The U.S. Small Business Administration (SBA) continues to issue guidance on calculations and loan forgiveness for loans issued under the Paycheck Protection Program (PPP). The PPP has provided a critical lifeline to businesses, non-profits and their employees. Business owners and non-profits whose PPP loan applications have been approved now face a new challenge of determining how to properly spend the loan proceeds in order to maximize benefits under the program. You need to use the loan carefully. First, you want to maximize the feature that makes the PPP loan forgivable. Second, you want to use the loan properly so that you stay out of legal trouble for any potential abuse of the program. This is a crucial issue, as businesses and non-profits must adhere to rules governing the use of PPP loan proceeds, particularly in order to qualify for maximum loan forgiveness. Although we expect further SBA and U.S. Department of Treasury guidance on PPP loan forgiveness sometime later this month, to-date businesses and non-profits are without clear direction on this topic.

Best Practice for Those Who Received a PPP Loan

Board Meetings. Organizations should hold regular board-of-director meetings and document how the loan is being utilized within PPP regulations. Businesses need to certify that the funds are “necessary to support ongoing operations.” That must be continually kept in mind to ensure your business maintains its eligibility for the loan and ultimate forgiveness. Documentation should include:

  • New regulations and clarifications or interpretations and how they could impact an earlier determination by the company regarding eligibility.
  • Use the funds for payroll and other approved purposes. Follow other SBA rules, such as buying American-made products where feasible.
  • Think carefully before conducting any layoffs or furloughs, and consider the extent to which that affects loan forgiveness.
  • Do not assume that the loan will be forgiven. Follow guidance to determine the amount that will be forgiven, and make plans for repayment if necessary.

Accounting for PPP Loan. Debit cash and credit a new liability account called “PPP Loan”. Keep in mind you have eight weeks from when the loan is funded to spend the money.

Open a Separate Bank Account. You may only spend PPP loan proceeds on specified business expenses, and you will be required to substantiate the proper use of your PPP loan proceeds to lenders in order to qualify for loan forgiveness. The SBA, and possibly commercial lenders, will be rigid in their substantiation requirements. To facilitate this process, businesses and non-profits should open a separate bank account to hold proceeds, and to ensure that they are not comingled with any other business funds.

Maintain Records to Substantiate Expenses. Maintaining adequate records and documenting payroll procedures for payroll cost allocations is expected to be key in maximizing loan forgiveness. While qualified rent, mortgage interest, and utility payments are relatively simple to document, payroll costs will be more complex.

How to Maximize Loan Forgiveness

The SBA says it will forgive a PPP loan if all employees are kept on the payroll for eight weeks from the date funds are disbursed, and the money is used for payroll, rent, mortgage interest, or utilities. Organizations should ensure that the funds are used for approved purposes in all cases.

  • Avoid Layoffs and Furloughs. Organizations can maximize the percentage that is forgivable by avoiding layoffs and furloughs. To maximize loan forgiveness, you should spend at least 75% as “payroll costs”.
    • The 75% is calculated as 8 week period/2.5 months period for loan amount = 56 days/76 days = 74% ~ 75%.
  • Allocable Payroll Costs. Organizations may include the following as payroll costs:
    1. Gross salary, commission, wages and tips for each employee up to $100,000 (on an annual basis);
    2. Payment for vacation, parental, family, severance payments, medical and/or sick leave (subject to (4) below under payroll cost exclusions);
    3. Employer contributions to retirement plans;
    4. Group healthcare coverage, including insurance premiums; and
    5. State and local taxes assessed on employee compensation (generally SUTA taxes).
  • Payroll Cost Exclusions. Organizations may not include the following in their payroll cost calculations:
    1. Employer’s portion of federal payroll taxes;
    2. Payments to 1099/independent contractors;
    3. Any cash compensation in excess of $100,000 (on an annual basis); and
    4. Sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act (FFCRA), meaning that a business cannot take advantage of both programs simultaneously.
  • Additional Forgivable Business Expenses. To obtain forgiveness of the PPP loan, organizations may use up to 25% of loan proceeds for the following types of expenses:
    1. Mortgage interest payments (but not for mortgage prepayments or principal payments) for mortgages entered into before February 15, 2020;
    2. Rent payments under a lease agreement entered into on or before February 15, 2020;
    3. Utility payments with suppliers under agreements entered into on or before February 15, 2020;
    4. Interest payments on any other debt obligations that were incurred before February 15, 2020; and/or
    5. Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.
  • Keep an Eye on Staffing. PPP loan forgiveness will be reduced if:
    1. you decrease your full-time equivalent employee headcount, or
    2. you decrease salaries and wages by more than 25% for any employee who made less than $100,000 annualized in 2019.

Organizations have until June 30, 2020, to restore full-time employment and salary levels for any changes made between February 15, 2020, and April 26, 2020.

  • Other Business Expenses. Organizations may use PPP loan proceeds for various other expenses, but that portion of the loan will not be forgiven. If the full amount of the loan is forgiven, you will not owe interest. Any unforgiven portion will accrue interest at an annual 1% rate. The PPP loan will mature in 2 years with no payments required for the first six months. However, interest will accrue on the PPP loan during the six-month deferment.

There are many nuances to the forgiveness calculation rules that impact forgiveness maximization strategies. The Treasury Department has indicated an intent to clarify these rules through further guidelines later this month.

Please click here for the SBA FAQs page, which is updated regularly.

Please click here for the SBA interim final rule issued April 2. Click here for the interim final rule issued April 14, which provides guidance for self-employed persons, among other things. Click here for the Treasury Department’s page with details on the PPP and EIDL programs.

We will continue to update you as we get more information on Coronavirus-related legislation and guidance that may impact you. Continue to check back here for the most up to date tax information and changes in response to Coronavirus. If you have more questions contact an MCB Advisor at 703-218-3600 or click here. 

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