A key feature of the CARES Act Paycheck Protection Program (PPP), which authorized $670 billion in funding for qualifying businesses, is the possibility of loan forgiveness.
PPP loans may qualify for forgiveness if the funds are used to cover certain payroll, benefits, rent and utility expenses, during the 8-week period that starts immediately following the receipt of the funds (8-week period).
Although the Federal government has endeavored to disburse funds into accounts of small business owners as quickly as possible, final Small Business Administration (SBA) guidance on the topic of forgiveness has not been issued. This has left many of our small business clients with more questions than answers.
The purpose of this communication is to provide some key points to consider that may bring our small business owner clients some clarity and address some of the more common questions we’ve been receiving on the topic of PPP loan forgiveness – given what we know today.
It’s important to note that additional guidance and rules may be issued by the SBA and/or Treasury Department that may require different conclusions, analysis, documentation and advice. We will keep you informed as we learn more.
For our small business owner clients, here are some of the key points to consider regarding PPP Loan Forgiveness (we also provide links below that offer more specific information and resources available):
- You must apply directly with your PPP lender after the 8-week period following the receipt of your PPP loan proceeds. Since principal and interest payments on the loan are deferred for six months, we foresee most businesses applying for forgiveness during the two to three-month period after the eight-week timeframe ends.
- Only qualified expenses incurred during the 8-week period will qualify for forgiveness. These expenses include payroll, rent, utilities and interest on mortgages. More specifically, payroll costs include salary, wages and tips, up to $100,000 annualized (or $15,385 maximum for the eight-week period) per employee, plus benefits for employees. Employee benefits include employer-paid healthcare expenses, retirement contributions and state taxes. Note: For a sole proprietor or independent contractor, wages, commissions, income, or net earnings for self-employment are also capped at $100,000 on an annualized basis.
- Pay attention to percentages! At least 75 percent of the forgiven loan amount must be used to cover “payroll costs” (wages, health benefits, retirement plan contributions and state taxes on compensation) as defined for the loan application process. This leaves 25% of the loan to be used for those other expenses like rent, mortgage interest and utilities.
- The PPP ties loan forgiveness to two data points that are company-specific: Employee compensation and full-time equivalent employee (FTEE) count. Loan forgiveness will be reduced dollar for dollar by a reduction in employee compensation during the loan period that is greater than 25% of the total salary or wages of the employee during the most recent full quarter during which the employee was employed prior to the loan period. Therefore, if you plan to use 25% of your PPP loan to pay rent, you should ensure that doing so does not reduce wages by greater than 25%. Remember: you can always use more than 75% of the PPP loan on payroll costs. There is no obligation to use the PPP for non-payroll expenses.
- If employees were furloughed or laid off prior to loan disbursement, you should strive to bring those employees or replacement workers back on payroll as quickly as possible. There is no requirement for employees to actually perform normal work duties. Many businesses are currently closed by public order. Whether recalled workers come to work and perform services or stay at home and do nothing, either is acceptable under PPP. Decreasing your full-time employee headcount will reduce your loan forgiveness amount. Likewise, decreasing salaries and wages by more than 25% for any employee that previously made less than $100,000 annualized will reduce your loan forgiveness amount. Re-Hiring: You have until June 30, 2020 to restore full-time employment and salary levels for any reductions made between February 15, 2020 and April 26, 2020.
- Some employers are considering additional discretionary retirement plan contributions for employees as a way of helping workers deal with the declining stock market and having more of their loan forgiven. Retirement plan contributions are not part of the $100,000 wage cap.
- You will be required to provide proof of payment of PPP qualified expenses. Recipients should immediately organize documentation and procedures in accordance with the current rules and expectations. These should include payroll reports from an internal or external payroll provider, proof of payroll payments, cancelled checks, ACH confirmations, wire confirmations, invoices, statements or other forms of receipt.
- All payments for rent, utilities, and mortgage interest must be for leases, mortgages, or utility services that were in existence as of February 15, 2020. We recommend that borrowers gather lease agreements, mortgage documents, and utility bills for several periods prior to February 15, 2020, to confirm the existence of those obligations and services prior to that date.
- There is no requirement for borrowers to establish separate bank accounts or separate general ledger accounts for tracking PPP loan proceeds and qualified expenses. In fact, given the difficulties with later classifying those expenses for financial statement and tax reporting, we recommend against establishing new G/L codes for these expenses.
- There is no guidance currently that clarifies whether expenses must be tracked on a cash basis for the 8-week period beginning on the date the loan proceeds are disbursed (which could be the middle of a pay period ) or if borrowers will be allowed to use the eight week pay beginning with the pay period starting after the first loan disbursement. Pending updated guidance, we suggest tracking expenses and receipts for eight weeks after the first loan disbursement and perhaps continue until the pay period after the end of the 8-week period. I have been suggesting that PPP recipients change their payroll frequency to weekly during the 8 week period.
- Understand the interaction between PPP and EIDL (Economic Injury Disaster Loan). Many companies received (or will receive) both a PPP and EIDL loan. While the CARES Act permits borrowers to do so, spending the money on the same costs is prohibited. For example, companies may not use both the PPP and EIDL for payroll for the month of May 2020. In fact, if a borrower uses EIDL funds for payroll costs, its PPP loan must be used to refinance the EIDL loan. Additionally, proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.
- Be your own advocate! Reach out to your PPP bank regularly for guidance on their process and requirements for PPP forgiveness, and be nice. Sadly, for many banking representatives, the velocity and magnitude of the PPP process (and other loan funding programs) has put a massive strain on bank employees. Be nice and you’ll likely stand out with your banking reps. Also, the Treasury Department updates its CARES Act guidance website regularly.
- Maintain communication with your financial, accounting and legal advisors to maximize your chances for PPP forgiveness and to distill future guidance that is published. Although news media outlets do a good job of covering the PPP from a high level, the nuances needed for PPP recipients to make good strategic decisions with respect to their PPP Funds will require a close reading and understanding of the rules and requirements; and reliance on a trusted team of experts.
We will keep you informed as we learn more on the topic of PPP and the loan forgiveness feature. In the meantime, please call me or a member of my team with questions. As always, we are committed to doing everything in our power to ensure we are providing you with support, guidance and reassurance during this challenging time.
Warm regards,
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Rick W. Campbell
MBA, ChFC®, BFA™, AIF®
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Helpful Links
https://home.treasury.gov/policy-issues/cares
https://home.treasury.gov/system/files/136/PPP--Fact-Sheet.pdf
https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program#section-header-7
https://www.forbes.com/sites/brianthompson1/2020/05/04/what-you-can-do-now-to-maximize-paycheck-protection-loan-forgiveness/#69bc8e3b3efc
https://www.aicpa.org/interestareas/privatecompaniespracticesection/qualityservicesdelivery/sba-paycheck-protection-program-resources-for-cpas/sba-payroll-protection-program-faqs.html
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Financial Independence
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