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Paycheck Protection Program

Paycheck Protection Program law eases loan forgiveness

Sept. 1, 2020
Provided that you properly account for and document your PPP expenditures, the law allows most doctors to receive 100% loan forgiveness. Here is what the new law includes.

On May 28, 2020, the House of Representatives passed HR 7010, the Paycheck Protection Program Flexibility Act of 2020 (PPP) by a vote of 417-1, and the Senate approved the measure on June 5. Provided that you properly account for and document your PPP expenditures, the law allows most doctors to receive 100% loan forgiveness. Here is what the new law includes:

• It reduces the amount of the PPP loan that must be spent on payroll-related costs from 75% to 60%, thus increasing the amount to be spent on rent, utilities, and interest from 25% to 40%.

• It allows you to triple the time period you have to use the PPP funds, from eight to 24 weeks. This extension is not automatic, so make sure that you elect to use the 24-week option when you file your application for PPP loan forgiveness.

• It extends the time period from June 30 to December 31, 2020, for rehiring all staff to avoid a reduction in loan forgiveness. Furthermore, you will not be penalized for any reduction in staff if you can document either of the following as of December 31, 2020: (1) that you were unable to rehire your staff who were previously employed by you on February 15, 2020 (and were later laid off or furloughed) or hire similarly qualified workers as replacements; or (2) that you were unable to return to the same level of business activity (compared to February 15, 2020) due to compliance with governmental and customer safety requirements.

While any amounts not forgiven still must be repaid, the law extends the time period before repayments must begin from six months to one year. Furthermore, the time period for PPP loan repayment in full is extended from two years to at least five years for new PPP loans taken out after the date of enactment.

Previously, you were not eligible to defer payment of payroll taxes if you received a PPP loan. Now you’re allowed to defer payments of payroll taxes otherwise due in 2020 by paying 50% by December 31, 2020, and the remaining 50% by December 31, 2022, even if you receive a PPP loan.

Revised loan forgiveness application and rules

While these relaxed rules will allow most doctors to qualify for 100% loan forgiveness, you must still “touch all of the bases.” It requires filing a complete and accurate loan forgiveness application along with all required documentation. On June 16, 2020, the Small Business Administration (SBA) released revised application forms for PPP loan forgiveness (Form 3508 and new Form 3508EZ). The SBA also issued some new rules for determining loan forgiveness.

The major surprise was the change in the maximum amount of wages eligible for PPP loan forgiveness. Under the original rules, the maximum wages eligible for forgiveness over the eight-week payment period was capped at $15,385 (8 weeks ÷ 52 weeks × $100,000), which applied to both doctors and staff. When the law increased the payment period from eight weeks to 24 weeks, most assumed the cap on wages eligible for forgiveness would triple to $46,155 as well. That’s the case for all employees who are not owners (associates and staff) under the new rules. However, the revised limit for owner-employee wages eligible for forgiveness has been increased to only $20,833 “in order to maintain the intent of Congress.”

Moreover, under the revised rules, group health insurance premiums paid on behalf of self-employed (Schedule C) doctors, those operating in a partnership (Form 1065), and owner-employees operating as an S corporation (Form 1120S) are not eligible to be included in the loan forgiveness amount.

Normally, these detrimental changes would make it difficult to achieve 100% loan forgiveness. However, if you elect to increase the time period over which you spend the PPP funds from eight weeks to 24 weeks, achieving full loan forgiveness should not be a problem. Under the rules, up to 40% of PPP funds can be spent on rent, utilities, and mortgage interest (nonpayroll costs). While the amount of PPP funds that can be spent on owner wages and health insurance has been limited, the remaining PPP funds can be spent on staff payroll costs over the expanded 24-week timeline to achieve full loan forgiveness.

Contact your CPA

The rules for PPP loan forgiveness are highly complex and have been constantly changing since the program began in late March 2020. Contact your CPA to make sure you are properly categorizing and documenting your PPP expenses that are eligible for loan forgiveness. Then, for the best results, make sure your CPA completes your application for PPP loan forgiveness (Form 3508) and files it before the deadline.  

JOHN K. McGILL, JD, MBA, CPA, publishes The McGill Advisory newsletter through John K. McGill & Company Inc., a member of the McGill & Hill Group LLC, your one-stop resource for tax and business planning, practice transition, legal, retirement plan administration, CPA, and investment advisory services. Visit mcgillhillgroup.com.

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