Phew! You were approved for your PPP loan and the funds just came in. Now what? It turns out there are very important steps to take to get as much of your loan forgiven as possible.
Your financial institution will request documentation to prove your PPP loan should be forgiven. Further, the Treasury Department announced that all PPP loans of more than $2 million will be audited to confirm the funds were properly obtained and are being used as intended before any forgiveness will be approved.
This is the first of two related articles and it focuses on the steps you need to take following receipt of your loan. Guidance has recently been provided narrowing those who qualify based in-part on need and circumstances. The second article in this series focuses on confirming you are eligible to keep the loan you received.
Steps to Sleeping Easy
Following are best practices to increase your chances of loan forgiveness:
1) Deposit the loan proceeds in a new account and don’t commingle it with other funds at any point.
2) To the extent possible, limit the use of the funds to covering qualifying expenses such as:
• payroll of up to $100,000 + qualified benefits, which include
– severance payments
– group health insurance premiums
– employer contributions to defined benefit and defined contribution plans
– paid sick leave
• State and local taxes assessed on employee compensation
• Rent on a lease in-force before February 15, 2020
• Mortgage interest on a mortgage in-place before February 15, 2020
At least 75% of the loan proceeds are to cover payroll costs with no more than 25% for other qualifying expenses.
3) If self-employed (such as a sole proprietor or single member LLC taxed as a sole proprietor), pay yourself out of the loan proceeds an appropriate periodic compensation amount based on your prior year net profit.
4) Use the funds within 8 weeks of the loan funding (origination) date.
5) Prepare a record keeping folder to substantiate all expenditures using the loan proceeds. Also track and document the number of full-time equivalent employees. Include invoices, cancelled checks, bank statements or other form of payment confirmation.
6) Avoid reducing the business’s number of full-time equivalent employees. If reduced, restore to full-employment by June 30, 2020, for any staffing reductions that occurred between February 15, 2020 and April 26, 2020.
7) Avoid reducing the pay of any employee position earning below $100,000/year on an annualized basis by more than 25%. The employee for any particular position need not be the same person throughout the period.
8) To the extent feasible, “only purchase American-made products.” This is a loan term in the application that you or your agent agreed to.
9) Document your need for the loan.
10) Submit a request to forgive the loan with the lender servicing the loan.
Your Request to Forgive
Contact your lender for their form or requested format for the forgiveness request if it is not sent to you by the end of May. With your request to forgive the loan you will provide the required supporting documents. This includes support for:
• The number of full-time equivalent employees
• The employees’ pay rates
• Payroll reports for the 8-week period
• Invoices, cancelled checks and other appropriate documents supporting other qualifying expenses
Your submission also includes your certification that you used the funds you are requesting forgiveness for to retain employees and on other qualifying expenses. You can make your request starting eight weeks after you receive your funds. The lender has 60 days to decide whether to forgive the loan.
Be prepared to repay any amount that will not be forgiven. While the terms are very generous, the payback period is short. Following are the key financial terms:
• No fees or prepayment penalties
• 1% annualized interest rate
• 2-year maturity
• 6-month payment deferral from loan funding with interest accruing during this period
There may be an SBA vehicle available to refinance the loan after the two-year period is up. However, no such vehicle currently exists. If such a vehicle is later created, the terms will likely be much closer to market terms.
Contact SDK’s Steven E. Warren, CPA, MBT, with any questions.