What to Do After Your PPP Loan is Approved
COVID-19 Business Survival Webinar Recap
The Payroll Protection Program (PPP) loan is a key piece of the $2.2 trillion federal stimulus package, the CARES Act. Unlike other loan or grant programs that help distressed businesses get back on their feet operationally, the PPP loan is designed to help businesses help their employees by keeping them on the payroll even if the business is closed or employees aren’t working their regular hours.
In Adams Brown’s webinar “What to Do After Your PPP Loan is Approved,” three teammates discussed what businesses should do in the days and weeks after they apply for PPP funding. Timing matters, and business owners have some important choices to make in how and when their loan gets disbursed.
Avoiding Unemployment Fraud
There is a lot of information out there, and perhaps too much in some cases. It’s possible to commit unintentional unemployment fraud if an employee accepts paid sick leave and unemployment compensation. Here’s how it could happen:
- If an employee has been offered and accepted paid sick leave under the expanded FMLA rules under the Families First Coronavirus Response Act, and
- The employee files for unemployment compensation, and
- The employer doesn’t fight the claim, figuring they’re doing the employee a favor, then…it’s unemployment fraud.
It is possible right now for an employee who is out of work to bring in more income through the expanded unemployment rules than by taking the paid sick leave option. However, even if the employee doesn’t want paid sick leave, employers still must extend the offer to them. If the employee doesn’t return the form, then the unemployment claim is valid. During this period where there are more questions than answers, it’s important for employers to understand employment laws, or work with an advisor who does to avoid a potentially unpleasant, and unplanned, situation.
Using the Loan
The goal of the PPP loan is to maximize the amount of loan forgiveness. The first step in doing this is to understand what can be spent using the loan proceeds.
Qualifying costs include:
- Payroll costs
- Interest on loans in place prior to February 15, 2020
- Rent or lease obligation for agreements in place prior to February 15, 2020
- Utility payments for services in existence prior to February 15, 2020
Gross payroll includes payments made for PTO, sick leave, overtime, salary, hourly, etc., paid to the employee before any employee deferrals. Add gross payroll PLUS employer contributions to health insurance, retirement plans, and paid state and local taxes. Do not add employee contributions as they’re already accounted for under the Families First Coronavirus Response Act. There is speculation on how to calculate the reduction of gross payroll to the $100,000 annualized limitation, and we expect this guidance to be clarified in the coming weeks.
You only have eight weeks to spend PPP funds that will be forgiven, and 75 percent of funds qualified for forgiveness need to be spent on qualifying payroll costs. Only 25 percent of the forgiven amount can be used for non-payroll items. In planning the use of funds during this 8-week period, the number one focus must be on maximizing the use of payroll.
The 8-week period starts when funds are received. There may not be as much control for businesses that want to estimate the target date of when funds will hit their accounts. Lenders are currently receiving guidance to distribute funds to businesses within ten days of receiving SBA approval. This may limit flexibility with regards to choosing the day the funds are taken. It’s very important to communicate with the lender, ask what the options are, and ask what their window is. Do not be surprised when the money hits the accounts.
When trying to set a target date for when to take the funds, first identify the payroll dates and look at upcoming pay dates. Because 75 percent of the funds need to be used on payroll expenses, this needs to have the first priority in planning. Look for days when those funds would be pulled from the account.
Use only funds that have been paid during the 8-week period. If the loan can be planned around those pay dates, a company can increase the likelihood of squeezing in an additional pay date. If the company can identify the middle of a pay cycle instead, we recommend starting a discussion with the payroll vendor about the possibility to run a mid-cycle payroll to fit one additional payroll at the end of the 8-week period and maximize the amount of payroll that will be eligible for forgiveness.
With reference to other qualifying costs, make sure to also plan to maximize the amount of these costs that can be fit into the 8-week window.
Loan Forgiveness Strategies
Two very important things to keep in mind are to maintain employees by headcount and not reduce any employee’s compensation by more than 25 percent compared to their most recent full quarter.
The current method of calculating FTE for the purposes of evaluating possible reductions in the amount of PPP loan forgiveness can be done in one of two ways:
- Based on reduction in number of employees, or
- Based on reduction in salaries.
In the first option based on reduction in employees, payroll costs are multiplied by the average number of FTEs per month for the eight-week period beginning on the loan origination date, divided by either the average number of FTEs per month from February 15, 2019, to June 30, 2019, OR the average number of FTEs per month from January 1, 2020 to February 29, 2020,. Seasonal employers would take the average number of FTEs per month from February 15, 2019, to June 30, 2019.
If employers have not kept employee levels at least as high as the first two months of 2020, or the period of February 15, 2019, through June 2019, then they will not receive the full forgiveness amount.
In the second option based on reduction in salaries, payroll costs that have been reduced by more than 25 percent compared to their most recent full quarter are subtracted from total payroll costs. This does not include any employee whose annualized salary was more than $100,000.
Thus, if employers have reduced wages by more than 25 percent during the coverage period as compared to their most recent full quarter, any amount that is below a 25 percent reduction in salary would be deducted from the expenses otherwise qualifying for forgiveness.
Last but not least, if the business restores wages and FTEs by June 30, 2020, it may be able to avoid these reductions in PPP loan forgiveness.
This guidance is from the U.S. Chamber of Commerce; at the time of this writing, the SBA has not released any updated guidance on how it plans to calculate full-time equivalent (FTE) employees. As such, these limitations and calculations could change in the coming days or weeks. It will be important to stay in touch with financial advisors, payroll vendors, and lenders to address specific questions.
The last piece of advice for webinar participants was to focus on documentation. After the loan funds are disbursed, it will be important for businesses to prove qualifying costs and expenses.
It’s critical to get the maximum amount for loan forgiveness. Preparing now to have the loans forgiven is essential. There is no current formal guidance issued from the SBA on documentation, but we recommend planning to submit the following documentation to the lender:
- Application requesting loan forgiveness
- Documentation supporting payroll and covered expenses
- Certification from the company affirming the extent of requested loan forgiveness
- Any other documentation the SBA determines is necessary
To the extent possible, deposit the PPP loan proceeds in a separate bank account so that these funds are not comingled with normal operating funds. Use the PPP loan proceeds for covered expenses and retain documentation supporting each component of covered expenses. Although not recommended, if PPP loan proceeds are used to pay for non-covered expenses, retain the documentation supporting these amounts. And finally, establish codes or sub-codes in the general ledger to track each component of covered expenses.
Loan Forgiveness Applications
Loan forgiveness applications should include all payroll registers and ACH transfers to the payroll company (when working with an outside payroll provider). Save copies of the payroll invoice supporting these payroll costs, employee benefits, and retirement benefits. Also, keep copies of the utility bills, rent statements, and mortgage and/or other monthly debt statements, as they are a covered expense.
The lender will determine the amount of loan forgiveness, and they are required to issue loan forgiveness within 60 days of receiving the application. The liability will be on the lender, so they are expected to be highly critical, dot their I’s and cross their t’s, so to speak, to ensure there is no fraud taking place if false documentation is being caught on their behalf.
Document retention should follow the latter of either when the SBA has resolved its audit of the PPP lender and/or the company’s loan forgiveness application, or the SBA audit period has expired.
Other questions to think about as PPP loan funds are being disbursed:
- Should payments be held until funds are received?
- Should there be a special payroll period to get as much forgiveness as possible?
- Should funds be deposited using ACH on the last few days of the loan forgiveness period to ensure they clear the bank?
There are still a lot of unanswered questions on how the loan forgiveness will play out. The good news is that forgiven loan amounts under PPP are not subject to federal taxation as discharge of indebtedness income.
Don’t feel like you must interpret these guidelines on their own. Adams Brown advisors are here to help every step of the way, from applying for funds, using them appropriately, filing the correct documentation, applying for loan forgiveness, and beyond. Please reach out with any questions.