2020 Year-End Tax Guide

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THE MARCUM 2020 YEAR-END TAX GUIDE

Top Five Questions about the Paycheck Protection Program

Q4

Q5 Can I receive full forgiveness even though I could not maintain my full-time equivalent (FTE) employee count?

My business has been profitable this year. Will I have to repay all or part of my loan?

Yes, if sufficient qualified costs are incurred. The reduction in FTEs only reduces eligible costs, not the loan forgiveness amount. It’s a key difference that allows many businesses to avoid having a loan that requires repayment. Consider the following scenario: Loan amount $100,000 Look back period FTEs 10 Covered period FTEs 7 Eligible expenses $150,000 ($120,000 payroll, $30,000 non-payroll) Eligible expenses ($150,000) is reduced by the FTE reduction percentage (30%), which is $45,000, leaving $105,000 of net eligible costs ($150,000 - $45,000). Since $105,000 of eligible costs is still more than the loan amount of $100,000, the entire loan is still forgiven.

The answer is probably not, but it’s all based on facts and circumstances. When the business applied for the PPP loan, it certified that the current economic uncertainty made the loan request necessary to support ongoing operations. Since then, guidance has been issued indicating that loan amounts under $2 million were assumed to have met this economic uncertainty standard. Therefore, if a loan is less than $2 million, the bright line test is passed, and business owners do not have to worry about 2020 profitability. For loans in excess of $2 million, the borrower will likely have to demonstrate economic need. Note that many loan certifications were made at the beginning of the pandemic, when nobody knew what would happen in the weeks following the application, during which the loan proceeds needed to be used. We recommend businesses gather documents that support projections at the time of application, such as real-time discussions held among owners, diagrams and projections for what-if scenarios, what credit or equity facilities were available, and the anticipated economic impact of the repayment of other loans, for example. Of course, each business is unique in what information was available to it and the factors included in its decision-making process.

The above discussion reflects the five most common questions Marcum receives about PPP loan forgiveness. Until full answers are known, we suggest taking a practical, conservative planning approach while we await guidance from the authorities. We suggest consulting with your advisors about various scenarios and planning for several possibilities.