After the initial debacle of the first round of PPP funding, we are now seeing more and more of our clients receive the much-needed relief thanks to the second round of funding. Getting the loan though is just the start of the process. Eventually we all want these funds forgiven and to get that we must follow some specific guidelines to ensure we have the best chance of this happening.
The key factor in the PPP loan program forgiveness request…documentation! You need to effectively document what you spent the funds for and when. This will need to be submitted when you put your request in for the loan to be forgiven. To help ensure you have the required documentation, we are recommending that you place the funds in a separate bank account from your operating fund. Then each time you need to transfer funds to your operating or payroll account to cover costs, you prepare a document that clearly outlines the spending to reflect that it is for only approved expenses. Then you would match the document with the source documents you will need to provide to the bank when requesting the forgiveness of the loan. I do want to point out one key factor here that a lot of people have not mentioned. The loan forgiveness is only for the principle portion of the loan. Interest begins to accrue the day you receive the loan and this interest, although fairly low, is not part of the forgiveness program and must be paid to the bank.
So, what are the approved expenses? During the period of eight weeks, from the day you received the funds, you must spend 100% of the funds on either approved payroll costs or a combination of 75% of approved payroll costs and 25% approved other expenses.
Approved payroll costs are the following:
- Gross payroll for staff not to exceed $100,000 annually
- State tax imposed on the gross payroll, for Virginia this is the State Unemployment tax
- Company portion of health insurance costs
- Company match to any company retirement plan
- For self-employed individuals without payroll, this would be the draws you take during the period to not exceed the $100,000 limit.
Approved other expenses are:
- Utilities (you will need to provide documentation of the expense)
- Rent Expense (you must have a lease document in place to support the rent expense)
- Interest on real property mortgages held by the business in lieu of rents
Spending the funds correctly is just one part. Remember this is the Payroll Protection Program. It is designed first and foremost to keep employees on payroll roll. Therefore, you need to ensure that your reported number of employees do not change from what you listed on the application to who you pay during the eight-week period. You also cannot cut the employee’s payroll by more than 25% during this time. Failure to meet these two factors will reduce or eliminate the ability to have the funds forgiven. So how would this work. Say you listed 10 employees but now only have 7, then 30% of the loan proceeds will not be forgiven. For the hourly rate, assume you were paying someone $20 an hour and they typically worked a 40hr week. You decide to reduce the hourly to $12, which is $3 less than the allowed reduction of 25% ($20 * 75% = $15). $960 of the loan proceeds would not be forgiven due to this. (($3 *40hrs) * 8 weeks = $960). One key factor here is that you can avoid this if you rectify the reduction in wages and or staffing by June 30th. The SBA as of now has not provided the exact details in clarifying this.
Another factor often forgotten is if you received both the Economic injury disaster grant as well as the PPP funds. If you did, you do not need to return the funds but the EIDG funds received will be subtracted from the total amount eligible for forgiveness.
Any loan proceeds not forgiven will need to be repaid within two years along with the associated interest of 1%.
Keep in mind though, if you do not use the funds for the approved expenses, the SBA can come back and charge you with fraud and require you to repay the full amount. I point this out only to state that if you requested the funds and prepare documentation based on 2019 data that does not apply to you today, you may want to consider returning the funds to avoid this.
Our office is available to work with you in ensuring that you receive the maximum forgiveness amount and can document this amount properly. Please feel free to reach out and set up a time to discuss your particular situation.