The Paycheck Protection Program loans as aligned with the Coronavirus Aid, Relief and Economic Security Act (CARES Act) were made available for application April 3, 2020. Already, there has been high interest and demand in this program, which is accessible for eligible employers through SBA-insured 7(a) program lenders and other authorized bank and credit union lenders. The program specifications and application are found here on the SBA site:
The biggest benefit being promoted about this program is that the funds are potentially 100 percent forgivable if used for qualified expenditures. The use of these funds and tracking of expenses will be critical in determining what amount of the loan will be granted forgiveness by the federal government.
Planning prior to using the PPP funds as well as understanding how they interplay with Economic Injury Disaster Loans (EIDL), or other relief funds will be critical.
Below are several recommendations for your consideration:
- Segregate your relief funds.
We recommend creating separate bank accounts for PPP, EIDL or other disaster relief funds. The relief programs commonly have strict guidelines for use of funds, including ensuring relief funding is not used for the same expenses in the same period. Separating relief funding (PPP, EIDL, etc.) from the general operating cash in your business is a way to show transparent use of funds necessary in future SBA audits. The bank that issued your PPP loan should be able to set up separate accounts with minimal effort.
We suggest using a “draw system” for use of the funds by transferring money from the new designated bank accounts to your general operating checking accounts as you pay qualifying expenditures eligible for loan forgiveness.
- Track PPP funds and eligible expenses.
Because the loan forgiveness process is still uncertain, tracking of all fund use is critical. You should track payments in Excel, tag them in QuickBooks, or in any system that works for you, and reconcile them with your bank statements. Tracking funds is necessary for forgiveness calculations, but it is also recommended to continue tracking use of the funds past the Covered Period.
Remember, under current guidance, to be eligible for full forgiveness of the PPP loan, businesses must use at least 75 percent of their loan for “payroll costs.” Less than 25 percent should be used for expenses such as utilities or rent and mortgage interest payments. You will need to track qualifying payroll, fringe benefits, utilities, rent and mortgage interest expenditures to support loan forgiveness for these expenses.
- Document payroll and other expenses.
Begin collection and keeping copies of invoices, payroll registers, timesheets, payroll tax filings and any backup for covered expenses under the PPP for the forgiveness documentation. Keeping this documentation in a central, but secure file area will aid in providing the forgiveness backup documentation your lender will request.
Your records will need to demonstrate proof that loan proceeds were used only for eligible business expenses, as noted above. Also be mindful that under current guidance, forgiveness is based on the expenses incurred and paid under the 8-week Covered Period. Often, payroll is paid in arrears, so you will need to evaluate ensuring expenses are paid in the 8-week period. Future guidance may change this, so be on the lookout for changes.
- Plan with your lender and CPA.
Funds received that are not forgiven are considered a loan with repayment terms. Based on your actual forgiveness calculation, your planned loan balance may differ from the actual loan balance.
Be sure to talk with your lender to understand the repayment terms, deferral period and how they may impact other existing debt service agreements. Contact your Anglin service partner to schedule time to properly plan for the use of your PPP loan funds and to maximize your eligible forgiveness amount.
- Plan your staffing and re-hire plans to maximize forgiveness under PPP.
The amount of loan forgiveness is tied to maintaining full-time equivalent headcount and salary levels to established periods prior to the COVID-19 pandemic. We suggest evaluating your staffing plan in advance of PPP funding to understand the expected forgiveness amount. Of course, maximizing forgiveness is not the only consideration, because your staffing needs may have changed if you have experienced full or partial business shutdown. At Anglin, we can help to walk you through these staffing decisions, especially as they relate to the PPP forgiveness calculation.
Given that the intent of PPP is to keep employees engaged, the burning question is, “Does it make sense to bring back furloughed staff immediately or defer until the business reopens or picks up?” This is a tricky question, and the decision can impact loan forgiveness. Another factor is utilizing the PPP forgiveness exception for staff reinstatement by June 30, 2020. Again, this is a complex decision, and we expect for more definitive guidance in the coming days to help aid in how these staffing decisions impact the forgiveness calculation.
- Balance Unemployment and PPP.
A challenge that some companies are facing relates to bringing back staff currently on unemployment. With the federal benefit added on top of the state benefits, it may be difficult to bring some staff back, which may impact the amount of your PPP loan forgiveness.
We recommend evaluating this on a person-by-person basis to best project the amount of PPP that might be forgiven. If you can do this prior to your payroll calculation and application for funds, that would be ideal. You should also communicate to employees that do not want to come back that if you have offered their job back, they can no longer certify they have lost their job due to COVID-19, and that may impact their eligibility for unemployment.
- Utilize employees under PPP with modified jobs.
If you can bring back staff currently on unemployment and pay them under PPP, you may be looking at more creative ways to utilize their time. We advise that before making changes to their job description, be sure to check with your HR professional and legal advisors. The changes should be identified as temporary, as actions you take today could impact future job roles if they are not properly handled.
There are several different ways to strategically utilize your team, such as leadership development, strategic planning activities, financial and business modeling for post-COVID-19 scenarios, marketing initiatives, 360-degree evaluations and so on.
While the intent of PPP is to keep employees on the employer payroll, the decision on the timing to do so is unique to every business. Please reach out to your Anglin team to walk through these options.
You may also be interested in our blog post about business and individual tax provisions as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).