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 1st 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.