To all DHJJ business clients – words of hope, caution, and advice with the Paycheck Protection Program and Forgiveness.
Without a doubt, the Paycheck Protection Program (PPP) Loan has been viewed as a lifeline to millions of small businesses. As you emerge from the application process, enter the funding phase, and look forward to the eventual forgiveness phase, DHJJ urges you to look back on lessons learned and strategize for the future.
What happened with the Paycheck Protection Program
We think it is best summarized that the PPP is a well-intentioned program that suffered from a flawed implementation resulting from its rush to market. Our elected federal officials accurately foretold an unprecedented hardship befalling small businesses, across all industries, coast to coast, and rushed (yes, we mean RUSHED) to do something to get funds to those businesses and help them weather an economic shutdown. The $349 billion loan package, one piece of the much bigger $2 trillion CARES Act, went from enactment to accepting applications in one amazing week. Unfortunately, in the process businesses had to react daily, sometimes hourly it seemed, to a constant barrage of misinformation from a wide variety of well-meaning parties. During the ensuing week or two, clarifying Interim Final Rules and Frequently Asked Questions (FAQs) were issued by the Small Business Administration. Unfortunately, too often even the clarifications required clarification. In hindsight, misinformation was rampant on ill-defined topics ranging from eligibility, to applications, to required supporting data, to loan maximum calculations and the definition of key terms as fundamental as what is “payroll”. Even after applications were being taken it seemed that everything you read and everyone you talked to had their own interpretation and requirements. Somehow, through it all, PPP loans were funded.
Lessons learned from the application process are many. We will be well-served to apply those lessons to the next phase – managing our businesses to maximize forgiveness. With planning and patience, we can be ready to apply for PPP loan forgiveness.
- First and foremost, avoid the roller coaster of reacting to incorrect or incomplete information. Don’t assume that any article you read on the forgiveness process is factual and final. As of today, there has been no official guidance provided by the Treasury, the SBA, or the IRS that comprehensively answers the ultimate question weighing on every business right now: What do we need to do to ensure that the loan is forgiven? The Interim Final Rule and the FAQ’s to-date have primarily focused on getting the loans issued. The Interim Final Rule section III.2(o) states that the SBA will issue additional guidance on loan forgiveness. Keep your eyes open for the official guidance that is yet to come from the SBA, hopefully soon.
- Keep communication open with your lender. The application process has shown us that even with a national program and a single application form, documentation requirements and internal lender processes have varied significantly from bank to bank. We expect similar variations will be found in the forgiveness process. We recommend that you touch base regularly with your banker, and always ask for any official guidance on what they expect and/or require for the forgiveness process. Get it in writing so that you can assess its source.
- Safeguard the PPP proceeds received. Some companies are opening separate bank accounts to hold funds; others are holding the proceeds in limited-access accounts. Consider isolating your loan proceeds and transferring funds to your operating account only in amounts equal to the eligible costs being paid out. We believe that lenders vary in their expectation of what may be required if the loan proceeds exceed the 8 weeks of eligible expenses. Be prepared in case it becomes advisable to repay “unused” proceeds.
- Plan to maximize the forgiveness. This is obviously critical, yet the details remain subject to unconfirmed and often inconsistent interpretations as we await additional SBA guidance. What we do know is that there are several different requirements that must be met to secure full forgiveness. The following are the general requirements as stated in the CARES Act or the Interim Final Rule.
- In the 8 weeks immediately following receipt of the loan proceeds, all the proceeds must be used to pay eligible costs – payrolls, mortgage interest, rent, utilities. This was later extended to a 24 week covered period in the Flexibility Act.
- At least 75% (later revised to 60%) of the eligible costs must be in the “payroll” category
- The number of full-time equivalent employees paid over the covered period must not fall below the number of full-time equivalent employees paid in the designated base period.
- Wages paid to each individual employee during the covered period must not be less than 75% of that employee’s wages paid during the preceding quarter.
We know that all the foregoing must be satisfied to obtain full forgiveness of the PPP. Managing your business to satisfy those thresholds is made challenging by the absence of clear definitions, guidance, and examples. Questions abound that continue to cast confusion on definitions of eligible payroll costs, eligible interest, and rent. Base periods for the full-time employee test were defined in the CARES Act, but lenders may have asked for data from differing periods as part of the application process. Interpretations vary on the mechanics of the calculation that test for maintaining each employee’s wage level. The list of questions continues to grow as businesses and lenders turn their attention to the forgiveness phase.
3 Step Approach to Ready Your Information for PPP Forgiveness
Similar to what was experienced with the PPP application process, we expect to see several additional official interpretations of the forgiveness criteria. Our advice to businesses currently is three-fold:
- Model a few different scenarios that you are contemplating. For each scenario, schedule cash flows on eligible costs over the covered period. Do your expected eligible costs equal or exceed the loan proceeds? Does the sum of the payroll costs represent 60% or more of the total? If not, what other strategies could you follow to mitigate the shortfalls?
- a. Translate your employee decisions into gross payroll estimates that you expect for pay dates falling within your covered period.
- b. Do not add in the employer share of FICA or Medicare taxes.
- c. Do not consider federal unemployment taxes but do schedule in state unemployment taxes.
- d. Schedule the cost you will pay for health insurance premiums. Don’t forget to reduce that invoice total by the amount of employee withholding for health insurance.
- e. Schedule the cost of any employer contribution to retirement plans that you will make during the covered period.
Other eligible costs
- f. Schedule the interest portion of any mortgage payments or debt incurred prior to 2/15/20 to be made during the covered period.
- g. Schedule rent that will be paid during the covered period.
- h. Estimate utilities that will be paid during the covered period.
- Track your progress regularly. Create spreadsheets to capture actual cash payments for all eligible costs paid in your covered period. Keep as much detail as possible: payment dates, check numbers, reference numbers. For payrolls note the pay date, the period covered, and track amounts for gross payroll, details of withholdings, and net payrolls. Remember to reduce payroll dollars paid for any amount paid to an employee that equates to a wage level in excess of $100,000 annually.
- Assemble reports and summaries that will track your progress and very likely may be required to support your application for forgiveness.
- a. Organize electronic copies of payroll registers, payroll tax filings, bills for eligible costs (mortgage payments, rents, utilities).
- b. As soon as the base periods are confirmed, assemble the relevant base period payroll reports and analyses.
- c. Prepare a spreadsheet of payroll by employee that will enable you to compare the wages during the base period to the wages paid during the covered period.
Expect questions to arise as you plan and track your expenses. Call your DHJJ CPA for guidance. We will review your calculations with you and provide insight into your questions. We continue to monitor this evolving topic and scrutinize each new interpretation issued by the U.S. Treasury, the SBA, and the banking community at large. Over the coming weeks, we expect many terms referenced in the PPP loan documents to be better defined by the SBA and by the various PPP lenders. Additionally, we expect the IRS to clarify income tax consequences arising from the PPP and other pandemic relief programs. As official guidance and clarification is received, you should revisit your scenario planning and your tracking documents to ensure they remain on track to maximize the available loan forgiveness.
The PPP loan program offers small businesses an unprecedented benefit to help fund their employee payrolls during the COVID-19 disruption. You can reduce anxiety through a forward-looking analysis, contemporaneous tracking, and organizing supporting documents now – so you will be prepared for the next phase, the forgiveness application.