What You Can Do Now To Maximize Paycheck Protection Loan Forgiveness
Update May 18, 2020: The SBA has released a sample request, which updates some of this information. As such, please see this article for the most recent information on PPP loan forgiveness.
After a chaotic start to the first round, the second round of PPP funding seems to be reaching the people who need it. According to a joint statement by Administrator Jovita Carranza and Secretary Steven Mnuchin, 2.2 million PPP loans were made to small businesses in the second round, with a total value of over $ 175 billion. . It is already more loans than in the first round, there are still some funds to distribute. Additionally, the average loan amount is $ 79,000, which is $ 127,000 less than the average loan amount of $ 206,000 for the first round. This means that more small businesses with less income get the financing they need so badly.
But getting a loan is only the first hurdle. Once business owners get financing, then they have to figure out how to use the funds in a way that maximizes the loan forgiveness. As has been the case with this program from the start, we have some initial rules, some additional tips, and a lot of unknowns. As always, we’ll do our best with the information we have to provide some indication of how this forgiveness will work.
The current forgiveness rules
Under the Provisional Final Rule on Additional Eligibility Criteria and Conditions for Certain Loan Pledges (Provisional rule 4.14.20), the amount eligible for the rebate depends in part on what you spend the money on for the eight weeks after your lender disburses your funds. Forgiveness can be up to the full principal amount of the loan plus accrued interest if the loan funds are spent on the following:
- salary costs, including salary, wages and tips, up to $ 100,000 annualized salary per employee (for eight weeks, a maximum of $ 15,385 per person),
- benefits covered for employees (but not owners), including health expenses, pension contributions, and state taxes imposed on employee payrolls paid by the employer (such as insurance premiums -unemployment),
- replacement of the owner’s compensation, calculated on the basis of 2019 limited to eight weeks (8/52) of 2019 net income,
- interest payments on mortgage bonds on real or personal property incurred before February 15, 2020,
- rents from leases in effect before February 15, 2020 and
- Utility payments under service agreements dated before February 15, 2020
At first glance, these rules seem simple. Six basic types of expenses count for loan forgiveness. However, a few actions can reduce your performance, including:
- You spend less than 75% of the loan on personnel costs
- You reduce full-time employees compared to 4.1.19 – 6.30.20
- If you reduce your employee’s salary or wages to less than 75% of that employee’s salary or base salary in the previous quarter
The the rules have huge loopholes, and all these ambiguities have not yet been clarified. My intention is to help you focus on what you can control and navigate the rules as best you can with the information you have.
What does it actually look like
Since lenders are the final arbiter for forgiveness, the process and therefore the results may differ depending on your lender. But according to interim rule 4.14.20, the documents you will need for loan cancellation include:
- If you have employees, you must submit Form 941 and the state payroll and unemployment insurance tax return forms or equivalent payroll processor records that best match the period covered ( with proof of any pension and health insurance contributions).
- Annex C of Form 1040 2019 that was provided at the time of the PPP loan application should be used to determine the amount of net profit allocated to the owner for the eight week covered period.
- Whether or not you have employees, you must provide proof of commercial rent, commercial mortgage interest payments on real or personal property, or utility payments during the period covered if you have used the loan proceeds for these. purposes.
Let’s break down what it looks like for each business
Sole proprietorships without employees
This is the simplest case because you have already provided the documentation you need during your application: your Annex C. You have divided line 31 by 52 and multiplied by 8. Let’s say you reach the maximum threshold of $ 100,000. This would translate into a forgivable loan amount of $ 15,385. This amount is presumably automatically remitted (assuming you request the remittance), since the SBA did not request any additional information. So you don’t have to try to figure out how to pay yourself over the eight-week period to get forgiveness. Keep in mind that these rules are known to change mid-term, so you may want to consider transferring the refundable portion from your business account to your personal account.
In addition to landlord compensation, the interim rule states that you must submit proof of commercial rent, commercial mortgage interest payments on real or personal property, or utility payments during the period covered if you have used with.
Finally, Sole Proprietorships should have claimed or were able to claim these expenses on their 2019 return. Be sure to verify the expenses you are trying to claim against what you have already submitted.
Business owners with employees
Things get a bit tricky for business owners with employees. To be eligible for the rebate, you must submit 941 forms or similar payroll documents to document what you paid to employees during that period. And like the sole proprietor, you must submit proof of commercial rent, commercial mortgage interest payments on real or personal property, and utility payments during this covered period.
You also have the extra step of verifying that you have the same average number of full-time employees (FTEs) for the next eight weeks as you did from February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020. If you do not meet this requirement, your rebate amount is reduced by the following equation.
Salary costs X FTE 8 weeks from the origination of the loan / FTE from 2.15.19 to 6.30.19 or 1.1.20 to 2.29.20
Even if you reduced your employees during either period, you can get a full pardon if you eliminate that reduction by June 30, 2019. You can find a additional support sheet here.
So, if your total salary costs are $ 50,000, but you had four employees from 2.15.19 to 6.30.19 and from 1.1.20 to 2.29.20, the amount of reimbursable salary costs is reduced by 75%. You can again get a full pardon if you bring the employee back before June 30. According to the most recent FAQs, you can also get a full pardon if you offered to rehire the same employee, but the employee declined the offer (See FAQ 40).
This formula works well if you can easily estimate the average number of full-time employees and your workforce was stable during the periods in question. The formula is more difficult if there is a lot of fluctuation between full-time employees.
For the salary-based reduction, you must calculate the salary costs less the amount of any salary reduction greater than 25% from the most recent full quarter, for any employee who did not earn in a period in 2019 a salary at an annualized rate greater than $ 100,000.
This formula seems much more complicated to determine, but from the language it will be good for you to determine:
- The total base salary or salary of each employee for the last full quarter before the date you received your loan
- Note all employees whose salaries have been reduced and have not earned an annualized rate greater than $ 100,000 for a period in 2019
- Track the amount, if any, of pay cuts for any of these employees
As with the restoration of wage earners, you can get full forgiveness if you restore wages.
What you can do now
These rules are far from final, and we can all hope for further guidance soon. In the meantime, here are some things you can do right now to prove and maximize your loan forgiveness process:
- Calculate your salary costs for the next eight weeks. You can find help in calculating salary costse. Exclude any amount of annualized salary greater than $ 100,000. Compare these labor costs to the 75% threshold for loan cancellation.
- Be on the same page with your payroll manager to make sure the amounts you expect are paid with P3 funds
- Calculate your average FTEs from 2.15.19 to 6.30.19, as well as from 1.1.20 to 2.29.20
- Estimate your business rent, mortgage interest, and utility amounts that can be used for forgiveness and make sure they won’t exceed 25% of your loan.
- Track how you spend your P3 funds and be able to link them to eligible expenses. I have even seen some people open a separate account for these funds.
- Keep in touch with your lender and ask them for any forgiveness information they have (they’ll likely tell you we’re waiting for further advice).
- If and when additional advice arrives, you can find it here.
I know it’s a lot of quarrels. I have some final notes.
Lenders have 60 days from the date of your application to decide if you qualify. It is also important to note that you are not allowed to deduct the expenses with which you paid the grant funds. Anything that is not forgiven is paid back at an interest rate of 1%.