Despite the early lack of guidance and stressful process of preparing, together we were able to successfully submit many of your applications for the Payroll Protection Program. We are starting to see approvals and acceptance from the SBA. Nearly 50% of the funds have been claimed and Secretary Mnuchin is looking to secure another $250 billion for the program.
If/when you are approved for a loan, it is important to properly plan how to apply those funds and the feasibility of achieving loan forgiveness. Below is guidance through the next phase of the program.
Within eight weeks of receiving your loan proceeds, you must use your funds to cover the following costs:
Within eight weeks of receiving your loan proceeds, you must use the funds to cover the following costs:
- Salaries, wages, tips, self-employment earnings - capped at $100,000 annually per employee
- Employee Benefits – which include pay for vacation time, paternal, family, medical and sick leave; allowance for separation or dismissal; group health care benefits (premiums); and retirement benefit payments
- Employer state and local taxes assessed on compensation
- Interest on debt obligations incurred before February 15, 2020
- Rent agreements in force before February 15, 2020
- Utilities for service that began before February 15, 2020
In addition, the business has to consider the following rules to ensure 100% forgiveness:
- At least 75% of the loan proceeds must be used for payroll costs; the other costs listed above cannot exceed 25% of loan proceeds
- Maintaining headcount – If your business reduces full-time equivalent employees, the forgiveness will be reduced. The formula for that reduction is the average monthly full-time equivalent employees for the eight weeks following receipt of the loan divided by the average number of monthly full-time equivalent employees from February 15, 2019 through June 30, 2019. For new businesses, the denominator is the average number of monthly full-time equivalent employees from January 1, 2020 through February 29, 2020.
- Further reductions will be applied if, for any employee making less than $100K annually, wages are reduced by more than 25%
- If by June 30, 2020, you restore any headcount or wage reductions made between February 15, 2020, and April 26, 2020, you will avoid resulting reductions in the amount of loan forgiveness
Failure to meet any of the above criteria will not disqualify you from loan forgiveness entirely. However, it will reduce the amount that would be forgiven. For example, a reduction in full-time employee headcount by 10% would result in forgiveness of 90% of the loan.
Economic Injury Disaster Loans:
If you applied for the Economic Injury Disaster Loan Emergency Advance, the amount of the advance ($10,000 max) will reduce the forgivable amount of the PPP loan
At the completion of the eight weeks, you will begin the process of applying for loan forgiveness. This will be done through the bank where you applied for the PPP loan. You will need to have the following records ready at that time:
- Payroll Records (during the eight-week period)
- Payroll processing reports
- Cancelled checks
- Schedule of payments
- Group healthcare benefit invoices
- Retirement benefit payments
- Additional Obligations
- Average full-time headcount by week for the periods of February 15, 2019 to June 30, 2019 and February 15, 2020 to June 30, 2020
- Comparison of average weekly compensation reported on the application to actual compensation paid during eight-week period to ensure no reductions greater than 75%
- Invoices and Proof of Payment (for the covered period)
- Interest on debt obligations
Remainder of Proceeds:
At the end of the eight-week period, if funds remain unutilized or you fail to meet all required criteria, the proceeds will convert to a loan, payable within 24 months at an interest rate of 1% per annum. There is a 6-month deferral on the initial repayment, making the true term of the loan 18 months; however, interest does accrue over the entire 24-month period. There are no prepayment penalties or fees. Finally, the lenders can purchase the loans and possibly extend those terms.
Depending on the client’s industry and current working capital, owners are met with a difficult decision:
- Attempt to restore your employee headcount quickly following receipt of the PPP loan, even if the business has not yet reopened, so that 75% of loan proceeds are spent on payroll costs or
- Accept at least some portion of the PPP loan will not be forgiven and will be due in two years