(Editor's Note: All Information included herein is as of April 10, 2020.)
For many, the past week has been a mad dash to apply for the Small Business Administration's ("SBA") 7a Paycheck Protection Program ("PPP") loans. Up to this point, the focus for businesses applying has been how to file, where to file, how to calculate payroll costs and what support is needed by the SBA and/or your bank.
Now that PPP loan applications have been "submitted," "approved" or "authorized," businesses wait as the SBA and banks hash out the details on how loan funds will be documented, managed and accounted for when disbursed. We don't know the exact timeline for when funds will start to be disbursed (initial indications are 10 days after "approval"), but while we wait for the "process" to be hashed out, it is a good time for borrowers to begin focusing on their own process for documenting and managing these funds so as to maximize the amount of qualifying loan forgiveness.
One of the attractive features of a PPP loan is the potential for a portion, or potentially all, of the loan to be forgivable. The amount of forgiveness will be equal to the sum of the following costs incurred and payments made during the eight-week period after receipt of the PPP loan funds:
- Payroll costs (same definition used in calculating the amount you can borrow under a PPP loan)
- Payroll costs may be limited if there is a reduction in:
- The business's "average number of full-time equivalent employees per month" employed during the eight-week period versus either:
- February 15 ,2019 to June 30, 2019, or
- January 1, 2020 to February 29, 2020 (the period chosen for this comparison is at the discretion of the borrower)
- Seasonal employers have to use the February 15, 2019 to June 30, 2019 period for comparison
- An employee's (those making less than $100,000 on an annualized basis) total salary or wages during the eight week period that is more than 25 percent less than the total salary or wages of the employee during the most recent full quarter (we anticipate this to be Q1 2020) during which the employee was employed prior to the eight week period
- If these reductions occur between February 15, 2020 and April 26, 2020 (30 days after the date of the act) the reduction can be excluded from reducing the amount of loan forgiveness, if by June 30, 2020 the reduction has been eliminated (if the employee is hired back or their total salary or wages are restored to the pre-eight-week period amount)
- Interest on a "covered mortgage obligation" - a covered mortgage obligation is any indebtedness or debt instrument incurred in the ordinary course of business that:
- Is a liability of the borrower
- A mortgage on real or personal property, and
- Was incurred before February 15, 2020
- Excludes any prepayment of or payment of principal
- Rent - the rent paid must be obligated under a leasing agreement that was in force before February 15, 2020
- Utilities - includes payments for a service for the distribution of electricity, gas, water transportation, telephone or internet access for which service began before February 15, 2020
Subsequent guidance issued after the CARES Act was signed into law, indicates that the total of these amounts is further limited to a 75/25 percent split, with 75 percent consisting of payroll costs and the remaining 25 percent consisting of interest, rent and utilities.
What should you be doing to make sure you maximize your loan forgiveness? Here is a list of suggestions that may make the process of identifying these costs and therefore reporting these amounts easier:
- If possible, set up a separate checking account for the PPP loan fund proceeds. Having a separate account for just these funds allows for only PPP loan fund transactions to be recorded in the account, preventing any co-mingling of the PPP loan funds with other existing funds and the need to separate or reconcile which funds were used for qualifying transactions.
- Calculate the following for the relevant time periods:
- Average number of full time equivalent employees per month - at this time, there is limited guidance on how to calculate this number. The CARES Act language indicates, "The average number of full-time equivalent employees shall be determined by calculating the average number of full-time equivalent employees for each pay period falling within a month."
- If this information isn't part of your regular payroll reports, it may make sense to request it from your payroll provider (some providers have special reports they can produce as a result of gearing up for PPP loans).
- If you do your own payroll reporting, it may make sense to begin isolating this information to perform these calculations, so you are familiar with the data when it comes time to report.
- Salary or wages for employees in the quarter prior to the eight-week period. We anticipate for most businesses this will be January 1, 2020 to March 31, 2020 (Q1, 2020).
- Identify reductions in employee count or salary and wages that have occurred so you can determine whether reversing these reductions can occur before June 30, 2020.
- For interest, rent and utilities keep your supporting statements readily available for the next couple months.
If you begin planning now for reporting and summarizing the required supporting amounts of qualifying expenses for PPP loan forgiveness, you will be able to maximize the amount of the PPP loan that is forgiven.
The SBA continues to produce new and revised guidance for PPP loans. As additional guidance is issued, please be aware it may result in changes to the above information. We encourage you to refer to our COVID-19 Resource Center, for updates.
If we can assist you with your PPP loan questions, please call any Sponsel CPA Group Team member or our PPP Task Force colleagues listed below: