What You Need to Know Before You Receive Funds from a Paycheck Protection Program (PPP) Loan

Effective as of April 13, 2020 – Subject to SBA Guidance

1. Understand the Legal Aspects of the (PPP) Loan

There are legal restrictions on the use of the funds. When you applied for the (PPP) loan you certified that you would use the funds to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments. Knowingly using the funds for unauthorized purposes could lead to federal fraud charges.  Additionally, if a (PPP) is used for unauthorized purposes, the loan can be converted into a recourse liability loan.

2. Prepare to Document and Account for the (PPP) Loan Proceeds and Expenditures

You need to assume your loan activity will be audited by the Federal Government at a later date for accuracy and misappropriation of funds. You will also need to submit to your Lender and the SBA detailed documentation to satisfy the loan forgiveness provisions. Your accounting needs to be impeccable. WDR highly recommends a dedicated separate bank account established to receive the proceeds and to pay out expenses. If possible, you should also create sub-accounts in your accounting ledger to post Covid-19 (PPL) allowed expenses for tracking purposes. Keep copies of all back-up documentation including payroll ledgers, payroll tax reports, receipts, cancelled checks etc.

3. Understand Your Full-Time Equivalent Benchmarks (FTE’s)

Once the first dollar hits your account from a (PPP) lender the clock starts ticking as of the day you received funds. You have (8) weeks from that day to manage your (FTE’s) to minimize loan forgiveness. Generally,  your loan forgiveness amount will be reduced by the percentage that your (FTE’s) for the (8) week period does not meet or exceed your chosen benchmark (FTE) period. Note that there is a savings provision that allows you to bring staff back by June 30, 2020 which could save the percentage drop provision of (FTE’s) and wage drop provision. However, waiting to June 30, 2020 to save the percentage reduction may result in partial loan forgiveness due to the total dollar spend provisions.

You should spend the time calculating your monthly (FTE’s) average for the (2) benchmark periods and determining the lower of the two which you will use as your benchmark for loan forgiveness. The two periods to consider are 02/15/2019 to 06/30/2019 or 01/01/2020 to 02/29/2020. For seasonal employers the benchmark period is 02/15/2019 to 06/30/2019. Forgiveness will also be reduced if you lower by more than 25% the wages of any individual employee making less than $100,000 in 2019 . Consider, if you reduce pay in the benchmark period  you may not have enough qualifying expenses for full forgiveness. There has been no definitive clarification if (30) or (40) hours will be used for (FTE) calculations. Historically SBA and ACA has used (30) hours but we are not certain until guidance is issued. We recommend using (30) hours at this point to determine the benchmark figures until further guidance is released.

4. Understand Expenses that Are Eligible Expenditures of the (PPP) Loan

Payroll Includes the Following:

• Salary, wages, commissions or similar compensation
• Payment of cash tips or equivalent
• Payment of vacation, parental, family, medical, or sick leave
• Allowance for Dismissal or Separation
• Payments required for the provisions of employee benefits including insurance premiums
• Payment of any retirement benefits including defined contribution and defined benefit
• Payment of State or local tax assessed on the compensation of employees; and
• For sole proprietors or independent contractors net earnings from self-employment.

Payroll does NOT include:

• Compensation of an individual employee in excess of $100,000, as prorated for the covered period. The $100,000 cap is on “cash” compensation, not on non-cash benefits, including; employer contributions to defined benefit or defined contribution retirement plans, payment for the provision of employee benefits such as health premiums and insurance premiums as well as payment of state and local taxes assessed on compensation of employees. These costs can exceed the cap.
• Employer Paid Life Premiums (likely not but not stated by SBA yet)
• Federal Employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA and Railroad Retirement Act taxes, and income taxes required to be withheld from employees. (Basically, Employer paid employment tax remittances on payroll tax returns can’t be added to gross wage figures.)
• Any compensation of an employee whose principal place of residence is outside the US
• Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response ACT.

Following are additional expenses that are eligible expenditures for loan forgiveness. However no more than 25% of the total loan forgiveness amount can be attributable to these costs: 

• Electricity
• Gas
• Water
• Transport of utilities
• Telephone
• Internet access service (Likely will need to exclude hardware rental costs from bill)

Other eligible non-payroll costs also subject to the 25% rule Include:

• Interest on Mortgages (No prepayments eligible)
• Interest on any debt incurred before February 15, 2020
• Rent/Lease Payments on written leases dated prior to February 15, 2020 (We will need clarification as to the method to calculate allowable rent if no written lease is in place)

Important Note – As of this writing it is unclear whether the SBA will be using cash or accrual basis or potentially both depending on your tax elected method of accounting for computing expenditures in the (8) week period. It is also unclear whether prepayments will be allowed expenditures or payments of expenses unpaid from prior periods will be allowed.

5. Loan Forgiveness Certification

After the (8) weeks from the date you received your (PPP) funding you will need to submit a forgiveness request to your Lender who is servicing the loan. Each Lender will have specific requirements for backup data to review the forgiveness request and to make a determination as to the level of forgiveness. The (PPP) Promissory Note you signed for the loan may include the required information. The data requests may increase in complexity as guidance is issued. Be prepared with exacting and impeccable records. The Lender will have (60) days to decide on forgiveness. For the cherry on top forgiven loan amounts under this program are excluded from taxable income.

If you have any questions or would like assistance from WDR please contact us