MAXIMIZE PPP LOAN FORGIVENESS - HOW TO PLAN, SPEND AND TRACK
NOTE: This article was finalized on May 15, 2020 prior to the issuance of the SBA loan forgiveness application on May 16, 2020. Check back frequently for updates.
Over the past few weeks, the scramble to acquire Paycheck Protection Program (PPP) loans has given way to uncertainties around how to spend the money without jeopardizing the opportunity for loan forgiveness. Please note that the first link above is to the SBA's PPP Loan Forgiveness application.
Once your PPP loan funds, you have eight weeks to use the money on approved expenditures. Guidance from the SBA has been to spend 75% of the loan proceeds on payroll expenses and the remaining 25% on mortgage interest, rent, and utilities. Specifically, qualified expenses include:
Payroll Expenses (75% of PPP loan funds should be applied to these expenses):
Gross payroll costs including, salary, wages, commissions or similar compensation i.e.: cash tips (up to $100k of annualized pay per employee – in other words, for eight weeks a maximum of $15,385 per FTE)
State and local taxes assessed on the compensation of employees
Costs related to group insurance premiums (medical, dental and vision) and the continuation of group health care benefits during periods of sick, medical, or family leave
Employer retirement plan contributions, including 401k matches and profit-sharing contributions
Additional Approved Expenses (25% of PPP loan funds should be applied to these expenses):
Mortgage interest payments and rental payments under a lease agreement
Utilities (from schedule C for self-employed individuals) including, electricity, gas, water, transportation, telephone, and internet access for service which began prior to February 15, 2020. Additional guidance includes gas used when driving a business vehicle. Other common utilities such as garbage collection or security monitoring may also be classified as a utility but confirm with your lender.
Interest payments on any debt obligations that were incurred before February 15, 2020 (excludes a capital lease)
Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020
PPP money spent on the above forgivable expenses in the 75/25 percent proportions is the first step to loan forgiveness. Full loan forgiveness is subject to maintaining employee headcount and compensation levels. Any amount of the loan not forgiven must be paid back to the bank in two years at 1% annual interest.
Sounds simple, in theory, but when met with reality we end up with a lot of questions and a great deal of uncertainty.
While we await further loan forgiveness guidance from the SBA, FAL has compiled its recommendations to prepare for the process as well as created a Q&A from some of our most frequently asked questions.
Please also check out the SBA loan forgiveness application using the link at the top of the page.
RECOMMENDATIONS FOR DOCUMENTATION AND PPP EXPENDITURE PLANNING
SAFE HARBOR FOR PPP BORROWERS UNDER $2 MILLION
Borrowers with a PPP loan under $2 million have safe harbor and are considered by the SBA and Treasury to have satisfied the loan certification criteria.
Borrowers with loans greater than $2 million will be subject to review by the SBA for compliance with program requirements. It is important to document your basis for making the good faith certification of necessity. If, upon review, the SBA determines that a borrower lacks an adequate basis to certify the necessity of the PPP loan, then the SBA will seek repayment and notify the lender that the loan is ineligible for forgiveness.
With this safe harbor in place for borrowers under $2 million, the need to document necessity reasoning is greatly diminished but if you have already taken the steps to document, save it as back-up.
For borrowers over $2 million, absolutely document and be prepared to provide basis for your certification. FAL recommends using the points below to support your position:
What factors and business indicators did you consider?
How has the pandemic impacted your business? Use comparative data from 2019 to show swings in business metrics.
Plan Your Qualified PPP Expenses
Remove the variable of chance and plan for the qualified use of every penny of your PPP loan. FAL can provide a spreadsheet template of eligible expenses broken down by week to get you started with your PPP loan use plan. Email us at firstname.lastname@example.org and request the “PPP Expense Plan ” spreadsheet.
Track Every PPP Loan Expense Against Your Plan
Have a PPP loan tracking system in place to track the actual vs. planned use of the funds. A couple of ideas to make tracking easier are to place the funds in a separate bank account or create separate PPP GL accounts.
Know the Numbers
When it comes time to calculate loan forgiveness, make sure you have the numbers ready and that they support your overall case, for example: employee and compensation levels must be maintained during the covered eight-week period to be eligible for full forgiveness and you’ll want comparison periods to back up your data. FAL has a spreadsheet that can help you prepare now for the upcoming loan forgiveness process. Email us at email@example.com and request the “PPP Expense Plan ” spreadsheet.
Frequently asked questions
What is my liability exposure around loan forgiveness?
Any portion of your PPP loan that is not forgiven must be repaid within two years at a 1% interest rate. Payments are deferred for six months following disbursements of your loan. Interest begins accruing upon loan funding.
What if I'm still nervous and want to give my loan back?
You can return your PPP funds without penalties or questions until May 18. 2020.
When do I start tracking the use of my PPP funds?
Immediately. You have eight weeks to use your PPP loan funds for eligible expenses and the clock starts ticking the day the loan funds.
How do I request loan forgiveness?
Loan forgiveness requests should be sent to your lender and must include documents that verify the number of FTEs, compensation rates, as well as payments toward eligible expenses including mortgage, lease, and utility obligations. If you have employees, you should submit Form 941 and state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records that best correspond to the covered period.
When can I apply for forgivenss?
Most lenders are accepting loan forgiveness applications seven weeks after the funding of your loan. Lenders are required to respond to your application within 60 days of submission.
I am a partner in a partnership and/or a seasonal employer and did not receive the maximum allowable loan amount. Will my loan amount be increased?
Yes, the SBA issued new guidance allowing PPP lenders to increase existing PPP loans to partnerships or seasonal employers to include appropriate amounts to cover partner compensation or to permit seasonal employers to calculate their maximum loan amount using alternative criteria. Contact your lender to receive your maximum allowable PPP loan.
My loan funded in the middle of a payroll cycle, can I use the PPP funds for only the days worked since the funding of the loan?
We don't have clarity on this issue and are waiting for further guidance regarding payroll paid/incurred. In the meantime, we recommend erring on the side of caution and avoiding any retroactive application of PPP funds toward payroll.
How is an FTE defined and what's the maximum payroll per FTE?
An FTE is the hours worked by one employee on a full-time basis. The concept of FTE is used to convert the hours worked for several part-time employees into the hours worked by full-time employees.
If I laid off workers, do I need to rehire the same employees and positions?
No. Loan forgiveness is based on headcount (FTE) and your payroll calculation upon which the loan was based.
If I laid off employees, how long do I have to hire them back and still qualify for forgiveness?
Currently, 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.
Will my PPP loan forgiveness amount be reduced if I laid off an employee, offered to rehire the same employee, but the employee declined the offer?
No, your loan forgiveness amount will not be reduced if you make a good faith, written offer of rehire, and the employee's rejection of that offer is documented. If you follow these steps and can show the documented back-up, your loan forgivenss amount will not be reduced.
Is hazard pay a qualified expense?
There is currently no clear direction related to hazard pay but we see it as a reasonable PPP payroll expense given the current crisis. Again, for now, employers are still limited to the $15,385 of gross payroll per FTE and that includes hazard pay.
If I'm a self-employed individual or independent contractor with no employees, how are payroll costs calculated?
Your PPP loan amount is based on your 2019 Form 1040 Schedule C, up to $100k (see line 31 net profit amount). If the Schedule C shows a net loss, the allowed amount is zero.
Is owner health insurance considered a qualified expense?
Employer health insurance is covered if you have employees and are part of a group health plan. For self-employed individuals with no employees, the loan amount is determined from Form 1040 schedule C.
My employees have nothing to do. Can I ask them to use their vacation days and pay them out of PPP funds?
If you have a seasonal business and historically a large number of vacation days are used during the eight-week PPP loan period, then you can reasonably encourage your staff to use vacation days as normal. It could raise red flags with your lender if you have an inordinate amount of vacation days covered by the PPP loan funds.
If I fire someone and they get severance, does that payment count as payroll for the purposes of calculating my loan forgiveness?
The CARES Acts doesn't specifically mention severance, but the definition of "payroll costs" includes allowance of dismissal, which would mean that severance can be forgiven. The intent of the PPP is to keep people employed so our recommendation is to proceed with caution on this point. If you need to fire someone for reasons un-related to the pandemic, document your basis and be ready with back-up. You don't want to do anything that may raise red flags with your lender.
Can I make all my retirement contributions for the year in the eight-week forgiveness period ,and have those payments count as payroll for the purposes of loan forgiveness?
Retirement plan contributions are an allowable expenses and included as part of payroll costs. We recommend making retirement plan contributions as normal. Do not deviate from standard payment procedures and schedules. If you can show that in previous years, due to seasonality or for other reasons, you made this payment during the eight-week period, then you should be fine.
I have salespeople who are paid mostly through commissions. During the eight-week period used to calculate loan forgiveness, those salespeople cannot sell anything. Can I pay them a higher salary during that period to make up for the lost commissions and include that higher salary in the calculations to determine forgiveness?
Yes, but not more than $15,385 per FTE. Your payroll for eight weeks this year will be compared with last year. Material differences, up or down, will be noted by the lender. You cannot structure the pay as an advance on commissions, it must be pay without strings.
Can I pay all my employee bonuses in the eight-week period?
If the bonuses are for work performed during the eight-week period and/or you can show that historically, you issue bonuses at this time of year, you should be fine. Again, this is another gray area where we recommend proceeding with caution and being careful not to exceed the payroll ceiling of $15,385 per FTE.
Are traditionally tax deductible expenses still deductible if I used PPP funds to pay them?
Expenses paid with PPP funds will not qualify for tax deductions. There is currently a lobbying effort to change the legislation and allow for expense deductions.
What if I don't use the funds for payroll, rent or interest payments?
Failure to use the funds in compliance with CARES Act requirements and in accordance with guidance from the SBA and Treasury will flag your lender and potentially trigger an SBA compliance review or audit. It will also jeopardize loan forgiveness.