If you are a business owner who successfully applied for, and received, a loan through the Paycheck Protection Program, it is critically important to stay on top of those loan funds to ensure you comply with the program and remain eligible for loan forgiveness. Unfortunately, compliance can be extremely challenging since it seems like the rules governing the PPP program are constantly changing.
Tip No. 1 – You Have 8 Weeks to Spend the PPP Funds
If you received a PPP loan, it is important to understand that you cannot simply set that money aside. You need to utilize those funds for qualifying purposes within 8 weeks (i.e. 56 days). The proverbial clock starts to run on the date you received the loan. That is why I strongly recommend you circle the date you received the PPP funds and ensure to exhaust them within 56 days.
Tip No. 2 – You Need to Adhere to the 75/25 Rule
The 75/25 rule for PPP funds means that you need to expend at least 75 percent of your loan on payroll costs. This includes the cost of salaries, wages, vacation benefits, parental leave benefits, health benefits, etc. It is also important to note that payments made to independent contractors do not qualify as acceptable payroll costs.
Tip No. 3 – You Need to Retain Your Staff
In order to maintain your eligibility for PPP loan forgiveness, you are required to maintain the number of employees on your payroll. It is also important to know that a new exemption was created that allows you to include employees who were previously furloughed and rejected your offer of re-employment. To qualify for this exemption, there needs to be evidence of a written offer to rehire that was conveyed in good faith to the employee, you must have offered to rehire the employee at their same salary/wage rate and the same number of hours, and you need to document the employee’s rejection of your re-employment offer.
Tip No. 4 – You Need to Maintain Detailed Records to Improve Your Chances of Loan Forgiveness
If you have not kept good financial records in the past, that needs to change and change quickly when you received a PPP loan. Why? Because you need to supply detailed records to qualify for loan forgiveness. As a result, make sure to track all eligible expenses over the eight week period beginning when you receive the loan funds. Your lender will likely want these documents in digital format, so make sure to save financial records in PDF or other digital format. The documents necessary to apply for PPP loan forgiveness include:
- Payroll reports from your payroll provider
- Payroll tax filings (i.e. IRS Form 941)
- Income, payroll, and unemployment insurance filings from your state
- Documents that substantiate your contributions to retirement and health insurance plans
- Documents that substantiate your eligible interest, rent, and utility payments
Tip No. 5 – Do Not Give Up Hope If Your Loan Forgiveness Application is Initially Denied
Considering the fluidity of the PPP program and the ever-changing rules and regulations, it is important not to get discouraged if your loan forgiveness application is denied. You should follow up with your lender to see if they will allow you to submit additional documentation to reevaluate your loan forgiveness request. Worst case, your loan balance will continue to accrue interest at 1 percent over the course of a 2-year repayment period. It is also important to know that there is no prepayment penalty. You have the option to pay off the outstanding balance at any time with no additional fees.
Tip No. 6 – Be Nimble and Ready for Change
As mentioned earlier, the rules surrounding the PPP program seem to be changing by the minute and the uncertainty surrounding the implementation of the program does not appear to be going away any time soon. For example, the U.S. House of Representatives recently passed a bill called the Paycheck Protection Flexibility Act (i.e. H.R. 7010). This legislation would extend the loan forgiveness period from 8 weeks to 24 weeks. In addition, it would lower the percentage of funds needed to be used exclusively on payroll costs from 75 percent to 60 percent. The Senate is working on its own bill that would double the covered period of PPP spending from 8 weeks to 16 weeks. However, the Senate’s bill, as of 5/29/20, would not change the 75 percent payroll cost requirement, according to the Journal of Accountancy.
Have Questions? Contact InSight Law
We are staying on top of the new guidance issued by the Small Business Administration, lending institutions, and Treasury Department. If you are feeling overwhelmed and unsure of whether your PPP loan will qualify for forgiveness, we understand and are here to help. Contact our office today.