Develop a strategy to spend your PPP loan correctly for forgiveness

Just when you thought adapting your business to social distancing was challenging enough, here comes another critical item for your financial to-do list.

If you applied for and received a Payment Protection Program (PPP) loan from the Small Business Administration (SBA), you’re not done filling out paperwork quite yet.

Believe it or not, this loan program was designed so that small businesses won’t have to pay the money back. Naturally, there are some hoops to jump (and soon!) in order to make that happen.

Just days ago, the SBA issued guidelines outlining how they expect loan recipients to spend the money by the end of their 8-week covered period. You don’t have to navigate those guidelines alone—we’ve gone over the new rules with a fine-toothed comb and created a simple checklist to help you anticipate what to do next.

The SBA’s Form 3508 PPP Forgiveness Application is the key to avoiding paying the loan back. We highly recommend that you submit the application to your lender as soon as possible after your 8-week covered period is over and you’ve gathered all the required documents.

The lender will then have up to 60 days to make a decision on your application. It’s important to submit all of your information in an easy-to-read format to help the lender process your application quickly. The lender will most likely notify you of exactly what they require and in what format.

Follow these 5 steps to assure that you spend the loan funds wisely and use the money where it’ll do the most good—keeping your business afloat.

Step #1: What’s My Start Date?

On what date did the loan funds arrive in your bank account? That’s the day the loan clock started ticking. You’ve got 8 weeks (56 days) from that day to spend the money, at least 75% on payroll and the other 25% on certain business expenses (more on that in Step #2).

Those 56 days are called the “covered period.”

• Tip: If you pay employees weekly or every 2 weeks, your 8-week clock can start ticking on the day of your first full payroll after loan funds landed in your account. The SBA is calling this the “alternative covered period.” This can buy you extra time and will certainly simplify the process.

Check out page 1 of the PPP Loan Forgiveness Application for a detailed explanation of who can use this alternative period.

Step #2: How Should I Spend the Money?

Clearly, the PPP program was meant to keep workers from losing their paychecks.

The SBA wants you to spend most of the money on payroll. If all the loan funds go entirely to cover payroll costs in your 8-week period, that’s fine. Just make sure at least 75% of the money went to paying employees and/or yourself as the owner.

• Tip: For independent contractors and sole proprietors without formal, regular paychecks, at least 75% (or even all) of the loan funds can go toward paying yourself—up to a limit of $100,000. This applies to you if you filed a Schedule C with your 2019 taxes or all of your income is reported on a 1099.
• Tip: For borrowers with employees, “Payroll” includes benefits like company-paid health insurance and retirement benefits.

So what should you do if you have loan funds left after payroll?

One of the wisest things you can do right now is to spend smart.

The SBA is pretty specific about what they want to see you shell out funds to buy. See the full list here (page 2).

• Tip: Mortgage interest payments for your business location—or rent you pay a landlord for your storefront—fall into the category of approved loan expenditures. Don’t forget equipment you make payments on—interest on the loan to buy your backhoe is considered mortgage interest here.

• Tip: Like mortgage interest, rent payments for both real estate and personal property count. Don’t forget the copier or computer leases you may have. For both interest and rent, the loan or lease must have existed before February 15, 2020.

• Tip: You’re probably not used to thinking of some business expenses as utilities. The SBA defines items like transportation, internet-access and telephone services as utilities. Take the time to read the entire list on page 2 to make sure you get the full benefit of this rule.

Step #3: Did I Restore Employee Compensation to the Right Level?

Next, the SBA wants to see that you brought employee compensation back to at least 75% of what it was back in the good old days, pre-COVID 19.

Don’t worry—if you had to lay workers off or they quit, there are ways to keep this from counting against you (and requiring payback of loan funds).

On an employee-by-employee basis, you need to determine if their pay was reduced by more than 25%. If their pay wasn’t reduced, congratulations—you’re done with this test!

But for each employee who had a wage reduction, follow steps 2 and 3 at the bottom of page 7 of the application.

Step #4: Did I Restore the Right Number of Employees?

Start by calculating the average Full-Time Equivalency (FTE) of employees during your 8-week period. For instructions on how to make this calculation, go to page 7 in the “Average FTE” section.

This step is basically asking you to provide a headcount of your employees. The SBA created a test to make sure you not only spent the loan money where you were supposed to, but that you also paid attention to ensure each employee made it back to work.”

Essentially, you’re asked to report what were the average hours each employee worked in a 40-hour workweek after you got the PPP loan. Then you’ll compare that to a period of time before you got the loan—“the good old days.”

You have a choice about what time period you’re going to refer to as “the good old days” (or, as the SBA calls it, “the chosen reference period”).

Choice 1: February 15, 2019, to June 30, 2019

Choice 2: January 1, 2020, to February 29, 2020

OR

Choice 3: If you have seasonal employees, you’ve got options. Check out page 10, item C under the FTE heading.

• Tip: Choose the time period that had the LOWEST average FTE. You’ll compare the FTE during the covered period to this base period (“the good old days”) to see if you now have at least the FTE of the base period. If not, then your loan forgiveness may be reduced.

• Tip: A safe harbor sounds pretty nice right about now, doesn’t it? That’s what the SBA is calling its exception to the FTE rule. They know that things probably didn’t go smoothly during your 8-week loan period and keeping all of your employees was tough, so you need a safe harbor. To see a complete explanation of the “FTE reduction safe harbor,” see the last paragraph on page 8.

Example: Let’s say you had two employees who worked 40 hours each week in your “good old days” timeframe. Sadly, one worker quit because he couldn’t find childcare. And the second worker put in 50 hours a week after that. The SBA’s calculation, the “FTE Reduction Safe Harbor,” helps you explain how you juggled staff hours to stay in business and how you tried to fully staff your business.

Don’t assume that workers who refused to return when you offered them their job back are going to count against you. Let’s say a worker moved away and (obviously) won’t be working for you now. Did you do everything you could to bring that worker back? Yes. Is it out of your control that the worker did not come back? Yes. So the SBA says you can count that worker toward your FTE.

There are lots of exceptions to consider as you document what happened with each individual employee. The long and short of it is—you may get to count employees who don’t work for you now as part of your FTE.

Step #5: What Documents Do I Need?

The SBA offers a list of documentation you’ll need to submit with their PPP Forgiveness Application. (There’s also a list of documentation on page 10 you should maintain but don’t have to provide with the application.)

Remember, the effort to wade through all of this will be worth it when your whole loan (or even part of it) is forgiven.

If you follow these steps, we feel strongly that you’ll increase the level of your loan forgiveness substantially.

Be sure to check the SBA and Treasury website frequently for updates and clarifications to the Forgiveness Application process.

We know you have more than enough on your plate right now, so if you need a hand, reach out to your lender or to us for help. We’ll get through this together.

Added 6/5/2020

There is an overwhelming amount of info that has surfaced for the forgiveness portion of the PPP. However, we’ve found this to be a helpful website to help customers fill out the applications.