To help manage your company’s business and employee risks related to COVID-19, this article covers best practices for minimizing audit risks, safety standards, and the return of the workforce based on legal guidance as of June 2020. It is likely that the federal government will continue to issue evolving guidance and interpretations. Keeping up with new changes will help your company ensure success in today’s changing world.
Minimize Audit Risks Related to Pandemic Recovery
The Coronavirus, Aid, Response, and Economic Security Act (CARES Act)1 created the Special Inspector General for Pandemic Recovery (SIGPR)2 to audit the Paycheck Protection Program (PPP)3 loans, Economic Disaster Injury Loan (EIDL),4 and payroll tax credits. The SIGPR will audit any PPP loans of $2 million or more, but also can audit smaller loans. Note that the Paycheck Protection Program Flexibility Act of 2020 (PPP Flexibility Act) was signed into law on June 5, 2020 and provides relief to businesses that received PPP loan proceeds and are preparing to seek loan forgiveness within the requirements of the CARES Act.
A company that receives these loans must retain proper documentation to substantiate that it qualified for the loan, was accurate and truthful in the loan application documents, properly spent the funds for permissible purposes, and has corroborating support. The SIGPR may audit and pursue recovery of funds for up to five years.
PPP Permissible Uses
At least 60% of PPP loan funds must be used for payroll costs (as revised under the PPP Flexibility Act), but the rest may be used for the following purposes:
- Mortgage interest payments (excludes mortgage prepayments or principal payments)
- Rent
- Utilities
- Interest on any other debt obligations incurred prior to February 15, 2020
- Refinancing an EIDL made between January 31, 2020 and April 3, 2020; the PPP loan must be used to refinance an EIDL loan if that was used for payroll costs
PPP Payroll Costs: Defined
The PPP defines payroll costs to include salary, wages, commissions, tips, payment for vacation, family, medical or sick leave, severance payments, and state and local taxes on employment compensation (including state unemployment taxes). These payroll costs include expenses related to continuing group health care benefits during periods of paid sick, medical, or family leave; insurance premiums; and employee benefit plans such as 401k plans or paid time off (PTO).
As discussed below, PPP borrowers may elect either an eight or 24-week covered period, except that borrowers that received their PPP loan on or after June 5, 2020 must use a 24-week covered period. The salary, wages, commissions, or tips are capped at $100,000 on an annualized basis per employee, which equals approximately $15,385 for an eight-week covered period, or $20,833 for a 24-week covered period in which a company must use the PPP funds in order to be eligible for loan forgiveness.
Payroll costs do not include compensation of an employee whose principal place of residence is outside the U.S. (e.g., temporary visas such as H-2B and H-2A visas), compensation of an individual employee in excess of an annual salary of $100,000, federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, or qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act (FFCRA).5
PPP Loan Forgiveness
A PPP loan, including principal and accrued interest, is eligible for forgiveness up to the amount actually spent by the borrower during the applicable covered period. PPP borrowers that received their PPP loan before June 5, 2020 may elect either an eight or 24-week covered period. This election is made when the borrower applies for loan forgiveness. PPP borrowers that received their PPP loan on or after June 5, 2020 must calculate loan forgiveness based on a 24-week covered period. The maximum amount that may be forgiven consists of the eligible costs incurred and payments made during the applicable covered period, which begins on the date the loan is originated.
Origination occurs on the date the lender makes the first disbursement of loan funds to the borrower. Costs incurred outside the covered period are forgivable if the actual payment is made during the covered period (e.g., prepaid rent or payroll). Forgiven loan amounts are not taxable as cancellation of debt income for federal income tax purposes.