“My company took a PPP loan, but I’m confused about what expenses can actually be forgiven. Help!”
It’s certainly been confusing, especially when the forgiveness period was expanded. Let’s break it down. As of August, payroll expenses must make up at least 60% of your PPP spending. The remaining 40% can cover rent or lease payments, mortgage interest, and utilities.
Salary, wages, commissions, and tips qualify as allowable expenses. But PPP forgiveness also covers:
- payments for vacation, parental, family, medical, and sick leave;
- payments used for group health care benefits, including insurance premiums;
- employer contributions to defined benefit or defined contribution qualified retirement plans; and
- state and local taxes assessed on compensation.
What’s not covered? Independent contractor or freelance labor is not an allowable expense, and neither are employees living outside the United States. And although PPP funds can be used to pay down for interest on other debt, it cannot be included in forgiveness.
“It’s been such a challenging time for my team, I’d like to give them a bonus with my remaining PPP funds. Can that be forgiven?”
That’s very kind! However, employee bonuses are a gray area. If your company typically gives bonuses, and you have the financial documents to prove it, then yes, it’s an allowable PPP expense. But, if this is a one-time gift, it may not be forgiven. Your lender will determine that during the loan forgiveness application process. Worst case scenario, the total bonus dollars will be subject to the loan terms of 1% interest and must be paid back in two years.
“Is there any reason I can’t use all of the money on payroll?”
No, there is nothing stopping business owners from spending the full amount of the loan on payroll. Go for it, if you can. It’s the best way to ensure you’ll qualify for forgiveness.
“Can a business claim a tax deduction for expenses that result in forgiveness of a PPP loan?”
No. A tax deduction is generally available for all ordinary and necessary expenses paid or incurred during the year in carrying on any trade or business. Business-related payroll costs, mortgage interest, rent, and utilities are, therefore, normally deductible. However, no deduction is allowed for any expense that is otherwise exempt from tax. This prevents a double tax break.
