2020 – 4/15

As discussed in our previous article, “Ten Key Questions of PPP Loans,” small business owners have the opportunity to borrow up to 2.5 times their average monthly payroll expense through the Payroll Protection Program (PPP).

The loan can be forgiven if the proceeds are used in accordance with the rules of the program. This article takes a deeper look at these requirements and how businesses can maximize the forgiven amount.

Is forgiveness automatic?

No. Borrowers must apply for forgiveness through their lender, providing a variety of documentation. Diligent record keeping is important.

What are the general guidelines for loan forgiveness?

The forgiveness amount is limited to the payroll, rent, mortgage and utility costs incurred in the 8-week window that begins at loan disbursement. At least 75% of the forgiven amount must be used for payroll costs.

What factors would reduce this forgiven amount?

  • Only expenses explicitly included by PPP rules are eligible. For instance, accounts payable for materials would not be forgiven.
  • Expenses incurred outside the 8-week window cannot be forgiven.
  • As the chief purpose of this program is to keep individuals employed, non-payroll costs are limited to 25% of the forgiven amount. 75% must be used for payroll and benefit costs.
  • Reducing the number of employees on payroll, or reducing wages by 25% or more will decrease the forgivable amount. This can be counteracted, at least in part, by returning payroll levels to their original levels by June 30, 2020.

Note: The calculations related to reducing payroll and returning it to original levels are too detailed to fully explain here. Ultimately, the intent of this rule is to help owners keep workers employed or get them back on the payroll at or near their original wages before June 30. Pursuing this goal will help to maximize the forgiven amount.

What record keeping is suggested to help maximize the forgiveness amount and streamline the process?

Of course, follow all guidelines provided by the lender. Lacking lender instructions, consider making it easy to isolate PPP expenses by opening a separate bank account specifically for qualified expenses, or setting up accounts in your accounting system to track these expenses. Documentation of individual expenses may be necessary at the completion of the program when applying for forgiveness.

What other steps can businesses take to prepare to maximize the benefit of the program?

Prepare a budget of how and when the PPP funds will be used. Be sure money is allocated only to qualified expenses, and at least 75% of the budget goes to payroll and benefits.

Should businesses adjust pay periods during the forgiveness window?

Because the expense period is 8 weeks and not two full months, monthly or semi-monthly pay periods may not maximize the eligible payroll expense. It may be advantageous to switch to weekly paydays to be sure that 8 full weeks of wages and salaries are disbursed during the 8-week timeframe.

What effect will furloughed employees have on loan forgiveness?

If it is possible to bring employees back from furlough, it will have the greatest impact on the forgivable amount to do so early in the 8-week period rather than waiting until the end.

What if a non-essential business with furloughed employees is shut down for social distancing purposes for the entire 8-week period?

Depending on local conditions, this is a very possible scenario. The intent of PPP is to keep people employed, so owners should consider the possibility of bringing people back on the payroll even if the business is closed. This keeps workers off unemployment and maximizes the potential for loan forgiveness.

The Paycheck Protection Program is a powerful, but complicated response to an unprecedented situation. We hope many business owners can use it to get through the worst of the storm. If you need additional information about how it applies to your business, please check with your Bland Garvey CPA team.

This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.  Please consult your CPA or legal counsel for guidance specific to your unique circumstances.
Guidance from the Department of the Treasury,  Internal Revenue Service and Small Business Administration and Lenders has been constantly changing since the COVID-19 Pandemic started and additional guidance is expected.

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