Published on April 30, 2020
In a matter of weeks, the federal government doled out more than $650 billion in forgivable loans to small businesses. While your loan allows you to continue paying your employees during the COVID-19 crisis, you need to plan carefully to make sure the loan proceeds are used correctly. Otherwise, your loan might not be forgiven.
Here’s the advice I’m giving to my clients about PPP loan forgiveness:
Proceeds must be spent on two areas.
At least 75% of your loan should be spent on payroll costs, which include salaries, vacation time, retirement plan contributions, health insurance expense and state unemployment taxes.
The balance of the money should be spent on the other allowable expenses, specifically including rent, utilities and mortgage interest.
The loan proceeds must be spent within eight weeks from date the loan was funded. The loan period essentially covers four two-week pay periods.
The spending window is critical as you try to qualify for loan forgiveness. We outline a plan below for documenting how you spend the loan proceeds, and when.
But be careful. Pay attention to due dates. Pay your rent and utilities on time. Make your mortgage payment on time. I’ve talked with a number of business owners whose landlords allowed them to defer payments of rent. While it’s nice to have the option to defer rent, it’s better to push that deferral out two months and pay full rent during this period. I encourage you to use your PPP money during the eight-week timeframe. It’s what the money is there for. If you make payments outside of the eight-week window, even by one day, it doesn’t count in the calculation for loan forgiveness.
This is the question I’m getting from every client. Although various spreadsheets have been floating around, there is no official way — at least not yet — to document the spending.
However, you will be seeking loan forgiveness, so you DO have to document your spending.
I recommend that you:
Eight weeks will, in most cases, cover four payroll periods. Over that period there will be four transfers of funds that add up to the total amount of the loan you used. This total amount used will enter the computation of how much qualifies for loan forgiveness, which we’ll get to in a moment.
If an employee doesn't want to be rehired, the SBA has provided additional guidance which states that a borrower’s PPP loan forgiveness amount will not be reduced if a borrower laid off an employee, offered to rehire the same employee and the employee declined the offer.
The answer to the when question is easy. You should request forgiveness eight weeks and one day after your loan was funded.
However, the answer about how to request loan forgiveness is less clear. There is no form or process for requesting loan forgiveness — at least not yet.
Guidance on how to request forgiveness will eventually be issued, but for now my best advice is to regularly check in with your banker. Each bank, similar to the PPP application process, will probably have their own method for requesting loan forgiveness.
It’s important to understand that even if you spent the loan money in exact accordance with the rules (payroll and related expenses, rent, utilities, etc.) it’s not a given that 100% of the loan will be forgiven.
You have to determine what percentage of the loan is forgivable. There’s a calculation for doing so, and it’s based on the monthly average number of full-time employees (FTEs).
The first question business owners usually ask, before even tackling the calculation, is “what’s a full-time employee (FTE)?” While the Payroll Protection Program does not define what an FTE is, there are varying definitions out there, including one from the Small Business Administration, that describe full-time employees as working 30 or more hours each week. When I advise my clients on the PPP calculation while we wait for additional guidance to be issued, I use this definition.
Let’s look at a real-life example that shows how to calculate the percentage of qualifying expenses that will be forgiven.
Ben’s Automotive Supply is a distribution business that opened in 2015. Just before the pandemic hit in early 2020 they had 135 FTEs. The business had an average of 125 FTEs during 2019.
We have to look at two comparable time periods, designated by the PPP, and the average number of FTEs that Ben’s Automotive Supply had during each time period:
|Time Period||Average Number of FTEs|
|January 1 - February 29, 2020||135|
|February 15 - June 30, 2019||125|
Then during the period of using the PPP loan, if Ben’s had 100 FTEs, 100 divided by 125 (the lower of the two numbers above) is 80%.
Ben’s Automotive Supply is eligible to have 80% of its loan forgiven.
If your business had the same number of FTEs in both of the time periods, 100% of the loan will be forgiven.
I think making this calculation early is critical so you can have a good idea of much of the loan may be forgiven. Of course, if the calculation isn’t clear for your business or if you have questions, work with your CPA or banker.
As soon as you secure your PPP loan, look ahead. The clock starts ticking as soon as you receive your PPP loan. You have eight weeks to spend the money, but don’t wait eight weeks to start thinking about life beyond that time period.
The Paycheck Protection Program buys you time before you have to implement any significant changes in your business. But think about where you want to be at the end of those eight weeks NOW. Work up various scenarios — best case, worst case, etc. — of where your business might be in eight weeks, and come up with a plan for how you will move ahead under each scenario.
In other words, lay out your plan NOW as to where you want your business to be in eight weeks.
Contact us here or call 800.899.4623.
This is part of our What Now? series, where we consider what business owners should do now to keep moving forward in a drastically changed business landscape.
Published on April 30, 2020