You Received Your Paycheck Protection Program Loan. Now What?
On April 17, 2020, the Small Business Administration announced the initial round of funding for the Paycheck Protection Program (PPP) had been exhausted. While this was unwelcome news for those who were waiting for guidance or had not yet submitted their applications, it was also a reminder that many New Jersey and Pennsylvania businesses had successfully secured their PPP loan. Companies who have received their loans are now wondering what comes next. The forgiveness feature offers the opportunity to receive loan forgiveness, assuming certain conditions are met. This includes the requirement to spend 75% of funds on payroll costs, including the employer’s portion of health insurance premiums, retirement, and state unemployment costs. Borrowers also need to maintain specific compensation and employee minimums through the eight weeks immediately after funding. Because there are a variety of questions about the best way to allocate funds, document expenses, payments, and other steps to facilitate loan forgiveness, Klatzkin has provided the following guidance for PPP recipients to follow to streamline and maximize the forgiveness process.
PPP Loan Management Tips
- Separate Bank Account – Since recordkeeping and expense tracking are essential to how proceeds were spent, it may be advisable, as a form of budgeting, to open a separate bank to prevent overlap with other company accounts. This will make it easy to track exactly how the funds are used.
- Payroll Costs – It is essential to remember that 75% of proceeds must be spent on payroll costs within eight weeks of funding to qualify for forgiveness. Also, proceeds can only be used to meet payroll expenses limited to $100,000 in annual compensation per employee. If payroll is being paid from a bank account designated for PPP disbursements, it is important to reimburse this account for any payroll amounts withdrawn that exceed the $100,000 annualized compensation limit for any employee. Failure to do so may result in miscalculating the allowed payroll expenditures.
- Full-Time Equivalent (FTE) Tracking – It is also important to keep track of FTE’s to maximize the amount eligible for a loan refund. Current FTEs will need to be compared against the number of FTE’s during either January 2020 – February 2020 or February 15, 2019 – June 30, 2019. A borrower can select either option as they prefer. If you have a lower amount of FTEs you will have to pay back a pro-rata portion of the loan.
- Payroll Provider – If a company uses an outside payroll provider, then it is important to let them know the new account information and ensure payroll expenses are taken from the correct account. If payroll is being supplemented, be sure the vendor has a clear understanding of the new process and necessary changes. The last thing a borrower wants to discover is payroll expenses have been funded from the wrong account.
- Payment Records – It is important to collect all records showing payment of payroll or other expenses authorized under the CARES Act, such as rent, mortgage interest, and utilities (up to 25%). Make sure all invoices can be matched up against expenses in the PPP account.
- Review Employee Compensation – Carefully review employee compensation changes to ensure no reductions beyond 25% of base compensation. Not following this requirement will reduce eligibility for loan forgiveness.
- Severance Payments – PPP funds can also be used for severance payments, which allows borrowers to help employees through the transition. However, remember to monitor FTE headcount when dismissing employees and the impact on loan forgiveness.
Loan Forgiveness Application
Once the 8-week period has concluded, borrowers will need to apply for loan forgiveness through their financial institution. While each lender will have different requirements on the information needed to support the application, it is vital to have documentation ready.
Central to this is information verifying the number of FTEs on payroll and compensation for the period used to verify staff and pay requirements have been met. This should include payroll reports, payroll tax filings (IRS Form 941), income, payroll and unemployment filings from the state, documentation on retirement and health insurance contributions and information detailing eligible interest, rent, and utility payments made (receipts, canceled checks or account statements).
Once the forgiveness application is filed, lenders are required to determine approval within 60 days.
Carefully tracking expenses and collecting corresponding documentation is essential to loan forgiveness. Remember to closely monitor expenses throughout the eight week period to ensure loan funds are properly spent. If you have questions on loan forgiveness or need assistance with another COVID-19-related issue, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon.
The above represents our best understanding and interpretation of the material covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change. This information is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.