Coronavirus Aid, Relief, and Economic Security (CARES) Act, meant to stimulate the economy during the COVID-19 pandemic, authorized the Paycheck Protection Program (PPP) loans. It enables small businesses to have access to low-interest emergency capital guaranteed by the U.S. Small Business Administration (SBA).
If you are among the first recipients, meaning you received the first disbursement on April 3, your 56-day period will probably be ending later this week or early next week.
Don’t Worry, Be Prepared
To be prepared, you should know the main risk areas the audit will be targeting, other than the common offend of providing false and misleading information. These four areas are;
- Size eligibility
- Amount requested
- Use of loan proceeds
- The necessity of the loan (only applicable to loans over $2million)
Three Major Steps to Maximize your Loan Forgiveness
1. Assess The Risks
From the four main focus areas, you need to analyze each and ensure your business falls under the complex forgiveness rules for maximum loan forgiveness.
- Size eligibility – SBA has provided size standards to determine whether your business falls under the “small” category. An example of a small business definition is having not more than 500 employees and that it is a tax-exempt non-profit under Section 501(c)(3) of the Internal Revenue Code (IRC), among others.
- Amount requested – PPP authorized loans up to $10 million. You will be granted your average payroll costs for the last 12 months multiplied by 2.5, to a maximum of $100,000 per employee for salaries, wages, and tips only. Providing false historical payroll costs will amount to criminal intent as pointed out above.
- How did you use the loan proceeds? – CARES Act has outlined allowable use, under the SBA 7(a) loan program, but to be considered for loan forgiveness, the loan should be used to cover these specific costs;
- Payroll costs and company-paid benefits
- Mortgage interest
You will be eligible for forgiveness if; primarily, 75% or more of the loan was used to cover payroll costs over the 56 days after disbursement and the rest used for the specified costs above and that you maintained all your employees and their compensation over the same period.
- The necessity of loan for loans over $2million – Does your business need the loan? These loans aim to boost struggling businesses during the COVID-19 crisis. You must, therefore, certify that the current economic turmoil has necessitated you to request the loan for the day-to-day business operations.
2. Start Your Documents Organization Now!
Start preparing all the necessary documents as early as now. Collect and maintain your employee records; timing of re-hiring, salary/wage levels as well as hours of work. Gather copies of leases, utility bills, rent invoices, etc.
If your loan is over $2million, also have important data on operations before and during the COVID-19 clearly showing the decline in business. Prepare the cash flows and budget forecasts and all necessary financial performance metrics to show the current economic turmoil of your business. These documents will justify your application for a PPP loan given that the company faces inconsistent revenues currently and in the future, unavailability of business cash reserves as well as the inaccessibility of alternative sources of financing.
3. Work with your financial, accounting or consulting specialists to maximize forgiveness
There are still several moving parts and many of the forgiveness calculations involve some decisions that need to be made in key areas. Here are some significant new items of guidance to the forgiveness application that was released by the SBA:
- Alternative payroll covered period - For borrowers with payroll schedules that are biweekly or more frequent, the application allows them to choose an eight-week (56-day) period that begins on the first day of the first pay period that begins after disbursement of PPP funds.
- Paid versus incurred costs - The application states that “borrowers are generally eligible for the payroll costs paid and payroll costs incurred” during the appropriate period and “an eligible non-payroll cost must be paid during the covered period or incurred during the covered period and paid on or before the next regular billing cycle.” This allows borrowers to include costs that were paid over a period of more than 8 weeks.
- Personal property included - The application includes “lease agreements for real or personal property in force before Feb. 15, 2020.” This would include leases for personal property such as vehicles and office machinery. It should be noted that covered utility payments include “transportation.” Since vehicle leases are included, and the SBA has defined utilities to include fuel costs in guidance provided to self-employed individuals, fuel cost may be ultimately allowed as a utility cost.
- Owner-Employee compensation – Owner-employees eligible payroll costs are limited to the lesser of 8/52 of their 2019 annual compensation; or $15,384 (equivalent to $100,000 annual salary).
- Full Time Employee (FTE) defined - The application uses a 40-hour work week as the standard for an FTE and rounds to the nearest tenth. It also allows for a “simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.” Borrowers should calculate using both methods to see which is more advantageous.
- Employee safe harbors - A new set of safe harbors were put in place to protect borrowers from a reduction in FTE employees due to an employee’s actions, including when an employee is fired for cause, voluntarily resigns or voluntarily requests a reduction in hours.