ISSUE
With the interesting opportunities for loans – that may turn into grants through forgiveness – what can I spend these funds on?
SITUATION
Saltwater Christian College (SCC) is a private college exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii). They are required to file Form 990 annually.
SCC’s leadership team is considering the opportunities (that abound) with regard to Coronavirus stimulus / relief packages. They have been looking at the Payroll Protection Program (PPP) loans/grants. They call us to ask what these types of packages may be used for.
Great question we tell them!
The amount of PPP loans are generally 2.5 times your average monthly payroll for the 12 months preceding the loan application. Potentially, PPPs may be forgiven or “converted” into non-taxable grants -if certain criteria are met. The funds may be spent on compensation, benefits, rent, utilities, mortgage interest, or interest on other debt obligations that were in place at 2/15/20. However, the amount of the loan must be expended in the 8 weeks following the receipt of the loan proceeds in order to be considered for full forgiveness. Also, 75% of the loan proceeds must be spent on “payroll costs.” Note that there are other forgiveness-related provisions in addition. Your local bank and other lenders handle the PPP loan applications and the forgiveness applications.
There are A LOT of nuances when it comes to the provisions of the PPP. For more information, check out the “PPP” links on our Coronavirus Resources page which can be accessed at: www.mojacompany.com/covid-19-resources
RULES
From “SBA PPP Regulations (31 pages):
- What qualifies as “payroll costs?”
Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.
From “Dept. of Treasury PPP FAQs”:
7.Question: The CARES Act excludes from the definition of payroll costs any employee compensation in excess of an annual salary of $100,000. Does that exclusion apply to all employee benefits of monetary value?
Answer: No. The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including:
- employer contributions to defined-benefit or defined-contribution retirement plans;
- payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and
- payment of state and local taxes assessed on compensation of employees.
BOTTOM LINE
- The Paycheck Protection Program loans/grants might be a wonderful opportunity for your school – but “borrower beware.”
- The SBA published a document entitled, “FAQ Regarding Participation of Faith-Based Organizations in PPP and EIDL” that may be helpful in your institution’s decision making on this subject.
- As we write this, the availability of PPP funds is reportedly running thin.
- Please, please do your homework before applying for PPP loans – do not presume that they will automatically be converted into grants. Do the math and the projections and the forgiveness preparation.
Specific questions? Email Dave Moja
The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.
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