CPA Chats: Paycheck Protection Program
SBA Loans: PPP
For every call I receive about economic impact payments, there’s an equal number of calls from small business owners needing assistance as it relates to the SBA loan options available and the application process.
The moment I heard the White House mention the SBA loans to be made available, I started calling my recurring business clients with all of the information I had on hand to let them know this was an option available for anyone who needed assistance. There are a few types of SBA loans that have become available. This post will focus specifically on the Paycheck Protection Program loans that were established as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. By far, this is the type I get the most questions about.
Let’s chat about PPP Loans.
The Paycheck Protection Program loans or better known as PPP loans were established as an incentive/assistance program for small business owners to retain their employees during the COVID-19 pandemic.
Let’s start with the basics. Who can apply for PPP loans?
Any small business concern that meets SBA’s size standards
Any business, 501(c)(3) non-profit organization, 501(c)(19) veterans organization, or Tribal business concern (sec. 31(b)(2)(C) of the Small Business Act) with the greater of: 500 employees, or that meets the SBA industry size standard if more than 500
Any business with a NAICS Code that begins with 72 (Accommodations and Food Services) that has more than one physical location and employs less than 500 per location
Sole proprietors, independent contractors, and self-employed persons
If you read that the way I did, you’ll realize that the eligibility is pretty broad and inclusive to almost all businesses.
What are PPP loans?
These loans are low-interest and designed to cover payroll costs, mortgage interest, rent, utilities, and interest on certain debt obligations. However, 75% must be used for eligible payroll expenses over the designated 8 week period. The loans have a maturity of 2 years and interest rate of 1%.
A ‘hot topic’ surrounding these loans is the forgiveness aspect. PPP loans may be forgiven wholly or partially, if specific requirements are met. Unlike the EIDL loans, PPP loans are applied for through your financial institution or any SBA approved lender. On a personal note, experiences of my clients’ vary greatly as it relates to the application process. Each institution has their own nuances to the application and acceptance varies as well.
At the end of the 8-week period, the borrower will need to apply for forgiveness through their lending institution. A borrower does not have to use all loan proceeds within the designated 8 week period, however remaining proceeds not disbursed will not be eligible for forgiveness. Forgiveness of these loans, based on current guidance available to date, is based on the way funds are used/disbursed. Certain expenses are expected to be forgiven including: payroll, mortgage interest, rent, and utilities. These are the only uses that we expect will be covered by loan forgiveness. However, the loan can be used for other purposes.
Eligible payroll costs may include compensation paid to employees (who reside in the US) including salaries, wages, commissions, cash tips, payment for vacation/leave, employee benefits, health insurance premiums, retirement benefits, and certain payroll taxes.
There are a few notes of caution included in the forgiveness promised through these loans. If an employer is approved and distributed funds based on a monthly payroll value/employee number and then reduces the number of employees; the forgiven value may be reduced. In a similar train of thought, if salaries/wages are reduced more than 25% for any employee during this 8-week period, the loan forgiveness amount may be reduced.
Other reasons the loan forgiveness amount may be reduced is if more than 25% of the loan was used for non-payroll costs. Additionally, if the borrower received an advance through the EIDL program; that amount will be deducted from the forgivable amount on the PPP loan. Overall, the idea really is to keep people employed and earning their normal wage to avoid economic hardship and an even greater rise in unemployment.
There are countless other intricacies as it relates to these loans and I am always available for a consultation if you or your small business needs assistance navigating this process. For anyone who has received a PPP loans, I’d like to include a few tips from your friendly neighborhood CPA.
I firmly believe that accurate record keeping will be the difference for some when it comes to forgiveness or not. When a borrower applies for forgiveness, you will have to have accurate documentation of the use of those funds. Having bookkeeping software like QuickBooks will be really helpful through the process.
A few tips:
You’ll want to created a long-term liability account for the PPP loan
Categorize any PPP-related expenses (using tags, notes, projects or classes)
You’ll also want to breakout your payroll costs to account for the exclusion of federal taxes paid (as a general rule PPP expenses are forgiven but not tax free), and exclusion of annual compensation above the $100K cap.
You may also want to keep a separate spreadsheet to track the overall use/spending to ensure you’re maintaining the 75% payroll usage of funds to qualify for forgiveness.
Use the report features in QBO to your advantage. Create a P&L for just the relevant loan & 8-week period using classes/tags/filtering.
If you use QBO Payroll, you also have the easy ability to run your payroll reports, exclude federal tax payments and export to a spreadsheet if needed.
Lastly, I recommend and have had many clients opt to have their PPP funds deposited into a separate cash account with their financial institution. They are using those funds to ‘reimburse’ their operating account for the exact amounts as needed. I think this is one of the most accurate ways to ensure funds are used appropriately and data is accurate to ensure you will have the opportunity to apply for forgiveness.
One more note of caution: timing is important. Make note of the date or approval/funds disbursement and know when your 8-week period begins and ends. Reach out to your financial institution to clarify any questions/concerns you may have and consult with your CPA for record keeping recommendations.
Finally, a few numbers to boost your spirits during this trying time:
This is a summary of Paycheck Protection Program Round 2 data as of 5:00 p.m. EDT, Sunday, May 10, 2020 per the SBA Website.
Total approved loans: 2,575,182
Total approved dollars: $188,033,735,242
Number of participating lenders: 5,428
Average loan size: $73,017
As many may know, the SBA paused accepting applications from lenders in April. However they have resumed accepting and approving applications from lenders as of April 27, 2020.
A few helpful resources:
https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program
https://www.sba.gov/document/support--how-calculate-ppp-loan-amounts