COVID-19 Resources Page
What are PPP Loans and How Can Loan Forgiveness Be Achieved?
By: Samuel J. Catanese, CPA and Christine Scholl, MBA
For small business owners, the COVID-19 pandemic has created a set of financial and operational challenges that could have long-lasting effects on many of their businesses. The CARES Act, passed into law on March 27, 2020, has provisions designed to protect the livelihoods of workers and the survival of these businesses. While no one knows the final regulations and if the loans will be forgiven, the following will help to explain what is known at the present time.
One provision is the administration of what are called Paycheck Protection Program Loans, or “PPP” Loans. Administered by the Small Business Administration through participating financial institutions, these loans offer 100% federally backed loans to employers with less than 500 employees through June 30, 2020. For-profit businesses, not-for-profit organizations, sole proprietors, independent contractors, and self-employed individuals can apply for these loans.
One of the hallmarks of PPP loans is that if the borrower uses the funds for specific purposes, the loan may be 100% forgiven. To achieve loan forgiveness requires an understanding of specific rules and guidelines set forth by government agencies. While these guidelines are still being developed and are subject to change, there are practical steps that borrowers can take to plan and document their use of the loan. First, borrowers must understand the general rules of the loan and loan forgiveness. Then, they should set up a budget to ensure that they will follow those rules throughout the 8-week time period starting when loan funds are received. Finally, documentation will be prepared and analyzed by the SBA lending institution that facilitated the loan.
Understanding Loan Guidelines
Small businesses that have applied for a PPP loan have begun to receive their funding through their SBA lender. Once that pool of eligible dollars is issued and delivered to the business, it is up to the business to budget and use those dollars in the correct way.
For full forgiveness, at least 75% of funds must be dedicated towards payroll purposes, and only a maximum of 25% can be used to pay for other expenses such as rent, utilities, and interest on mortgage debt. The money can only be used on expenses paid for within the eight-week period after the origination of the loan. For example, loan dollars cannot be used to pre-pay expenses like rent that would be incurred outside of the 8-week time period of the loan.
How Is the Loan Forgiveness Percentage Determined?
There are two main factors that are taken into consideration when determining the percentage of loan forgiveness that can be achieved with an individual PPP loan.
1. As one of the purposes of these loans is for small businesses to retain their workforce, 100% of their pre-loan workforce (determined as full-time equivalents, or FTE’s) must be employed by June 30, 2020 for them to achieve full loan forgiveness. A full-time equivalent employee is determined using the definition created under the Affordable Care Act. For example, if a business initially applied for the loan with 20 FTE’s on their payroll, then they must still have 20 or more FTE’s employed when they are ready to apply for 100% loan forgiveness. Alternatively, if that business went from 20 FTE’s down to 16 FTE’s by the end of the loan period, then only 80% of the loan could be forgiven.
Another incentive for small businesses to retain their workforce is the requirement to meet the 75% threshold for payroll expenses within the loan period in order to achieve loan forgiveness. Payroll expenses include gross compensation and employer-paid state and local taxes, and employer paid expenses such as retirement and health insurance. There is a gross compensation cap of $100,000 (on an annualized basis) per employee.
2. Only the loan money that a business actually used during the 8-week loan period for compensation and eligible expenses can be forgiven. For example, if a PPP loan was issued for $500,000 and the business only used $450,000 of that money, then only $450,000 is eligible for forgiveness.
Developing a Plan
Small business owners must determine how to maximize their debt forgiveness in a way that makes economic and business sense. Individual priorities may differ between businesses. For example, one business may prioritize loan forgiveness, while another may have the priority of financial survival (liquidity needs) over a specific time period. No matter what individual goals a business may have, a budget and proper monitoring is essential.
A business should develop a loan forgiveness template that tracks employee and firm-wide expenses over the 8-week period. A baseline budget would apply to a situation where there are no changes to the current operations over the span of the loan. However, with rapidly changing economic conditions and an unpredictable outcome of the COVID-19 pandemic, “what-if” scenarios should also be explored. Explore scenarios in alternate budgets such as delays in reopening, unstable levels of sales and operations with safety restrictions in place, and employee sick-time. Prepare for the possibility of the FTE count to be affected.
With changing circumstances, it is essential to start with an optimal budget but also perform a “budget to actual” on a regular basis, at least weekly. Then, assumptions can be adjusted based on the actual performance of the business. Also, Catanese Group will be monitoring regulatory changes put out by government agencies regarding guidelines for the loan program, which could change over time.
Documentation and Application for Loan Forgiveness
To achieve loan forgiveness, good-faith certification must be achieved through proper documentation and a full-accounting of how the loan money was used during the loan period. It is recommended that the business owner discuss with the lender what will be required upon application for loan forgiveness.
Once the 8-week loan period is over, borrowers must submit the following to their lender:
· – Documentation verifying the employees on the payroll and their pay rates
· – Documentation on expenses paid during the period with proof of payments
· – Any other documentation required that is specifically requested by the lender
There are things that a business owner can do to make the documentation process easier. Setting up a separate chart of accounts is recommended to keep track of all expenses being paid using loan funds. Using a separate bank account can also make reporting easier. The more prepared the business is, the easier it will be to make it through the process of loan forgiveness.
For businesses that have received $2 million dollars or more in a PPP loan, it is understood that they will be audited. The details of this requirement have not been finalized and will be subject to change.
For small businesses who cannot achieve forgiveness, or who may simply want a low-interest loan, payments will be deferred for a minimum of 6 months to a year, and then the loan will have a 2-year maturity at only 1%.
No matter how you choose to take advantage of the PPP Loan program, it is good practice to be fully informed of how your lender administers the loan. You also need to develop accounting practices that will make it easier to track and document how your funding is being used within your organization. This will make the process easier and allow you to receive the full benefits of the program.
Catanese Group is here to serve as a trusted advisor, helping small businesses navigate the complexities and regulations of PPP Loans, develop strategies for achieving loan forgiveness, plan and develop a budget, and fulfill documentation requirements. Please contact us using the information below if you would like updates on the constantly changing rules and regulations.
Please note, again, that the above recommendations are based upon information available as of May 7, 2020. We recommend that you confirm that no additional rules or regulations have been issued after May 7, 2020 when making decisions on your PPP Loan.
Samuel J. Catanese, CPA, is the leading partner of Catanese Group, a certified public accounting and business management firm located in Western Pennsylvania. Mr. Catanese has worked with clients across the country on consulting and planning engagements. For more information, call (814) 255-8400 or email him at email@example.com.
Christine Scholl, MBA is the Marketing Director of Catanese Group, and is a specialist in content marketing, information design, and business consulting. She helps design educational and practical content for clients on a variety of timely topics. For more information, call (814) 255-8400 or email her at firstname.lastname@example.org