Congratulations! You worked with your bank, completed the application, jumped through the hoops, and now you’re approved for a Paycheck Protection Program (PPP) loan. You might even have the funds in hand.
Here are steps and considerations to ensure you’re managing the loan properly and avoiding getting caught short when it’s time for the bank and SBA to review your loan for forgiveness.
Logistical matters – Recording the loan and related expenses
- There is not a uniform process for disbursing the loan funds. Some banks are requiring funds to be deposited into a separate account while others disburse the funds into the general operating account. Keeping the funds in the general operating account will simplify bookkeeping.
- Some banks require a draw request and proof that the money was used for payroll, rent, utilities or mortgage interest. This may create lead times of two or more days before monies are disbursed. Be sure to plan accordingly with your bank.
- Set the loan up as either a current or long-term liability on your balance sheet entitled “PPP Loan”. Adjustments may be necessary if/when the loan is forgiven later.
- Continue coding expenses as you normally would to the appropriate accounts on your income statement. Segregating those expenses to their own PPP expense account isn’t necessary
- Many banks have their own lists of requirements necessary to meet the loan requirements. The lists are quite extensive so it’s important that you request this list from your bank NOW so you know what’s expected.
Making the most of your money
The clock starts ticking on an eight-week (56 day) window the day you receive the funds. This is called “the covered period”. Your goal is to achieve the following to maximize forgiveness:
- Spend at least 75% of the loan on payroll costs (including benefits).
- Spend no more than 25% of the loan on rent, utilities and mortgage interest.
- Keep employee count consistent from pre-pandemic levels. The test period is either 2/15/19- 6/30/19 or 1/1/20-2/29/20, whichever produces the best result for your business. You can meet this test if your FTE employee count is completely restored by June 30. More guidance is needed from the SBA on this topic.
- Do not reduce an employee’s wages by more than 25% for those making under $100K (annualized).
Your loan may be 100% forgivable if you meet the above requirements. Here are some additional loan forgiveness maximization tips:
- It’s okay to pay your employees, even if they aren’t working, to utilize the funds. The intent of the program is to keep your employees off unemployment by paying them so you can hit the ground running when business ramps up again. They need not be productive during this time.
- Payroll and qualified expenses must be paid during the eight-week (56 day) window, not just incurred. You may need to run a non-scheduled payroll at the end of covered period to meet this strict cutoff.
- Track and plan for the use of the funds as they are used for their intended purpose throughout the eight-week period, NOT AFTERWARDS, as this may be too late. You should examine your ongoing expenses to determine what qualifies in the utilities and interest expense categories. Utilities can include electricity, gas, water, telephone, internet, and transportation (gasoline) if necessary for your business. Interest includes loans secured by real or personal property that were in effect before 2/15/20. This could include your line of credit if it is secured by your business assets. Make sure these are incurred and paid within the covered period.
- For borrowers who are self-employed, the forgiveness amount for owner’s compensation is calculated based on your 2019 net profit from your IRS form 1040 Schedule C for 8 weeks (8/52).
- Can’t spend all the money? You can repay the excess amount right away or treat it as a loan at 1% interest with a six-month payment deferral. The loan is not secured and not subject to personal guarantees.
- To facilitate a swift rollout, the usual SBA bank liability roadblocks were lifted from the PPP program. This means the risk of audit/compliance is now on you, the borrower.
- After your loan is funded, comprehensive records and accounting will be vital to meet certification requirements for loan forgiveness.
- Check with your lender now to understand what their loan forgiveness certification process may look like after the eight-week period. Lenders may have varying requirements based on their specific lending practices.
- The SBA continues to provide guidance as loan forgiveness details evolve. It’s important to keep in close contact with your banker and accountant as new details emerge.
How can PWB help you?
We’re accountants, and this is our environment and the language we speak. We have developed tools that can help you:
- Track the expenses as they are incurred during the eight-week period to ensure you are on target to maximize your loan forgiveness.
- It’s critical that you have a comprehensive loan forgiveness reporting package in place. You may be asked by the lender or the SBA to account for all expenses paid with the loan funds by providing payroll records, receipts, lease agreements, etc. PWB can help you pull this information together and keep it all organized and easy to understand.
- Although cash flow may look grim, it may be wise to map out the next 3-6 months. Short-term cash flow projections can give you a roadmap for the months ahead. We can help build a cash flow projection specific to your business.
You’ve got this.
Navigating these programs takes savvy planning and implementation. We have the experts ready to help you ride out the storm and our COVID-19 page has additional blog posts and resources available 24/7.