You Got the PPP Money, Now What?
Updated: Apr 1
You got the PPP money, now what?
After receiving the money from your bank, you may be wondering, well now what? The answer is simple… continue doing business as you have been and utilize that money to maintain your headcount. Official guidance has been released by the SBA regarding PPP loan forgiveness and includes the application to file with your lender. The requirements for PPP loan forgiveness at a high level:
The full amount of your loan must be spent within 8 weeks from the deposit into your bank
At least 75% of the loan amount must be spent on eligible payroll costs
You cannot reduce headcount or salaries by more than 25%
Loan forgiveness will be reduced if you decrease salaries and wages by more than 25% for any employee who made less than $100,000 annualized in 2019. Subject to change with additional guidance.
Another piece of the guidance states that if you terminate an employee and offer to rehire them before June 30th, and they accept the offer, then their salary counts towards the loan forgiveness amount. If they decline the offer, they don’t count against your loan forgiveness amount.
Fortunately, we have not faced the hurdle of layoffs at Proof and I believe it’s in large thanks to the PPP money we received! So for us, it’s business as usual. The money hit our account on April 24th, so we have until June 19th to utilize those funds on qualifying expenses. Which, for us, is:
I made a spreadsheet and started documenting all of our qualified expenses and created a folder of all receipts, pictures of cancelled checks, etc. I spoke with our banker recently and asked him three questions that I will dive deeper into. What will the process look like after the 8 week period? Are records of qualified expenditures enough?
Your bank should reach out and provide you with a SBA PPP application for forgiveness
Once you file the application, the bank has 60 days to review it with any supporting documentation. After review they will inform you of the amount of forgiveness.
The bank then notifies the SBA of the amount of forgiveness and the SBA will then have 90 days to approve it
The SBA may request additional information from you and will approve the amount in whole or in part depending on their determination on whether the amount met the guidelines for eligibility or forgiveness. They may request repayment of the loan. It’s important to note that the SBA is requiring borrowers to keep all files and paperwork on the PPP loan for 6 years. This gives the SBA 6 years to audit loans and potentially take action.
The kicker here is that the borrower is responsible for the loan forgiveness calculation, and it’s the lender’s responsibility to make a “good faith” review of the application. This would entail checking payroll reports, cancelled checks, lease agreements, and utilities bills. So have these handy when filling out the PPP forgiveness application. What stops someone from increasing their salary?
If you’re on a W2, you could technically give yourself a raise. He said, and I quote, “No one is stopping you from giving out raises. As long as it is reportable on a W2, you can go right ahead.”
The only caveat is the $100,000 limit for highly compensated individuals. If you increase the salary for someone that makes over $100,000 the additional raise will not go towards loan forgiveness.
What about sole proprietor distributions? How do we determine how much to pay ourselves?
Most owner’s draws are uneven and not on a fixed schedule, so sole proprietors have it a bit harder than the rest. I was advised that if sole proprietors make weekly payments to themselves in equal amounts, this will show the SBA that you have a normal pay schedule and it’s consistent week over week. You also should have receipts for the payments (this may be in the form of cancelled checks, bank statements showing the transfer, etc.) This same rule applies to both utilities and rent payments. You have to be able to show exactly where the money went and for what purpose to qualify for loan forgiveness.
Sole proprietors who report their business income on a Schedule C are limited to 8/52nd of their income that will qualify for loan forgiveness. An easy way to determine what this actually means is taking your most recent filed tax return and multiplying the profit from your business by (8/52). So if you reported $30,000 of profit from your business in 2019, you are limited to $4,615 of payments to yourself during the 8-week period that will qualify as eligible & forgivable payroll costs.
You may also be wondering, what if you got the EIDL loan + the PPP money. In this case, you will lump the EIDL loan into your PPP loan amount and the same rules will apply. As long as you spend more than 75% on payroll associated costs and can prove the remaining 25% went towards rent or utilities, then 100% of the loan is eligible for forgiveness. I received an email from Fundera last week that said there are still PPP funds available to small businesses. Their deadline to apply is June 30th. Apply here. Last week, the House passed a bill that made a few tweaks to the Paycheck Protection Program. Their proposed legislation included:
Reducing the amount of the loan needed to be spent on payroll from 75% to 60%, thus increasing the amount of funds available for other expenses (rent, utilities) from 25% to 40%.
The 8-week window to use the funds to be extended to 24 weeks
Pushing back the June 30 deadline to rehire workers to December 31, 2020
Providing more leeway on loan forgiveness for business owners who show they could not rehire workers or reopen due to safety standards
Extending the time recipients have to repay the loan from 2 years to 5 years
Letting companies that get loan forgiveness defer payroll taxes also
The reason for the proposed legislation changes is due to the administrative burden the loans have on small business owners. Especially those who did not have proper records or were flat out unorganized beforehand. They are now required to figure out how to straighten up their books and have detailed records instead of devoting their time to keeping their business afloat and employees paid. Other advocates of the new legislation are restaurants and retailers who have relatively low labor costs in relation to their fixed costs, like rent and utilities. There is no guarantee if or when this bill will be signed, but the early signs are promising. My main takeaways from the recent guidance
Have the proper documentation to show the paper trail of where the PPP money went. This includes payroll records, utility payment receipts, rent receipts, and bank statements. If you rehired an employee or offered to and they declined, have documentation of the offers and refusal.
Be in contact with your banker and accountant and start preparing the PPP forgiveness application now.