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To Pay, or Not to Pay, That is the Question.

New PPP Loan Forgiveness Guidelines Broken Down

There are many businesses out there that have either received Paycheck Protection Program (PPP) loans during the first round of funding for the CARES Act or are slated to receive it during the second round. As mentioned in my previous post about the PPP loans, a recipient can apply for loan forgiveness if certain conditions have been met.

Having said that, nobody is forcing you to seek loan forgiveness. If you’re fine carrying the loan on your balance sheet at a once-in-a-lifetime favorable rate, ignore the rest of this post and see the loan to maturity.

Now here is the point in the post where I say, “This is why we can’t have nice things.” The Department of Justice has found that almost $1 billion in funding went to publicly traded large businesses who took advantage of a poorly-worded portion of the CARES Act that allowed them to obtain funding earmarked for small businesses. The Federal government finally goes above and beyond for small business and the scammers are not too far behind try to take advantage. Fortunately, many are doing the right thing and returning the money.

In the twenty years, I have been working in disaster recovery, there is always someone who is going to try to scam, steal, loot, etc. during a disaster. We are seeing it here with PPP loans and with an increase in more advanced phishing scams aimed at remote workers. With every fiber of my being, I hope those a**holes are visited by three spirits every Christmas as they fight a perpetual case of painful hemorrhoids until they give the money back with interest, fines, and penalties. (Rant over.)

It is with these scams in mind, that the Small Business Administration (SBA) issued guidance (the first of a series I believe) regarding how loan forgiveness will be handled and who will be eligible. During any business disaster, documentation of key decisions and issues that arose during the event is key. It helps with insurance claims, legal issues, and now SBA loan forgiveness.

I had a lawyer tell me one time that if you have honestly documented your version of events, it is worth its weight in gold months or years down the road when someone asks you to justify your actions or decisions. I can personally attest to the fact that creating a “Memo to File” for such events saved me during at least two business disputes that could have cost me over $500K. Your memo to file can be an email or a literal memo that you write to yourself and put in a filing cabinet, but you need to make sure that it is secure from tampering or destruction. A locked PDF document backed up to an offsite location is a good way to do this electronically as well.

So here are the key points about PPP loan forgiveness:

  • You must use the money within 8 weeks of the time that the funds were received by the business (or you if you’re an eligible sole proprietorship). In other words, don’t sit on this money for a rainy day — use it now or lose the loan forgiveness.
  • Payroll: At least 75% of the loan must be used for the following payroll costs: Salaries (up to $100K per person), commission, bonuses, and tips. Paid time off for sick leave, vacation, parental leave, etc. Severance. Company contributions to health care and retirement. Employment taxes.
  • Office Expenses: Mortgage that includes interest on debt incurred before 2/15/2020. Rent payments on leases dated before 2/15/2020. Utility and service agreement payments in place before 2/15/2020. (Essentially, they want to pay for established expenses that were already on the books before COVID-19 hit and not incurred by a business trying to expand after COVID-19 affected everyone.)
  • EIDL Refinance: Refinance on certain Economic Injury Disaster Loan balances.

Conversely, here are the key non-allowable uses for PPP loans:

  • Salary and Wages in Excess of $100K: This has confused a lot of people. The PPP loan will partially pay the salary and wage for individuals paid more than $100K p/year. Here is how it works. If a person is paid $130K per year, the PPP loan could cover payroll up until $100K, but any payroll for the remaining $30K cannot be paid by PPP loan funds.
  • Fringe Benefits: Fringe benefits such as life insurance, disability insurance, supplemental insurance, etc.
  • FICA: The company’s portion of U.S. federal payroll taxes. This also includes combined taxes for Social Security and Medicare.
  • Sick and Family Leave: A business can either use the PPP loan funds to pay for sick and family leave or take a tax credit under sections 7001 and 7003 of the Families First Coronavirus Response Act. You can’t take both.
  • Non-US Residence: You cannot use loan proceeds to pay for employees whose primary residence is outside of the United States.

Requesting PPP Loan Forgiveness
“Forgotten is forgiven” – F. Scott Fitzgerald “Not.” – Small Business Administration

When looking at loan forgiveness, the first thing you need to think about is the goal of the program — to keep employees on payrolls and off unemployment. Secondarily, it is to allow businesses to quickly rebound when this is over. You need to think about the documentation that is necessary to prove that the PPP money was used to avoid going out of business and/or layoffs. In short, to be forgiven is to demonstrate that you meet the eligibility requirements of forgiveness (obviously). If you forget to apply for forgiveness, the SBA (and the issuing bank for the loan) will require you to pay it back amortized over two years.

While the SBA does not have the form developed to apply for forgiveness yet, it is not too early to start pulling together your documentation before things get busy or you forget. Make sure you have the following:

  1. Payroll Documentation: Documentation that proves the loan is being used to pay for approved payroll expenses. My company has done two things to make sure we can demonstrate meeting this requirement: 1) a spreadsheet that shows the calculation per payroll of the allowable expenses paid with loan money; and 2) we utilize a separate bank account to hold the PPP loan proceeds and withdraw only an amount equal to that of the calculated payroll expenses from the spreadsheet. We are only using money for payroll and no other expenses, so we can say 100% of it went to paying employees.
  2. Management Decision Documentation: At a minimum, you want to have a statement that details the negative impact that would have occurred to your business without the money. For example, if you had layoffs or were contemplating layoffs in February (when COVID-19 hit), then you need to document that in your files. If you had a layoff, you need to document recalling workers when you received the loan proceeds. In addition, if you did any of the impact analysis for your business that I mentioned in a previous post (link), then you should look to include that as well. You want to have documentation that shows you would have run out of cash without the PPP loan and you want to have that ready to show to your bank.
  3. Expenditure Documentation: If you did spend the money on anything other than payroll, then you will want a detailed accounting of that money as well as canceled checks, payment receipts, transcripts, and other documentation of payments.

Processing Loan Forgiveness Applications

While the processing timeline and information is subject to change, this is what we know right now. First, you cannot submit an application and supporting documentation to your lender for loan forgiveness until the 8-week period after receipt of the proceeds elapses. I am hearing rumblings that they might not allow you to apply until after June 30, 2020. Second, the lender has 60 days to review your application for completeness and submit it to the SBA. Third, the SBA then has 90 days to make a determination.

Is it worth the effort? Hell yeah it is! So what if you have to pull together some paperwork to keep your company in business? It is better than paying it back over 2 years and it is worth it. Besides, small business owners are used to getting down into the details and doing the grunt work. This is no different. We were built for it. Besides, you can always call on the Disaster Lady if you have questions. Even if I do not know the answer, I can always find someone who does!

Stay agile. Stay safe. Stay sane.
– The Disaster Lady