What to Know About the
Paycheck Protection Program
Use of Funds, Forgiveness & Documentation
We heard from many of our clients that they received confirmation from their lender that their PPP loan had been approved and an SBA number issued. Congratulations, this is great news! We also understand that not everyone was so fortunate and some are still in queue for the next round of funding. Hang in there because hopefully you will be ahead of the line when new funds become available.
Use of Funds
Obtaining approval and receiving funding took a lot of work and created some anxious days for everyone. This however was just the first step. Managing and documenting the use of funds in accordance with the PPP rules and regulations is the next. This will be critical to supporting your compliance with the program. As a reminder, the rules and regulations provide for the following allowable uses of the loan proceeds:
- Payroll costs – The regulations include a lengthy description which we encourage you to read if you have questions. In short, this includes employee compensation consisting of wages, salary, commissions or other compensation, the cost of benefits including group healthcare coverage and retirement benefits, and state and local taxes assessed on employee compensation. Payroll costs for employees with principal residences outside the U.S. are excluded. In addition, employee compensation in excess of $100,000 on an annualized basis is also excluded.
- Mortgage interest for mortgages incurred prior to 2/15/2020. Principal payments and prepayments are excluded.
- Rent paid on leases entered into before 2/15/2020
- Utilities in place before 2/15/2020
- Interest payments on any other debt obligations that were incurred before 2/15/2020.
Again, we encourage you to familiarize yourself with the rules and regulations which can be found at https://www.sba.gov/sites/default/files/2020-04/PPP%20Interim%20Final%20Rule_0.pdf.
Outside of being virtually free money, because of the low interest rate, the other very attractive piece of this program is the loan forgiveness. Up to 100% of the full principal amount and any accrued interest can be forgiven to the extent the loan proceeds are used for the purposes described, and employee compensation levels are maintained over the 8 week period following the date of the loan. Here are some important items to note when it comes to forgiveness:
- Forgiveness is limited to amounts spent over the 8-week period beginning the date of the loan. The date of the loan is the date funds are disbursed by your lender to your account.
- The maximum amount of compensation per employee that can be included in payroll costs is $1,923.07 per week or $15,384.62 for the eight week period. Since the spend period is 8 weeks and not two months the result is different than the average monthly amount used in determining the eligible loan amount.
- To maximize your forgiveness, at least 75% of the allowable costs must be spent on payroll costs. You can spend a higher percentage on other allowed costs but those costs will be capped at 25% of the forgivable amount.
- Forgiveness will be reduced if:
- You do not spend all the proceeds in the 8 week period
- Your FTE count drops during the 8 week period, as compared with the measurement period selected for your organization. The two measurement periods you can elect are either 2/15/19-6/30/19 or 1/1/20-2/29/20. You will want to select the measurement period with the lowest number of FTEs for this purpose.
- You reduce employee wages/salaries by more than 25%. This is a calculation heavy step that requires you to look at every employee who made less than $100,000 in 2019. To the extent that salaries, on an individual basis, are reduced by more than 25%, forgiveness will be reduced.
- The good news is it appears that if you restore headcount and/or wages back to prior levels by June 30, 2020 your forgiveness will not be reduced.
We don’t yet know the process for applying for loan forgiveness. Much like the application process, we expect it will vary by lender. We expect that lenders will continue to be engaged for a period of time in the continued disbursement of funds, especially when new funding becomes available. Given this, it may be a few weeks before there is any clarity on this important step. Be patient and be sure to stay in contact with your banker and be alert to communication on this process. We’ll also be tracking developments, and will keep you advised as best we can.
It is very clear that documentation will be critical for forgiveness, and how you account for these expenses and maintain supporting records is very important. Documentation that should be maintained includes:
- Payroll registers and tax forms
- Invoices and account statements documenting amounts due and the nature of the expense
- Proof of payment. Proof of payment can include canceled checks, bank statements showing EFT payments, and credit card statements. However, if you pay an allowable expense by credit card be sure to make a cash payment on your credit card within the 8-week period so that it is counted as a use of proceeds.
You may want to consider filing these documents in a specific document folder, preferably electronically to allow for easy submission as needed to your lender.
The PPP is a loan, so it is important to record it on your books as such and to accrue interest as part of your monthly close activities. Even though repayment doesn’t start for 6 months, interest does accrue during this period. Once you have a determination on forgiveness you can make adjustments to the loan balance, as appropriate. We have heard some recommendations that you set up a separate bank account for the funds. This is certainly your choice and it is not one that we believe is necessary, and simply setting-up a separate bank account will not satisfy all the documentation requirements. Regardless of how you bank the amounts received, you will be required to provide detailed accounting on the use of proceeds. You may want to consider setting up a separate cash account on your books that designates these as special purpose funds. As you determine the amounts you have paid that are eligible for these funds you can then do a book transfer between the special cash account and your disbursement account to cover. This will allow you to see at a glance the amount remaining to be spent.
We are developing tracking tools and will be training our team on how best to help our clients account for the use of funds. If you are a PlusPoint client and have any questions please reach out to your engagement manager. If not, contact us and let us know your question. Remember we are here to help!
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