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How Small Businesses Can Maximize Payroll Protection Plan (PPP) Loan Forgiveness
Posted by Sylvia Lagerquist, CPA
The signing of the Coronavirus Aid, Relief, and Economic Securities (CARES) Act into law in March marked a historic effort to provide relief for the nation’s small businesses, many of whom are struggling to pivot and adjust in the wake of the pandemic and its ensuing regulations on closures and social distancing.
A bulwark of the CARES Act is the loan-based Payroll Protection Program (PPP). Originally funded with $350B, another $310B was added in a second round of funding at the end of April. The goal of the program is to put cash in the hands of small business owners so that they can continue to pay employees as well as other expenses critical to operations.
The program has been fraught with difficulty, however, from quickly eroding funds and figuring out how to apply to determining how much your business is eligible to receive. Perhaps the greatest cause for concern, though, is the question of how to interpret what exactly can be forgiven.
Here’s What We Know
The PPP stipulates that loans will be forgiven if they meet certain criteria. The criteria have two main components: what the money is being used for, and when.
Forgiveness will be extended to monies spent specifically to cover payroll costs. This means wages, but it also means sick pay, vacation pay, commissions, and tips. Forgiveness is capped at $100K per employee prorated for 8 weeks, which is the coverage period.
PPP funds spent on group health insurance premiums, retirement plan contributions, and local and state payroll taxes, are eligible for forgiveness as well.
There is also provision for forgiveness of monies spent on critical expenses like rent, interest on mortgages, and utilities, however this is capped at 25% of the forgivable amount.
Here’s What Still Needs Clarification
Even with the guidelines above, there is still a lot that needs to be fleshed out in the interpretation of the CARES Act as it relates to the PPP. For example, there is ongoing debate as to whether the funds can be forgiven if they are used for eligible expenses that are incurred during the 8-week period of coverage, but perhaps paid afterwards. Or, if it is possible to be forgiven for eligible expenditures like rent that are paid in advance during the 8 weeks but maybe not incurred until after that window closes.
One major issue which remains in question is exactly how much loan forgiveness is impacted if the business reduces its workforce or wages.
Here’s What You Can Do to Maximize Opportunities for PPP Loan Forgiveness
Despite its ambiguities and obscurities, the PPP still represents a major opportunity for relief in a challenging time, and there are steps that small business owners can take right now to maximize their potential for PPP loan forgiveness.
Step 1: Plan now to prove later
Regardless of how the still-unclarified issues take shape in the coming months, if you receive a PPP loan, you will eventually be asked to prove how you spent the money in order to get any portion of it forgiven.
For this reason, it is advisable to keep PPP funds separate in their own business checking account, and to maintain meticulous records of when and how the money is spent.
Hold on to any supporting documentation like canceled checks and receipts, and keep them organized and in one place to be ready to submit as required proof that you spent the loan monies on expenses eligible for forgiveness.
Step 2: Be strategic about rehiring
Consult with your small business CPA firm on your strategy for rehiring any employees you have had to let go. While rehiring as much of your workforce as possible will maximize your eligibility for PPP loan forgiveness, the circumstances, operational needs, and goals of each business is unique.
For some, bringing back a skeleton crew to keep things running for now may prove more advantageous in the long term, and your CPA firm can help you determine what might work best for you.
3. Err on the side of caution
Since there is a lack of clarity concerning whether payments—even for forgiveness-eligible expenses—made after the eight week coverage period can in fact be forgiven, err on the side of caution and aim to keep the expenditures that you wish to be forgiven within the coverage time frame. This may mean not using the funds to pre-pay rent, or being sure to cut payroll checks before the 8 weeks is concluded.
Leveraging the support of experts like your small business CPA firm is critical for standard business operations, and even more so as we navigate the new business normal—with its challenges and opportunities—together. Talk to your CPA today about how a PPP loan can best be used by you to sustain your business and maintain its vitality, both now and in the future as you seek to maximize loan forgiveness.
Image Credit: 401(K) 2012 (Flickr @ Creative Commons)
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