As of May 18, 2020, the PPP Loan Forgiveness Application is now available on the SBA site. Apply here.

View the most up-to-date information in the PPP FAQ from the SBA and the Department of the Treasury, most recently updated May 13, 2020.

You applied for the Paycheck Protection Program (PPP) with your bank, and your request for funds was granted — now what?

Recall in applying for this loan, the largest incentive is that 100% of this loan could be forgiven. Unlike other traditional loans, having the loan forgiven will not count toward taxable income. Your focus should now turn to maximizing loan forgiveness.

Jump to information on Preparing for Loan Forgiveness.

When will the government and banks provide the funding for these loans?

The timing is still unknown. Most banks have some liquidity issues that limit their ability to even give out the funds for the PPP loans after approval. As of April 6, the Federal Reserve is still developing a plan to help facilitate funding.

Spending the Funds

Once the loan is funded, you have eight weeks to spend the money on authorized expenses.

Documentation for PPP

Companies need to document every dollar spent with the proceeds of the loan and provide documentation to the lender at the end of the eight weeks. It is considered fraudulent if loan proceeds are spent on anything other than approved expenses. As part of the PPP, the CARES Act established a Special Inspector General for Pandemic Recovery (SIGPR), with broad powers to audit and investigate businesses taking loans under the program.

Monitoring Spending in the Next Eight Weeks

Per the most recent US Treasury SBA Interim Final rules, 75% of the loan proceeds need to be on payroll with only 25% allowed on the specific operational expenses discussed in more detail below. You may also refer to the US Treasury SBA Interim Final Rules here.

Authorized Expenses

Spend the PPP money on qualifying expenses before you use your own money. There is a requirement to spend the money on only authorized expenses. Consider a separate bank account for receipts and systematic transfers of funds to cover the outlay of weekly authorized costs.

Proceeds of the PPP that qualify for loan forgiveness are to be used for:

• Payroll costs as defined in the Act
• Continuation costs of group health care benefits (during periods of PTO for sick, medical, and FMLA) and insurance premiums
• Rent and utilities
• Mortgage interest payments (but not for prepayments or principal payments)
• Interest payments on other debt incurred before February 15, 2020

Documentation Expectations

Know what documentation your bank will require after eight weeks to substantiate the loan forgiveness. Consider adding detail to your accounting system to track these costs separately, including creating a cost center with COVID designation if your accounting system supports this. If your business relies on QuickBooks or other smaller packages, they may require a separate account or class code.

As soon as the eight-week clock starts, all eligible expenses should be tagged to the new accounts or cost center. You’ll want to ensure your accounting department staff take care to retain any additional documentation the bank requires that you may not already routinely store. For easy organization, consider keeping a separate paper or electronic folder by expense category.

Talk to your payroll provider now, to ensure you can easily extract required payroll information. If you prepare your own payroll, be certain you are tracking the critical elements either through your accounting software or manually tracking on a spreadsheet.

Maintaining Employee Count and Compensation

For full loan forgiveness eligibility, a business must maintain employee headcount AND compensation levels.

• If headcount or compensation level was reduced between February 15, 2020 and April 25, 2020 but is re-established by June 30, there will be no reduction in the loan forgiveness amount.
• To determine headcount — compare average number Full Time Employees (FTEs) per month between February 15, 2019 and June 30, 2019 or alternatively January 1, 2020 to February 29, 2020.
• FTEs are defined as any employee, in a given month, who averages at least 30 hours of service per week. In addition for any part-time employee, this is calculated by taking all hours worked by part-time employees in a month and dividing by 120.
• To determine compensation level — each employee’s wages compared with the most recent full quarter cannot have dropped more than 25%. Employees with wages over $100K are ignored for this purpose.

Please note that as of April 17, 2020, none of the FAQs issued by the Treasury Department address what to do if you have an employee you need to dismiss for business purposes. For the forgiveness rule listed in the SBA Interim Final Rules, Section III(2)(o.), employee payroll costs are referred to in total.

In other guidance on computing the FTE count for forgiving the loan, somewhat conflicting language is used comparing the employee’s wages to the employee’s wages paid in the 1^st quarter 2020, for example. However, we believe you should make the best business choice and hire/fire accordingly. If you hire a different person for the same position, it seems reasonable to use the new person’s wages and compare to the former employee’s wages unless other, more definitive guidance comes out.

Any workforce reductions between February 15 and April 25, 2020 will not be considered in the calculation and you may still be forgiven for the full amount of payroll costs if your entire workforce is back in place by June 30, 2020.

Compensation levels must not decrease more than 25% for workers making less than $100k per year.

For seasonal employers, the comparison for the most recent quarter that the employee was employed may cause some issues if 1Q 2020 has higher than normal payroll amounts than for your business in the 2Q. This will need to be evaluated and potentially determined that full loan proceeds will not be spent in the 8-week period following the loan, and thus the loan will not be fully forgiven.

Your overall forgiveness threshold is not reduced if compensation for employees making more than $100K is diminished; however, the company still needs to spend enough dollars on payroll as a whole.

EIDL Loans

If you received an EIDL loan and you used the proceeds for payroll costs, your PPP loan must be used to refinance your EIDL loan and proceeds from any cash grant received up to $10,000 on the EIDL loan will be deducted from the loan forgiveness portion amount on the PPL.

Social Security Tax Deferment

If you deferred your 6.2% Social Security Tax on wages before you applied for this loan, obtaining the PPL means you will not qualify for certain payroll credits and deferrals. You will need to stop deferring the 6.2% from the date that the bank has provided the approval of the loan forgiveness.

What Happens if I Didn’t use all the Funds on Qualified Costs?

You may be required to pay back all or a portion of the loan, including interest. Interest will accrue on the PPL from day one, even though you will not have to make any payments for six months following the date of disbursement. The interest will only be forgiven on the amount related to the principal forgiven.

After the eight weeks, you will need to submit a request to the lender who is servicing the loan. The request will include all documents supporting the spending of the funds, number of full-time employees, and compensation levels. The lender will have 60 days to decide on forgiveness.

We highly recommend contacting the bank early on to determine the appropriate loan forgiveness documents. We expect the required documentation to be a bit of a moving target in the near-term, so we encourage you to over-document and track everything.

Your Aldrich Advisor is here to provide support for you however we can during these rapidly changing times. For more resources to help you navigate the developing impact of coronavirus on your business, visit our COVID-19 Resource Center.

This article was last updated April 17, 2020, with the available guidance from Treasury Department FAQs and SBA Interim Final Rules. As ambiguity remains in some of the rules, please consult your advisor if more guidance is published on this topic.