On March 27th, the CARES Act, a $2.2 trillion stimulus bill to help aid individuals and businesses affected by COVID-19 and the economic downturn, was signed into law by the President. Included in this package was the $349 billion Paycheck Protection Program (PPP), which is administered by the SBA and provides forgivable loans to small businesses to pay their employees during this crisis. If you have considered this loan, your focus these last two weeks has probably been on how to apply for the loan, how to determine eligibility, how to compute the loan origination amount, and when the loan will be available. Once you pass the hurdles of the application process, you need to focus your attention on the forgiveness provision of the loan and the record-keeping that should take place once the funds are received.
Eight weeks after the loan proceeds are received, you will need toapply to your bank for loan forgiveness. The original loan application requiresyou to certify that you will only use the loan proceeds for payroll costs,covered loan interest payments, rent, and utilities. You also certified that youwill provide your lender documentation when you later apply for loanforgiveness that supports how you spent the loan proceeds. There are severalways to generate this documentation, such as setting up subaccounts ordivisions within your bookkeeping software or creating an external spreadsheet.If you use QuickBooks, you can set up a "Class" and track the receipt anddisbursements of the PPP funds by assigning that "Class" to your PPPtransactions. Doing so will result in a streamlined, filtered report that canbe provided to your lender when applying for forgiveness. Other documentationthat will be needed when you apply includes support for the number of employeeson payroll as well as their pay rates, IRS and state payroll tax filings, andsupport for interest, rent, and utility payments.
The composers of the CARES Act intended PPP funds to be used for payroll regardless of whether your business is open. One of the stipulations of full loan forgiveness is that at least 75% of the funds be used for "payroll costs" during the eight weeks that follow receipt of the funds.
Payrollcosts include:
- Compensation (salary, wage, tips, or similar),excluding amounts that exceed $100,000 on an annual basis per employee
- Vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation
- Group health care benefits, including premiums
- Retirement benefits
- State or local tax assessed on compensation
Payroll costs exclude:
- Payroll taxes withheld such as SocialSecurity, Medicare, Railroad, and FITWH
- Compensation of employees whose principal placeof residence is outside of the U.S.
- Qualified leave credit utilized the Families FirstCoronavirus Relief Act
Twoother stipulations for full loan forgiveness include:
- Not reducing your full-time equivalentemployee headcount
- Not reducing salaries and wages of employeesthat make less than $100,000 annually by more than 25%
If your company reduced employment and salary levels between February 15, 2020, and April 26, 2020, then those levels need to be restored by the time the loan proceeds are received if you want to reach the 75% fund usage requirement. Lenders have said you can choose when to take loan proceeds to give yourself time to bring people back that you previously had to let go.
Failure to meet any of the loan forgiveness stipulations willresult in a reduction of the forgivable amount. Guidelines are still beingdeveloped regarding these loans. It is unclear at this point how the SBA and USTreasury will enforce the usage requirements of these funds, but we expect themto provide further guidance in the coming weeks. In the meantime, please reachout to ADKF with any of your questions or concerns.