Employers who received small business loans forgivable on a tax-free basis are increasingly worried about how the program will ultimately work, and that includes whether the proceeds can be used to fund employee bonuses.
“At this point, we don’t have much guidance, so it’s just speculation,” Larry A. Campagna of Chamberlain, Hrdlicka, White, Williams & Aughtry told Tax Notes. The purpose of the Paycheck Protection Program (PPP) loans was to keep workers employed, so as long as they’re used for that purpose, the proceeds should be allowed to fund bonuses, he said.
And it’s not as if it would open the door for abuse, Campagna said, because the loan program limits the amount that can be paid to employees, which is $100,000 on an annualized basis.
“We’re talking about $15,385 maximum per person,” Campagna said, referring to the overall compensation limit of the loan proceeds for employees during the eight-week period after the business receives the loan.
The loan program was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), enacted March 27, and gave employers options to keep paying their workers during the coronavirus pandemic.
Those options include the PPP and an employee retention credit that provides a fully refundable credit against the employer’s portion of payroll taxes. However, only $10,000 in wages per employee can be counted for all calendar quarters, and the credit is capped at $5,000 per employee.
An employer must forgo that credit if it wants to apply for a PPP loan, and jump through several other hoops to qualify for the loan. But if an employer does qualify and a specific portion of the proceeds is used to fund payroll costs over the eight-week period after receiving the loan, it will be forgiven on a tax-free basis.
Guidance on the PPP has been scattered thus far; a few rounds of interim final regulations have been released, along with FAQs that are regularly updated. But several questions remain, including the most important: How will the loan forgiveness actually work?
Several groups, including the American Institute of CPAs, the National Federation of Independent Business, and the S Corporation Association, issued a statement May 12 requesting that Treasury and the Small Business Administration address the lack of clear and consistent guidance on the program.
Increasing Concern
In the meantime, practitioners hope the treatment of employee bonuses will soon be clarified because it’s an issue businesses are increasingly concerned about.
Without guidance, some lawyers are telling clients the CARES Act defines payroll costs in a way that includes bonuses, subject to the $100,00 annualized salary cap. Absent guidance, ordinary-course bonuses given to rank-and-file employees should be fine.
But Lewis Horowitz of Lane Powell PC said those businesses should pay bonuses on what they would pay if it were their money being spent; the bonuses shouldn’t be used to boost the amount of the loan forgiveness. And it wouldn’t be wise to accelerate holiday bonuses to the eight-week covered period, at least not until there is more guidance from the SBA on the topic, he said.
It’s possible that bonuses will need to be annualized, so a fraction of the bonus may be forgivable, but not all of it, Horowitz said. To avoid that, he said employers may want to consider salary increases instead — permanent increases are more likely forgivable than temporary increases. But he warned that employers shouldn’t call the increases hazard pay because they could get sued if an employee gets sick.
Ivan H. Golden of Hahn Loeser & Parks LLP agreed that bonuses should be allowed under the PPP, pointing to the broad statutory language that said payroll costs are an allowable and forgivable use of the proceeds, provided the costs are both incurred and paid during the eight-week period.
“Presumably, bonuses should count as allowable payroll costs, so long as they are both paid and related to work performed during the covered period,” Golden said. “But it is conceivable the SBA will disagree. Guidance from the SBA on this and other issues would be very helpful for employers that are struggling with how to use their loan proceeds most efficiently.”
But enrolled agent Tom O’Saben took a more cautious approach in a May 11 post on the University of Illinois Tax School blog.
O’Saben said that based on the available guidance, businesses will likely have to justify that any bonuses and raises are necessary to support their ongoing operations.
Accountants at Withum Smith+Brown PC were even more hesitant, saying in a May 6 alert that it’s unlikely forgiveness was intended to cover excess salary or forward pay, unless perhaps forward pay is the norm for the employer and it becomes due during the eight-week period.
Allowable Bonuses
Ryan Corcoran of RSM US LLP said that according to what’s been released by the SBA so far, there doesn’t appear to be a prohibition on including bonuses as payroll costs under the PPP. That said, it’s still unclear which types of bonuses are allowable, he added.
“For example, if a bonus relates to services provided in a period other than the eight-week covered forgiveness period but is paid during the eight-week covered period, is that eligible?” Corcoran asked. “The statutory language in section 1106(b) of CARES states that forgiveness is an amount equal to the sum of qualified costs incurred and payments made during the covered period.”
And while nothing appears to prevent a borrower from paying a rehire bonus or other type of bonus during the eight-week period, Corcoran said that companies should model out the expected loan forgiveness and determine if the payment of the bonus may raise an employee’s compensation past the $100,000, as prorated during the covered period
“If a borrower is trying to model out forgiveness to ensure appropriate use of the funding, it cannot ignore the loan forgiveness reductions based on head count and wages,” Corcoran said. “Expending PPP funds to increase compensation, but not taking into account the [full-time equivalent employee] haircut could lead to an unfortunate surprise during the forgiveness application process.”