Were you recently approved for a Paycheck Protection Program loan by the SBA?

You may be asking yourself: “Now what do I need to do?” While we do not have clear guidance yet from the SBA on all of the ins and outs of the mechanics and requirements for the loan forgiveness, we wanted to provide you with some pointers on what you should be doing to correctly document your use of the funds.

First, a few reminders and tips:

  1. The ONLY things you can use the PPP loan funds for are:
    • Payroll and payroll-related costs incurred over the 8 weeks (56 calendar days) following receipt of funds (subject to the $100,000 annual limit for any individual). This includes the owners’ distributive net profit of Sole Proprietorships, Single-Member LLC’s, Partnerships, and LLC’s that are taxed as Partnerships;
    • Rent;
    • Utilities; and
    • Interest on (business) mortgage debt.
       
  2. Your loan may be larger than the sum of these expenses over the next 8 weeks. Only use the amount required to cover these costs, and retain any balance to be available for pay down of the loan if you don’t use all of the funds.
     
  3. Don’t use the loan funds to cover other operating expenses (e.g., non-payroll insurance payments, taxes of any kind other than state and local payroll taxes, etc.), since these types of uses are expressly prohibited under the CARES Act and related SBA Interim Final Rules.
     
  4. The primary drivers of the loan forgiveness calculation are payroll and payroll-related costs for your employees during these 8 weeks. Not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.
     
  5. The number of full-time employees during the 8 week measurement period will be compared to the number of full-time employees prior to the COVID-19 pandemic and this ratio will factor into your loan forgiveness calculation.
     
  6. We fully expect that you will only be able to account for actual cash expenses, not accrued liabilities incurred during this period, so please track cash expenses and do not try to submit for accrued costs not actually incurred.

How to track the loan funds and other considerations:

  1. We recommend retaining the funds in a separate account, and transferring the appropriate amount to the account from which you pay payroll and related costs, or rent, utilities and interest on mortgage debt a few days prior to needing the funds. This will make it clear how much was used and how much remained unused at the end of the 8 weeks.
     
  2. We recommend keeping clear records of all eligible costs, including:
    • Detailed payroll records and related limitations for individuals in excess of the $100,000 threshold;
    • A copy of your lease and/or invoices from your landlord for related maintenance; property taxes, insurance and other costs that are billed as part of the lease;
    • A copy of utility billings;
    • A copy of mortgage billing from the bank that breaks out the principal from interest;
    • Bank statements highlighting the above payments as incurred; and
    • Cancelled checks for the above, if any.
       
  3. Again, we recommend holding aside any funds that you cannot document were used for the above eligible costs. These excess funds should be used to pay down the loan after the 8 week period (or at least by the expiration of the 6 month deferred payment period), in order to limit the loan that must be repaid later, and to ensure you do not violate the CARES Act or SBA Interim Final Rules governing this program.
     
  4. If your non-payroll eligible costs (rent, utilities, mortgage interest) exceed 25% of the total loan amount and/or your payroll costs are reduced, you may want to limit the funds used for non-payroll purposes to no more than 25% of the total funds you will use, in order to ensure maximum forgiveness.
     
  5. If you have furloughed or laid off employees, you may want to bring them back onto your payrolls and consider paying them for each of these pay periods, whether or not they are working.
     
  6. Finally, we recommend that you plan out your use of the funds. Start by identifying the eligible expenses you expect to incur during the 8 weeks after funding. Compare those expenses to the total loan funds you received and the 75% payroll / 25% non-payroll limitations. Then, plan the use of these loan funds to maximize your forgiveness and provide the greatest benefit to your business and your employees.

And, recently the SBA outlined additional information around a certification that was included in the Borrower application, noted as follows: “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” 

Please note that if you made this certification in error, the SBA is offering the opportunity to repay your loan in full by May 14, 2020 to avoid further penalties*

It is also important to note that the U.S. Department of Treasury and the SBA recently announced that the SBA will conduct a full audit of all loans in excess of $2 million to ensure the borrower’s legitimate economic need before they can be forgiven.

If you feel that any of this may apply to you, please contact us to further discuss the options that are available to you.

We hope you find these tips helpful in maximizing your forgiveness and minimizing the amount you have to repay later. We believe that maximizing forgiveness is the most prudent approach to ensuring your long-term success. We will communicate additional guidance after we receive it from SBA and are committed to the ongoing support of your company’s success.


*On May 5, 2020, the US Government extended that repayment period to May 14, 2020. We appreciate your prompt attention to this important information.