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May 8, 2020
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.
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.
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:
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.
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.
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:
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.
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.
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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