The Paycheck Protection Program (PPP) was instituted during the COVID-19 shutdown to help small businesses keep their employees by offering coverage for up to 8 weeks of payroll costs, including wages, benefits, payroll taxes, and business owner compensation payments. According to the Small Business Administration (SBA), the PPP loans are forgivable if the company fulfills certain requirements.
On its face, the PPP loan looks fairly straightforward: small businesses with 500 or fewer employees are eligible for a maximum loan of $10,000,000. Calculated on documented monthly payroll costs, up to 25% may also be used to cover business rent, mortgage interest, or utilities. Unfortunately, there are limitations that complicate the program, which is why your clients need your guidance now more than ever.
It is important that you communicate the specifics of the PPP loan to your clients early on so that they understand the appropriate uses of the loan, its limitations, and the documentation necessary in order to be eligible for loan forgiveness.
Requirements for PPP loan forgiveness
In a nutshell, the funds are forgivable if:
- The entire loan is used for qualified costs, with at least 75% being used toward payroll, and the remainder for rent, mortgage interest, or utilities for the business.
- The loan is used for payroll benefits for employees, but not for owners.
- Any employees laid off are rehired by June 30, 2020.
- Any wages cut more than 25% are restored to their previous level by June 30, 2020. (This applies to those whose wages are under $100,000.)
Problems that may arise
Your clients need your help to avoid loss of forgiveness. Remind your clients that they have until June 30, 2020 to rehire any employees they may have laid off and restore wages to previous levels in order for that portion of the loan to be forgiven. If they are unable to hire someone back, they must show that they made a good faith effort, in writing, to rehire the person at the same wage but the offer was refused.
Further, the loan is not intended for business expansion. Therefore, rent or mortgage interest must have been incurred prior to February 15, 2020.
If a client has received an Economic Injury Disaster Loan (EIDL) advance, the amount of the advance will be deducted from the forgiveness amount.
Make sure your clients know to deposit the loan into the account from which they will pay their payroll and other allowable expenses, in order to demonstrate that the money was used for the stated purpose.
Documentation will be critical, and this is an area in which they will need your guidance. The statute requires the borrower to provide significant evidence of expenses to which the loan was applied. According to the PPP FAQ, this includes, but is not limited to:
- Documentation verifying the number of full-time equivalent employees on payroll and pay rates for the covered period, such as payroll tax filings reported to the Internal Revenue Service, state income, payroll, and unemployment insurance filings
- Documentation verifying payments for utilities, rent, and mortgage interest, including canceled checks, payment receipts, transcripts of accounts, or other documents
- Any other documentation the SBA deems necessary
“Any other documentation” is where your clients may get into trouble. Communicate to your clients that you can help them determine what else the SBA may need.
The value of your expertise
In short, like so many other financial dealings with the federal government, the PPP loan forgiveness procedure will be complicated, and your clients will be turning to you for your expert advice. Be sure to reach out to them as soon as possible, help walk them through the application process if they have not yet completed it, and make sure they are using the funds appropriately and maintaining meticulous records to help them receive the maximum forgiveness of the loan during this challenging time.