Eligibility and usage are key factors in determining whether a small business will have its loan forgiven. In Part I of this post, we looked at eligibility factors.
Once PPP funds are received, what are the best practices to maximize your opportunity to have your loan forgiven? It may sound obvious, but make sure you’re using the funds for the forgivable purpose. These include the following:
- Payroll costs (if you’re self-employed, these costs include the net profit amount from your business, as reported on your 2019 tax return)
- Interest payments on mortgages incurred before 2/15/20
- Rent payments on leases dated before 2/15/20
- Utility payments under service agreements dated before 2/15/20
However, according to the SBA, not more than 25% of the forgivable loan amount (the amount of the loan used to pay forgivable expenses) may be attributable to non-payroll costs. In other words, at least 75% of the loan must be used for payroll costs.
If you have already laid off or furloughed workers, try to restore employee headcount and salary levels by 6/30/20. If you do so, any headcount and salary reductions that occurred between 2/15/20 and 4/26/20 will be ignored.
We’ve responded to many business owners who’ve indicated there is no work for employees, so “I will not bring back employees until there is work.” NO. The intent of the funds is to keep a small business’ work force in place until the stay-at-home order is lifted. Once you obtain the funds, call employees and advise them you are paying them with PPP funds.
Keep in mind that you don’t have to rehire the same employees, and rehired workers don’t actually have to perform customary work duties. Before taking action, you should consult with your labor and employment attorney to work out the terms for rehiring workers.
We have been hearing from many business owners who offered reemployment to furloughed employees, who subsequently declined the offer. The Department of Treasury has recently come out with FAQ 40, which states the loan forgiveness of a company will not be reduced if an employer offered to rehire the same employee, but the employee declined the offer. The Department of Treasury’s response in part states that “SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation.” The response goes on to say, “Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.”
Recordkeeping is key to forgiveness
To maximize the potential forgiveness, start planning now. Here are some thoughts:
- Establish a separate checking account for the PPP funds. If a separate account cannot be established, develop a reconciliation of how the funds were used for payroll, rent and utilities. Keep in mind the maximum eligible payroll to be paid by the PPP is the equivalent of $100,000 divided by pay frequency.
- Review headcount to the base year of 2/15/19-6/30/19. A decline in headcount will result in reduced forgiveness.
- If it appears because of an inability to rehire your entire workforce there will be remaining funds, consider bonuses to your employees outside of your normal pay cycle.
- Make certain all mortgage documents, leases and utility bills arose prior to 2/15/20.
- Keep payroll records available, especially those from 2/15/19-6/30/19, to document headcount for the period 2/15/20-6/30/20.
Some additional thoughts on loan forgiveness
It would be naïve to think the rules for forgiveness would be left unchanged given the FAQ activity recently issued by the SBA and Department of the Treasury. Given we can expect to see more FAQs, let’s answer some more possible questions revolving around forgiveness.
- What if my business is profitable during the period subsequent to using the funds?
- What if additional guidance is issued and it changes my eligibility?
The SBA seems to be leaning toward advising companies to NOT request forgiveness in the two circumstances above. Will it mean the initial assessment of eligibility is unjustified? Not necessarily, since there is a “good faith certification.” If facts and circumstances have changed dramatically since you were eligible, you may not want to seek forgiveness if the rules change based on what is known today. The important thing to keep in mind is the certification that was made in the PPP application. The penalties are severe if there is an intent to deceive (fraud). The SBA seems to understand that a business could not have anticipated all factors dictating its need of PPP funds.
So, if you do apply for loan forgiveness, how soon? A business is eligible to apply for loan forgiveness after eight weeks. This coincides with the period for usage of the funds. The bank has 60 days to process the forgiveness paperwork. This means depending on the when the PPP funds are received, a business should count six months from the date of receipt and count back 60 days. Why? The six months coincides with the deferral period for the loan and repayment commences after the deferral period expires.
To ensure forgiveness is received in a timely fashion, allow for 60 days from submission of paperwork, but no more than four months after expiration of the eight-week payment period.
One thing is certain with PPP funds — there is more uncertainty than certainty in the interpretation of the law. Put your business in the best possible position to have its PPP loan forgiven. The key is to plan and document your eligibility and usage in advance.
As always, if we can be assistance in modeling your businesses’ repayment or helping to understand the law, please reach out.