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PPP Loan Forgiveness - Where are we today?

May 8, 2020

Many of our clients have received PPP Loan funding and are asking, WHAT NOW?  There is an abundance of information on the topic, and it can be overwhelming. Here is a summary of ideas designed to help you with frequently asked questions and considerations regarding PPP loans.  

The Basics:
  • You have eight weeks to spend PPP loan proceeds on qualified expenses. 
    • Dates are critical and must be tracked diligently.
    • Our team will not track these dates, so you are solely responsible for doing so.  
  • The eight week period will start on the date you receive your loan proceeds.
  • There are two independent events:
    1. Receipt of Loan – based on SBA guidelines, your bank determined your PPP loan amount using information you provided.  The bank may or may not have computed your loan correctly, but whatever they disbursed, “is what it is” and that is your starting point.  
    2. Loan Forgiveness – expenses that qualify for loan forgiveness are DIFFERENT from those submitted during the loan process.  
  • After the eight week period, you will need to provide documentation to your bank requesting loan forgiveness for qualified expenses.  Any amounts not eligible for loan forgiveness will be converted to a traditional loan to be repaid in two years from the date of your loan.  
Overall Considerations and Game Plan: 

Much is still unknown about the PPP loan forgiveness process.  As your CPA and tax advisor, we wish we had complete clarity on the PPP loan and all aspects of it.  However, the simple fact is there are no definitive answers to even the most basic questions regarding loan forgiveness. 

Why is that?  As a quick recap, CARES Act legislation created the PPP loans and laid out conceptual guidelines.  Then, the Department of Treasury and SBA interpreted the legislation into processes and rules.  And now, the banks are ultimately responsible for determining your loan forgiveness.  

The SBA has issued regular updates through the Q&A section on their website.  However, none of the updates to this point have provided comprehensive guidance regarding loan forgiveness.  In reality, rules are being created after the fact, which may or may not have been the “intent” of Congress, or our understanding, at the beginning of this process.  It is a quintessential moving target.  

The best piece of advice we can offer is do NOT let PPP loan forgiveness drive your business and the decisions you are making.  Make prudent decisions on re-hiring employees and re-opening your business, regardless of loan forgiveness.  Expect that PPP forgiveness criteria will be stringent and that some amount of your PPP loan may need to be repaid, regardless of your best efforts to follow the guidelines as they exist today.  This shouldn’t prohibit you from planning on how to best utilize the PPP funds with the information we have now.  It is simply the reality of the uncertainty that exists with PPP loans today.  There is NO free money, especially when the government is involved.

FAQ 31 & 37

We recently posted information on these two FAQs.  The guidelines are disconcerting to us and to all PPP loan recipients.  This is a perfect example of how limited the information is that has been released through the FAQ process and how the rules are changing after the fact.  The short answer is we don’t know how the rules will ultimately be interpreted or if you, or any business, should give their loan proceeds back.  We would encourage you to read the information thoroughly and contemplate how you feel it may or may not relate to you.  

Budgeting/Tracking Tool for Use of PPP Funds

Here is a link to a spreadsheet from our friends at Skytale Group that can be a helpful tool for PPP loan planning. When you click on the link it will take you to an article with their commentary as well as the calculator.  Scroll down to just below the “Apply the 75% Payroll Test” section for the direct link to the spreadsheet.   

We recommend using this (or similar) spreadsheets in two ways:      

  • Use it to create a rough budget of how you expect/plan to spend the funds for qualified expenses over the eight week period.  Once you complete it, send us a copy and we can work through any questions you have together.  
  • Create a second copy of the spreadsheet to track actual expenses to organize your qualified expenses for the PPP loan forgiveness process. 

You should have new accounts in QB for any money received through these new programs.  PPP and Medicare funds will be liabilities on the books assuming that some part may have to be repaid in the future. 

  1. New Bank Account for Funds ( if one was created) – this will be a bank account in QB 
  2. PPP Loan Proceeds – liability in QB 
  3. Medicare Loan Proceeds – liability in QB 

Many of you have a new bank account for the PPP loan funds.  Our recommendation is you transfer funds to your operating account as qualified expenses are paid.  For payroll, only transfer the gross wages (not payroll taxes) and apply the 100K compensation cap on any reimbursements.  

Forgiveness & Qualified Expenses: 

While reasonable guidance exists on qualified expenses, there are many uncertainties with forgiveness.   One of the most significant uncertainties is whether expenses must be paid during the eight weeks or incurred (more of an accrual concept where you are liable for the expense but have not yet paid it).  This may make a difference for timing of payroll compared to your normal cycle to make sure you hit eight weeks of payroll.  This will also apply to all of your qualified expenses.  With what we have seen, the “incurred and paid” concept makes the most sense to us.  That is, an expense must be BOTH incurred and paid during the eight week period.  

What does this mean?  Here are a few examples of the challenges this lack of clarity creates:  

  • Rent – under the concept of “incurred and paid” prepayment of rent would not work.  Assume loan date of 4-30-20.  Theoretically, rent paid for May and June in the eight week period that is paid by the end of the eight week period should qualify.  But what if you get your loan on 5-2-20 after May rent has been paid?  Will you be able to include eight weeks of rent expense in the loan forgiveness calculation if your normal payment dates are outside of the eight week period?  
  • Payroll – assume loan date of 4-30-20.  Payroll run on 5-1-20 is for payroll INCURRED from 4-13-20 to 4-24-20.  Will this payroll run be forgiven if PAID during the eight week period but INCURRED for time outside of the eight week period?  
  • Pension – can you pay unfunded 2019 amounts (not due until 9-15-20) or can you only fund 2020 amounts?  Can you only fund the 2020 amounts estimated for the payroll paid in the eight week period, or amounts for any of 2020?

Unfortunately, there are more questions than answers to even the most basic expense items.  

There are also a number of questions on the headcount provisions for loan forgiveness.  If FTEs and/or wages were reduced during the 2-15-20 to 4-26-20 period and you re-hire your team by 6-30-20 with FTEs and wages at levels that existed on 2-15-20, does that mean other prior reductions in headcount and wages during the eight week period do not reduce the amount loan forgiveness?   Is the 6-30-20 date a “magic bullet?”  We are all anxiously awaiting more guidance from the SBA in these areas.   

With all of this uncertainty, how should you plan?  Our approach is to look at what we know so far about qualified expenses and start there, regardless of the loan forgiveness provisions.    

  • Look at the essential expenses you will have regardless of the loan, and estimate those over the eight week period.  This would include: 
    • Essential wages for staff who are still working 
    • Payments to partners/owners up to a maximum of $8,333 per month 
      • Ultimately only $7,692 may be allowed. This is one of the unknowns. 
    • Rent 
    • Utilities 
    • Loan interest 
    • Health insurance benefits 
    • Retirement plan matching for employees 

These are expenses you would incur, regardless of whether you had the loan.  Our hope is that the majority of these will be qualified expenses for loan forgiveness purposes, but if they are not, it should not change your behavior since they are essential to operating your business.   

  • Include the additional wages and payroll expenses you will pay for your team when you reopen. 
  • See if your total loan proceeds will be spent or how other variables may impact the amount of PPP loan you have available.   
  • Do not engage in behaviors that could be construed as fraudulent by the bank or the SBA.  Don’t add your dog or cat to the payroll.  Don’t prepay a year of rent expense.  Don’t back date documents.  Make prudent spending decisions that are in alignment with the way you have traditionally conducted business and you will have the peace of mind knowing that you can defend the spending decisions you made with PPP loan funds, regardless of what guidelines are ultimately issued. 

With this road map, you will have a game plan for your eight week spending plan using the PPP loan proceeds.  As more information becomes available, expect to tweak this plan.  

As always, please don’t hesitate to reach out to us with any questions.  One silver lining over the last several weeks has been the opportunity to talk with so many of you and brainstorm together.  Our team is honored to be your trusted advisor and work with so many good people! 

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