Small Business Paycheck Protection Program Update
It has been almost two weeks since the application process has begun for the Paycheck Protection Program (PPP) loans (depending on your lending institution). As you begin to receive your loan proceeds it is important to understand what these proceeds can be used for and how you can maximize the amount of the loan that is forgiven. The information provided in this email will list the items that were included in the Cares Act to be considered authorized or unauthorized uses of the funds. There will be final regulations issued by the SBA that could, and most likely will, change certain aspects of the Cares Act, including what is authorized and/or unauthorized uses of the PPP funds. That being said, we are stating the most recent information provided by the SBA. In addition, there should be records that show how the funds were used for the authorized purposes listed in the CARES Act. Any unauthorized use of the funds have significant consequences.
The SBA has also issued new guidance on calculating the maximum loan amount for individuals with self-employment income who file a Form 1040, Schedule C, Profit or Loss from Business. The new guidance also directs that self-employment income of partners in a partnership (or LLC filing taxes as a partnership) be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application. Individual partners may not submit a separate PPP loan application as a self-employed individual. Please contact us for more information regarding this calculation.

The funds are to be used during the eight week period from the DATE OF THE LOAN.

CANNOT be used for:
  • Any compensation of an employee whose principal place of residence is outside the United States
  • The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary
  1. This breaks down to the maximum forgivable compensation per employee of $1,923 per week.
  2. The $100,000 salary limitation does not include healthcare, retirement benefits, and state and local taxes
  • The employer’s federal employment taxes between February 15, 2020 and June 30, 2020 which would include the employer’s share of FICA and Railroad Retirement Act taxes.
  • Employee portion of health insurance and 401(k) WITHHELD from the employee’s paycheck.
  • Qualified sick and family leave wages for which a credit is allowed under section 7001 and 7003 of the Families First Coronavirus Response Act

CAN be used for:
  • Payroll costs including the following as described by the CARES Act
  1. Salary
  2. Wages
  3. Commission
  4. Similar compensation
  5. Cash tips
  6. Payment for vacation, parental, family, medical or sick leave
  7. Separation or dismissal
  8. Payment for the provision of the employer portion of the employee benefits consisting of group health care coverage, including insurance premiums, and retirement
  9. Payment of state and local taxes assessed on compensation of employees (state unemployment)
  • Interest on mortgages incurred before February 15, 2020
  • Interest on any other debt incurred before February 15, 2020
  • Rent payments on leases dated before February 15, 2020
  • Utility payments under service agreements dated before February 15, 2020
  • Refinancing an SBA Economic Injury Disaster Loan (EIDL) loan made between January 31, 2020 and April 3, 2020

Of the amount forgiven 75% or more MUST be used on payroll costs. Only 25% of the forgivable amount can be used for non-payroll costs.
At this point, the SBA has not issued regulations regarding a reduction of the loan forgiveness amount, but they have stated you must maintain your staff and payroll or your forgiveness amount will be reduced. Below are examples of how your forgiveness amount could be reduced if your staff and/or payroll is reduced.
Workforce Reduction
  • The amount of loan forgiveness is reduced by percentage change of the following: Monthly average full time equivalent (FTE) employees during the covered period (eight week period after the loan date) divided by the monthly average FTE employees of either February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020.
  1. Example: ABC Company received a PPP loan. After the covered period ABC Company determines its potential loan forgiveness amount is $100,000. The average number of FTEs during the covered period is 100. The average number of FTEs from February 15, 2019 to June 30, 2019 is 200. Therefore since the workforce has been reduced by 50% (100/200) their potential loan forgiveness amount would be reduced by 50% from $100,000 to $50,000.
Salary Reduction
  • The amount of loan forgiveness is reduced by any reduction in salary of certain employees (only employees that earn less than an annualized rate of $100,000) that is in excess of 25% of the total salary of the of the employee during the most recent full quarter during which the employee was employed.
  1. Example: ABC Company received a PPP loan. After the covered period ABC Company determines its potential loan forgiveness amount is $100,000. Employee A earned $20,000 in the first quarter of 2020. If ABC Company reduces Employee A’s earnings by more than $5,000 a quarter (based on 25% of the of the employees most recent full quarter; 25% x $20,000 = $5,000) the amount in excess of $5,000 will reduce the loan forgiveness amount.
Relief for Re-Hiring
  • If you are able to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020 by June 30, 2020 you will not be required to reduce your loan forgiveness amount.

About Shelton & Company, CPAs, P.C.

Shelton & Company, CPAs, P.C. is a CPA firm specializing in the accounting needs of construction contractors and their related companies. If you have any questions about the information provided here or for more information about our firm, please contact us at 1-800-446-2534 or visit us on the web at