PPP Common Questions, Answered.
May 14, 2020
Questions on the PPP loan? You’re not alone. We’ve heard some great questions recently, and given how murky the guidance has been, we wanted to put together our best answers in one place. Just this morning, the Treasury Department released updated FAQs on the PPP, and together with other sources of information, we’ve tried to give you up to date answers to these common questions. Have a question we didn’t answer here? Please reach out to us!*
*We aren’t lawyers, practicing accountants, or bankers. We do help small businesses with their finances and we’re a small business ourselves. We’re deep into the murky questions of this program by virtue of those two facts, but we don’t claim to be the final word on any of this.
1. I am concerned about all the news regarding the qualification rules for the PPP Loan and that they may have changed. Now I hear there is a Safe Harbor? What does that mean?
Answer: The new FAQ released from the Treasury today included a “safe harbor.” Essentially, every borrower of a PPP loan had to certify that they needed the loan. This was based on a good-faith assessment that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” However, many businesses found this vague and were not sure if they were properly complying with this requirement. The FAQ today created a new safe harbor, which states that “any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” Additionally, the FAQ states that the SBA will be focusing its audit resources on larger loans, above $2 million, when it comes to the good-faith certification.
2. What about liquidity? My bank is making me certify something about liquidity for the business.
Answer: This goes to the above certification, that the economic uncertainty makes this loan request a necessity. The recently released guidance says, “Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.” Taking this guidance together with the safe harbor language above, we believe this should answer most small business liquidity questions.
3. Now that I have the funds, how do I spend them so that the loan will be forgiven?
Answer: According to the current guidelines, the money needs to be spent within 8 weeks of receiving the loan disbursement and at least 75% of those funds must be spent on payroll costs. However, we don’t have much more guidance than that. We’ve been asked many questions by our clients about how to specifically calculate these amounts, particularly if the funds are received in the middle of a payroll period. Does it need to all be disbursed by the end of 8 weeks? At this stage we don’t have information on that and some of what we do know may be changing in the near term as Congress and Secretary Mnuchin are in discussions over these questions. We will respond once we have additional information.
4. I had an employee leave and refuse to come back to work. What do I do?
Answer: The recent guidance answers this question. From the FAQ released today (5/13/2020):
“40. Question: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?
Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, 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 interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.”
(Find the full guidance here).
5. What happens if I don’t get the money forgiven?
Answer: There are two possibilities that could result in the loan not being forgiven. The first is if the SBA decides that loan request for this business was not “necessary to support the ongoing operations of the applicant” and is therefore not eligible for forgiveness. Then the lender (the bank) will notify the borrower that they do not qualify for forgiveness. According to the FAQ, as long as the loan is repaid, there will be no enforcement issues.
The second possibility is that your forgiveness is denied based on something other than the good-faith certification for taking the loan. This could be due to not meeting the spending requirements (75% spent on payroll, 25% on other eligible expenses), not enough documentation, or some other definition of the spending. Then we recommend appealing the decision through your bank. Worst case, if not all of it is forgiven, the loan remains a loan and you have up to 2 years to pay it with no payments for the first 6 months and a low interest rate of 1%. This is why it is so important to keep detailed records.
6. How do I keep track of the expenses to be forgiven?
Answer: QuickBooks has a great article about the way to track the loan. We also recommend a few additional steps, if they are feasible for you:
- Open a separate business account for the PPP loan proceeds and spend your payroll and other eligible expenses directly from there.
- Have a file folder on your database dedicated to the PPP documentation. Keep everything there, including copies of the loan documents, correspondence with the bank, paystubs, tax calculations, checks, receipts, etc. Make sure this file is backed up or kept in secure cloud storage. If your computer dies or your hard drive fries, you want to have another copy.
- If you are using QuickBooks or some accounting software, you can separately track these expenses so when you apply for the forgiveness, you can print a report from QuickBooks with all of the expenses listed on it.
7. What other tips should I know about to help ensure forgiveness?
Answer: We suggest a few other tips:
- Write yourself a memo describing your rationale for any decisions you make with the PPP loan. Deciding to rehire? Write a memo. Payroll timeframe? Write a memo. Calculating full time employees and pay dates? Write a memo. This will ensure you have a copy of your thinking and can clearly demonstrate the rationale for any decisions you make regarding the funds.
- Write yourself email “memos” after every conversation regarding the PPP with your banker, bank, SBA, SBDC, etc. Make sure to write what you discussed, names, phone numbers, titles, and questions you asked.
- Get guidance if you are unclear. Call your bank, call the SBA, call your local SBDC and get what guidance you can. It will show that you tried in good faith to have your questions answered. Yes, we know the wait times are long. It’s not fun.
- Communicate with your payroll company, accountant and bookkeeper. Keep them in the loop and informed of your decisions. Do it in advance of having to make changes to payroll, etc.
- Keep good records weekly of all the expenses, so you have a record of everything you spent because you’ll have to submit that in a package to the bank.
8. My banker isn’t giving me guidance, or I can’t reach a person at the bank. Is there anyone else I can contact?
Answer: This is a great question. We are hearing that people aren’t able to get through to a person at the bank to ask questions. Instead, you can try the SBA or the SBDC or your bank’s headquarters, if you can reach them. Alternatively, many CPAs are providing guidance particularly around the forgiveness issue. Do your best; we know it’s hard right now.
9. Are the expenses that are forgiven tax deductible?
Answer: Currently, no. The IRS released guidance stating that because the loan is forgivable and the loan amount is NOT included as income to the business on your tax return, these funds are essentially tax free already. If the expenses were also tax deductible against the business income for the rest of the year, this could be double dipping. That being said, we have heard that Congress is looking into changing this position, so wait for further guidance.
10. How is the loan forgiveness calculated?
Answer: Payroll costs must account for 75% of the spending. Eligible expenses can account for the other 25% (rent, mortgage, and utilities). Payroll costs include gross payroll, which includes the income taxes withheld from employees’ paychecks. However, the annual salary per person is capped at $100,000. It’s important to note that payroll costs do NOT include the employer’s portion of federal payroll taxes. Employee benefits, such as employer retirement contributions, group health care coverage, and state and local taxes, also count towards payroll costs and are in addition to the $100,000 annual salary cap. See questions 7 and 16 of the released FAQs. Your PPP expenses can include sick time, but you cannot use it if the wages would qualify under the credit allowed by the Families First Coronavirus Response Act. See question 8 in the released FAQs.
Any advancement or grant from an EIDL (up to $10,000) lowers the total amount of forgiveness under the PPP, although any loan above the grant amount does not, as you need to pay those funds back. Be sure not to use the EIDL loan and PPP loan for the same expenses – this will jeopardize forgiveness. You must also maintain the average number of full-time equivalent employees and keep employee pay at 75% or more of their previous annualized pay (unless their annualized pay was more than $100,000). Also, remember that the forgiveness amount is calculated based on the 8 weeks of eligible expenses following the PPP disbursement. However, that too may be changing based on discussions with Congress. We will keep you updated.
11. I’m confused about the full-time equivalent employees (FTE) and how that affects my forgiveness. I included my part time employees on the PPP application as one full employee each. Does that jeopardize my forgiveness?
Answer: We are still waiting for further clarification on some definitions. During the original application, it asked for the number of employees, and did not ask you to specify FTEs (whether employees were full time or part time). We believe that is simply a headcount calculation, not a full-time equivalent calculation, per SBA Regulation Section 121.106. However, the full-time equivalent calculation does come into play for the forgiveness. Our understanding at this time is that the forgiveness application will compare your FTEs from January to February 2020 vs. what they are June 30 to ensure that you have brought back your employees. The best clarification we’ve seen can be found in questions 15 and 16 of the CLA article on the PPP here.
Paycheck Protection Program Loans Frequently Asked Questions
Track how you use your Paycheck Protection Program loan from Intuit
Answers to Your Paycheck Protection Program FAQs from CLA
KCS Wealth Advisory is a registered investment adviser. Our services include discretionary management of individual and institutional investment accounts, along with personalized financial, estate and tax planning services.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance does not guarantee future results. Investing involves risk, including loss of principal. Consult your financial professional before making any investment decision. Other methods may produce different results, and the results for different periods may vary depending upon market conditions and portfolio composition. This email does not represent an offer to buy or sell securities.
Investment advisory services offered through KCS Wealth Advisory, an SEC Registered Investment Adviser. Clearing, custody services and other brokerage services provided to clients of KCS Wealth Advisory are offered by Fidelity Brokerage Services LLC, Member NYSE/SIPC. Fidelity and KCS Wealth Advisory are unaffiliated entities.
Electronic communications are not necessarily confidential and may not be delivered or received reliably. Therefore, do not send orders to buy or sell securities or other instructions related to your accounts via e-mail. The material contained herein is confidential and intended for the addressed recipient. If you are not the intended recipient for this message, any review, dissemination, distribution or duplication of this email is strictly prohibited. Please contact the sender immediately if you have received this message in error.