finances at this time.

Thank you!


Matt Brady, CPA

Image Credit: The White House (Flickr @ Creative Commons)