As a follow up to the previous March 31 blog on the Paycheck Protection Program (PPP), this blog is intended to assist small business owners with maximizing the financial benefits from these new Small Business Association (SBA) emergency loans. The upshot is simple: if used correctly as Congress intended, then small businesses will be able to convert their PPP loan into a grant or 100% forgivable loan.
Remind me, what is the Paycheck Protection Program?
On March 27, Congress passed “The Coronavirus Aid, Relief, and Economic Security Act” (CARES Act), which included the “Paycheck Protection Program” (PPP) for small businesses. The purpose of the PP was to offer small businesses across the country a financial lifeline through this challenging and uncertain period. As explained in more detail in the previous blog, the PPP is essentially a forgivable federal loan to help small businesses, including home improvement contractors, survive this temporary economic downtown and avoid layoffs.
How Loan Forgiveness Works
At this point, you are probably still waiting for your PPP loan like most other businesses due to the “less than optimal” roll-out of the program last week. Hopefully, you will soon receive 2.5 times your average monthly payroll costs to help your business get through the next eight weeks.
The next most important step to take is using your PPP loan in the right way: namely, on allowable payroll costs to maintain staff and salary levels. If you follow these points below, you should have a great chance of getting your PPP loan forgiven (i.e., converted into a grant).
1. The amount of forgiveness of a PPP loan depends on the payroll costs of a business over an eight-week period.
So when, exactly, does this eight-week period begin?
According to a new FAQ released by the SBA, this eight-week period begins on the date the lender makes the first disbursement of the PPP loan. The lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval. In other words, small businesses must track their spending for eight weeks beginning on the first day they receive their PPP loan.
2. The federal government says it will forgive PPP loans if all employees are kept on the payroll at nearly the same salary rate for eight weeks, and the money is used for payroll, rent, mortgage interest, or utilities.
How will these employment levels be measured?
As a small business owner, you will likely owe some money when your PPP loan is due if you do not maintain your staff and payroll. That’s why it’s very important to follow the conditions set forth by the SBA, which has made clear how they will determine if these key employment conditions above are met. Specifically, the SBA says the following:
● Number (#) of Staff: Your PPP loan forgiveness will be reduced by some amount if you decrease your full-time employee headcount.
● Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
● Re-Hiring: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
3. The PPP loan is intended for “allowable payroll expenses,” which are also forgivable.
What exactly are these expenses, and how can I make sure they will be forgiven?
To maximize the odds of 100% forgiveness, small business owners should use the full PPP loan amount for allowable payroll costs, mortgage interest, rent, and utility payments over the eight weeks after getting their loan. These “allowable uses” include:
Eligible Payroll Costs
● Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);
● Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit;
● State and local taxes assessed on compensation; and
● For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.
Other Allowable Uses
● Interest on mortgage obligations, incurred before February 15, 2020;
● Rent, under lease agreements in force before February 15, 2020; and
● Utilities, for which service began before February 15, 2020
Due to the limited amount of federal funds available, it’s essential to keep in mind that the SBA warns that not more than 25% of the forgiven amount may be for non-payroll costs. Therefore, the recommended course of action is to ensure (to the extent possible) that less than 25% of your PPP loan is used to cover rent and utility costs. In other words, 75% or more should go towards eligible payroll costs, as defined above.
Next Steps – How to Apply for Forgiveness
To apply for forgiveness, the SBA directs small businesses to take the following steps:
1. Submit a request to the lender that is servicing the PPP loan (i.e., whatever private bank or financial institution you used to get your PPP loan processed and disbursed).
2. Your forgiveness request letter should include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on the eligible mortgage, lease, and utility obligations.
3. In the letter, you must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on forgiveness within 60 days.
As a final note of caution, Renew Financial has attempted to describe the Paycheck Protection Program as clearly as possible. Many details have been left out. It’s therefore incumbent on all small business owners to carefully review all the program rules and confirm their eligibility with their preferred bank/lender before proceeding. Renew Financial is not providing legal analysis.
