Part of the CARES Act, the Paycheck Protection Program (PPP) offers loans to small businesses impacted by the COVID-19 pandemic. A business owner can borrow up to 2.5 times their monthly payroll costs or $10 million, whichever is greater. The borrower has an 8-week period beginning the day of the disbursement to spend the proceeds on qualifying expenses and can potentially have the PPP loan forgiven fully.
There are still a host of issues in the Act that need further clarification from the Small Business Administration (SBA). In the meantime, here are some steps to take to help ensure you’ll have your PPP loan forgiven.
Keep your PPP loan funds in a separate account
Put your PPP funds in a separate bank account and transfer the funds to your business account to cover qualified expenses. Keep documentation of every transaction in a separate PPP loan file. Doing this is not a requirement, but it will make tracking your PPP loan allocation a lot easier.
Document everything carefully
The key to having your PPP loan forgiven will be keeping careful documentation of each payment made from the loan. Make it easy on your lender by keeping your invoices and receipts together and organized and create an excel spreadsheet to document every disbursement made.
Plan to spend at least 75% of your PPP loan proceeds on payroll expenses
Experts have differing opinions about how the 75%/25% allocation of funds will be forgiven. Some think this is a cliff scenario, in which none of the loan proceeds will be forgiven if less than 75% of the expenses don’t go towards payroll costs. Others think borrowers will receive partial forgiveness if they spend less than 75% of the loan on payroll costs.
According to the SBA, “Limiting non-payroll costs to 25 percent of the forgiveness amount…will also help to ensure that the finite appropriations available for PPP loan forgiveness are directed toward payroll protection.” To error on the safe side, we are advising all our clients to make sure that at least 75% of their PPP loan proceeds go towards payroll costs.
Incur and pay all qualified expenses within the 8-week period
Here’s the million-dollar question: If I incurred an eligible payroll or utility expense before receiving the PPP loan and paid it after I received the PPP loan, is it eligible for forgiveness?
The answer? We don’t know. Section 1102 of the Act states: “An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period.” Again, we’re erring on the side of caution and encouraging all our clients to incur and make all eligible payments from the PPP loan funds within the 8-week period, which may mean altering your pay period.
More updates to come
As we wait for further guidance from the SBA, we encourage you to check our COVID-19 web page frequently and subscribe to our e-newsletter for more updates and resources. If you have any questions or concerns, please feel free to reach out to our team.
Author: Megan O’Donnell