While we wait for additional SBA guidance to come out, we want to provide some pointers and information for those who have received PPP loan proceeds from the first round of funding or who intend to apply for a PPP loan during the second round of funding. Understand that for the moment, these should be considered general pointers and suggestions while we await additional guidance from the SBA. As we continue to have many calls with those seeking guidance and advice during these stressful times, we find many similar questions regarding the eight-week reporting process and how to properly plan to account for the use of the PPP loan proceeds to try and maximize the potential forgiveness of the PPP loan.
Manage the Process with a File Now – Documentation will be needed in a few months for the loan forgiveness application. Create a PPP loan disbursement file now, either paper or digitally, and place copies of invoices, receipts, bills, canceled checks, bank statements showing electronic drafts, payroll summaries, etc. to support each PPP loan expenditure during the eight week reporting period. For leases and business loans in existence before February 15, 2020, we suggest including a copy of your lease and any loan documents for business loans to further support rent and business loan interest payments.
Paying “Covered” Expenses with PPP Funds – Assuming you have placed the PPP loan proceeds in a separate account, pay your covered expenses from your operating account and then transfer the same amount from your PPP loan account into your operating account to cover that expense. For example, if you pay $3,000 rent on May 1, 2020, that same day transfer $3,000 from the PPP loan account to cover that expense. Once the canceled check becomes available, place a copy in your PPP loan file. You would use this same procedure for any covered expense such as payroll, utilities, health insurance premiums, employer retirement plan payments, etc.
Salary of more than $100,000 -For those who generally pay themselves more than $100,000 per year, we advise you to limit individual compensation during the eight weeks to $15,385 ($100,000 divided by 52 weeks multiplied by 8 weeks). Then divide the $15,385 by four pays if you pay every other week AS LONG AS YOU’RE SURE TO HAVE FOUR PAYS IN THE EIGHT weeks.
Doing this will make the eight-week reconciliation process for payroll much easier. It also eliminates unnecessary payroll tax costs incurred on salaries paid above this amount.
State & Local Taxes – Make sure you pay any state and local payroll taxes with the PPP funds. These include state unemployment taxes and any other local taxes you pay as part of payroll.
Group Health Care Benefits – Health insurance premiums are a covered expense and employer-paid health care benefits such as HSA and HRA payments should also be covered.
Utilities – Covered utility expenses should include gas & electric, water, sewer, and telephone. What is not yet clear is whether cell phones, oil & propane, or cable and internet services will be includible. Until further SBA guidance is provided, we are suggesting that PPP funds be used to pay these expenses.
Retirement Plan Payments – Retirement plan contributions were included when the PPP loan amount was originally calculated. If you make employee matching retirement plan contributions after each payroll cycle you should use your PPP loan proceeds to cover those contributions during the eight weeks. This would not include any employee contributions (payroll deductions) to their 401K plan as those amounts are already included in gross wages.
What is unclear at this point is to what extent any retirement plan contributions paid using PPP funds during the eight weeks will be eligible for loan forgiveness. Can you fund the entire 2019 profit sharing contribution owed during this timeframe? Can you estimate and pay all of your 2020 retirement plan contributions during the eight weeks or will only eight of the fifty-two weeks worth (8/52’s) be eligible for loan forgiveness? This is another item requiring further SBA guidance before we know for sure.
Loan Forgiveness Reduction Formulas – Beyond knowing what expenses to pay and when to pay them three other important hurdles are challenging to navigate to know how much of the PPP loan will be forgiven.
Here are the hurdles however, we’re sure additional SBA guidance will be forthcoming as the language in the CARES Act lacks sufficient clarity. First hurdle: At least 75% of the PPP loan proceeds used during the eight weeks MUST be used for payroll and the related health & retirement benefits, therefore no more than 25% can be used for rent, business loan interest, and utilities. If this 75%/25% isn’t met, the forgiveness amount will be reduced. Second hurdle: During the eight weeks you must pay each employee at least 75% of what they had been paid during the first quarter of 2020. If not, the forgiveness amount will be reduced. Third hurdle: The monthly average FTEs for the eight weeks must be at least equal to the monthly average FTE’s for February 15, 2019, through June 30, 2019. If not, the forgiveness amount will be reduced. What is unclear is how these reductions in loan forgiveness will be calculated under each hurdle and how the three will interplay with each other in determining the total reduction in loan forgiveness.
In the meantime, let us know if you have any questions.
Stay your distance, stay social, and stay safe!