Best Practices to Ensure Your PPP COVID-19 Loan is Forgiven
NOTE: In early June, new legislation was enacted that extends the time period during which PPP loans may be used and the percentage of the loan that must be used for payroll. We continue to promote the following recommendations, in general, and encourage you to also refer to more recent articles and guidance.
(LAST UPDATED 5/26/2020)
The eight weeks immediately following the bank’s disbursement of a PPP COVID-19 loan are crucial to ensuring that the maximum amount possible of the loan will be forgiven. While a few of the PPP’s loan forgiveness requirements are still unclear, we recommend the following “best practices” to ensure you have the greatest chance to have your PPP COVID-19 loan fully forgiven:
- Time your loan funding for the best day possible. Note that under recently issued SBA guidance, the loan must be funded within 10 calendar days of getting the SBA approval. Check with your banker if they will give you any flexibility on the date of funding. Time the funding so it is received immediately before your next payroll pay date, if possible.
- Create a separate bank account for PPP COVID-19 loan funds. This will make it much easier to track when and how the funds are used. If your bank funded your operating account or paid back your line of credit, we recommend you transfer the funds to a separate account. Use your PPP COVID-19 loan funds to reimburse the company for payroll and other expenses. If you use a payroll service, it should be able to help you track these expenses. If you don’t have a payroll service or have questions, contact WBL and we can help. If you cannot establish a separate account for the PPP COVID-19 funds, use your accounting software to tag or create a “class” for the forgivable expenditures. [Note that based on the most recent guidance, the maximum per-person salary eligible for forgiveness for the eight-week covered period is $15,385 ($100,000 / 52 X 8). There is also a new cap on owner/employee and partner/member compensation eligible for forgiveness. The amount is limited to 8/52 of 2019 compensation. Therefore, you cannot increase compensation to owners above the prior year level in order to increase the amount eligible for forgiveness.]
- Meticulously document how the funds are used. At least 75% of the funds from a PPP COVID-19 loan must be used for payroll costs (see definition of payroll costs here). No more than 25% of the funds can be used for rent/mortgage, utilities, or interest payments on other debt obtained before 2/15/20. In addition to tracking your expenditures in your accounting software, keep receipts, actual or electronic check copies, and invoices, as well as rental agreements or other contracts entered into before 2/15/20. The SBA has published a list of the documentation requirements which includes payroll records, bank account statements, payroll tax forms, payment receipts, cancelled checks, lender statements, loan amortization schedules, leases, utility invoices, payroll records to support FTEs and pay rates, and other documents which must be maintained for six years.
- Rehire laid-off or furloughed staff or restore wages to employees by June 30, 2020 or earlier. If your business has laid off or furloughed employees as a result of the COVID-19 pandemic, you can rehire those employees or hire others to fill the open roles to restore payroll to the pre-pandemic level. For loan forgiveness purposes, compare the difference between the average number of full-time equivalent (FTE) employees per month your company employed during the more favorable comparable period of either 2/15/19, through 6/30/19; OR 1/1/20 through 2/29/20, to the number of FTE employees during the eight week period that starts with the loan date. If you reduced the salaries of employees making annual compensation of up to $100,000 a year by 25% or more, restore reduced employee pay/salary, as well. The amount of loan forgiven may be reduced if this is not done prior to June 30, 2020. Similarly, business owners should continue to pay themselves up to the $100,000 annual salary-eligible compensation (up to $15,385 for the covered period and limited by compensation paid in 2019 as discussed above).
- Use SBA’s “FTE” and related calculations based on 40-hour work week. Calculate FTEs based on the methods outlined in the Loan Forgiveness Application. Certain short cuts are available, and you can use whichever approach gives you the best results.
- Leverage the timing of payroll and other payments. During the eight-week period covered by the PPP loan, time your payroll, catch-up payroll for employees whose salaries have been reduced, payment of bonuses and hazard pay (remember to stay under the maximum compensation per person eligible for forgiveness of $15,385), utilities and rent (per the ratios discussed above) to maximize your forgivable loan amount. You cannot prepay expenses, since the expenses have to have been incurred. However, you can pay expenses that were incurred before the covered period. Expenses incurred during the covered period can be paid after the covered period but before the next billing date. You can obtain forgiveness for any retirement benefit that has been incurred during the eight-week period if paid by the next payroll period. The forgiveness application includes retirement benefits paid during the covered period but it is unclear if retirement benefits incurred during periods prior to the covered period can be paid during the covered period and be forgiven. Based on the wording in the application you may be able to justify paying the 2019 contribution, if it had not been paid yet, but it remains unclear. We are advising clients that it is better to pay it if you have excess loan capacity, since you definitely will not get forgiveness if you don’t pay it.
- Determine if using the “alternative payroll period” is more advantageous. The loan forgiveness application included an option to use an “alternative payroll period” which is the eight weeks (56 days) of payroll that begins on the first day of the payroll period after the disbursement of the loan proceeds. Calculate the total forgivable payroll costs using both options. If the forgivable payroll costs are higher using the alternative period than the period that beings on the loan disbursement date (assuming you have increased your employee count or pay rates during these later payroll periods) we recommend using the alternative period.
- Avoid using other CARES Act relief programs such as payroll tax deferral or employee retention credits. The PPP was one of several provisions of the CARES Act offered to help struggling businesses. However, using some of CARES Act provisions will reduce the amount of or eligibility for PPP loan forgiveness. Also, misusing PPP loan funds will result in nullification of loan forgiveness. Check our blog article FAQs: Understanding the Paycheck Protection Program for more details.
- Repay any unforgiven amount within the two-year limit. Remember, interest and principal payments on PPP loans may be deferred up to six months, and the principal is payable in monthly payments over the next year and a half, depending on the exact bank loan terms. There will be no penalty for early repayment, but do not sacrifice your business’ cash position to do so. It will take some time to emerge from this economic and social crisis, and the more businesses that survive (with a little help from Uncle Sam) the quicker and stronger our recovery will be.
- Check frequently for updates. The PPP COVID-19 loan forgiveness program has been conceived, designed, implemented, exhausted and refunded in a matter of weeks. New guidance and clarification on the meaning of specific provisions are being released almost daily. If you have received your PPP COVID-19 loan funds, it is up to you to make sure you maximize the available forgiveness. We are here to help. A loan forgiveness calculator is available on WBL’s website, and we will update our FAQ blog post and links to official publications as new information is released.