The Paycheck Protection Program (PPP) has been a lifeline for many businesses. As of Monday, April 13, 2020, the United States Treasury reported over $230 billion of funds have been released to over 4,600 banks throughout the United States to fund small businesses through this loan program. Now that your business has been funded, here is what you need to focus on now to ensure loan forgiveness.
What is Forgivable?
The Small Business Administration (SBA) PPP outlines guidance on calculating forgiveness and the documents required to maintain and provide as proof as to how the proceeds were used in order for banks to determine the forgiveness of the loan. According to the Interim Final Rule regarding the PPP, “…forgiveness can be up to the full principal amount of the loan and any accrued interest. That is, the borrower will not be responsible for any loan payment if the borrower used all of the loan proceeds for forgivable purposes and employee and compensation levels are maintained.”
What are “Forgivable Purposes?”
The SBA is very specific as to what is considered forgivable purposes of the PPP loan proceeds. More specifically, the proceeds of a PPP loan are to be used for:
- Payroll costs (as defined by the calculation used to determine the loan amount);
- Costs related to the continuation of group term health care benefits, during periods of paid sick, medical, or family leave, and insurance premiums;
- Mortgage interest payments (but not mortgage prepayments or principal payments);
- Rent payments;
- Utility payments;
- Interest payments on any debt obligations that were incurred before February 15, 2020; and/or
- Refinancing an SBA Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020.
How Does the Calculation of Loan Forgiveness Work?
The actual amount of loan forgiveness will depend, in part, on the total amount of “Forgivable Purpose” cost, as noted above, incurred before February 15, 2020 over the eight-week period following the date of the loan. For instance, if your loan date was on April 15, 2020, the eight-week period under review of the forgivable costs will be from April 15, 2020 through June 10, 2020. However, of these forgivable costs, a minimum of 75% of the proceeds of the loan must be used for payroll costs, as defined in the calculation of the loan amount. No more than 25% of the loan proceeds may be attributable to non-payroll costs. It is very important that when determining the use of loan proceeds, that these requirements of the minimum 75% payroll costs/maximum 25% non-payroll costs are met. If these requirements are not met, the calculation of forgiveness will be impacted.
Other requirements to be met to receive full loan forgiveness are:
- Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount.
- Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
- Re-Hiring: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
To date, the SBA has not provided specific details of how the loan forgiveness will be impacted nor a direct calculation as such if the requirements noted above are not met. It is believed further guidance regarding forgiveness and a calculation to be used will be provided by the SBA. As more information becomes available on this, we will be sure to provide this information immediately.
How Can I Request Loan Forgiveness?
You can submit a request to the lender that is servicing the loan. The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on the forgiveness within 60 days.
What Documentation Do I Need to Provide to Prove Loan Forgiveness?
As part of the loan documentation to originate the loan, the borrower had to certify that “Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. Not more than 25 percent of the forgiven amount may be for non-payroll costs.” In order to support the forgiveness calculation, maintaining the following documents will assist the bank in the loan forgiveness calculation and determination:
- Payroll reports, most preferably the same reports or reporting format as those used in the loan origination process. Payroll reports should document a list of employees paid with check number or direct deposit information.
- Bank statements supporting all transactions for payments made.
- Copies of all qualified utility bills including EFT or check payment information.
- Copies of all interest payments made and/or EFT payment confirmations or checks paid.
- Copies of rental and lease agreements showing frequency of payment and monthly payment amounts as well as EFT or check documentation of payment.
What Best Practices Should I Consider?
The benefit to the PPP loan is the loan forgiveness component. Appropriately documenting how the proceeds of the loan are used and maintaining the appropriate documentation of the use of the loan proceeds will help expedite the banks review of the forgiveness calculation. As is stated in the Interim Final Rule, “Lender does not need to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs.”
Maintaining the documentation noted above will be very important. On top of the documentation here are some other “Best Practices” that will further assist with outlining clear use of the funds as outlined above.
1. Maintain a separate bank account for the PPP Loan Funds.
Set up a new bank account for the sole reason to track PPP loan proceeds and expenditures. This will help ensure that the proceeds of the loan are used specifically for the purpose of the loan and also verify the minimum 75% payroll costs/maximum 25% non-payroll cost requirement for full loan forgiveness. While this is not a requirement, it may ease a compliance burden when applying for forgiveness. A number of banks are asking loan recipients to maintain a separate bank account, within their bank, to manage the use of the proceeds through this account in order to ease the future forgiveness compliance burden and approval for forgiveness from the bank.
2. Maintain subaccounts within the general ledger for the loan and applicable debt forgiveness income and corresponding expenses.
Along with paying all associated costs with the PPP loan through a separate bank account, maintaining subaccounts to separately track the reporting of the PPP loan funds will also assist with providing detail and documentation as to the use of the proceeds. Having subaccounts for payroll, rent, utilities and interest on covered debt will more clearly document the use of the funds for the specific purposes of the loan. It will also assist the bank with completing the final forgiveness calculation of the loan and provide detailed information to support any copies of invoices, receipts or payroll journals requested and outlined above.
Further guidance is expected from the SBA on the loan forgiveness calculation and requirements of the banks and borrowers at the end of the eight-week forgiveness period. As new guidance becomes available, we will share that information as quickly as possible. Also, guidance from the American Institute of Certified Public Accountants (AICPA) as well as the Financial Accounting Standards Board (FASB) is expected out soon in regards to the accounting and recognition of the loan proceeds and forgiveness factors. As further definitive guidance becomes available, that information will also be shared as quickly as possible.
If you have questions regarding this information, please feel free to contact David Blain, CPA, CVA, Partner & Director of Entrepreneurial Services at McKonly & Asbury at email@example.com or by calling (717) 972-5722.
To stay up to date with all current financial, accounting, tax, and other matters relating to COVID-19, please continue to visit our COVID-19 Resource Center for the latest updates.
Questions on submitting your PPP loan application or the forgiveness process?
Our team stands ready to assist you through the PPP loan application and forgiveness process. Do not go at it alone. Ensure you are submitting the right information and receiving the highest forgiveness amount possible. Visit our PPP Loan Consulting webpage by clicking here to request assistance or support.
This communication is intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although McKonly & Asbury has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.