Got PPP Loan? Understand the next steps by Syed and Aadil

Many small business owners including physician practices, hotel and convenience store owners have qualified for SBA disaster relief loans under the Paycheck Protection Program part of the CARES Act. Due to high demand many did not get the funding on the first round and are still in the process of getting funded from recent additional approval from congress.

For those who have received funds from Paycheck Protection Program, it is important to understand that this loan is not automatically forgiven. There are rules and process to follow to make a case for the lenders to forgive this loan. We are still waiting for further clarity from SBA and hoping to get more information in coming weeks. As of now, please speak to your CPA and financial advisor about the following:

• The forgiveness of the PPP will happen only if the funds are used as prescribed in the CARES Act and are used within 8 weeks after the funds are received.
• The eight-week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower. The lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval.
• At least 75% of the loan must be used for Payroll and up to 25% can be used to Utility.
• Payroll cost includes Wages, Sick Leave, Employee Health Insurance Premium, Retirement contribution. Payroll costs includes all cash compensation paid to employees, subject to the $100,000 annual compensation per employee limitation.
• Utility cost includes Rent, Mortgage Interest Payment, electric, gas, water, cable, internet etc.
• It is not required but some CPAs are recommending opening a separate bank account for the PPP loan funds and expense funds from there to make accounting easy in an event of an audit.
• If you have furloughed your employees and they went on unemployment, you will have to hire them back as full payroll for the loan to be forgivable by June 30^th, 2020.
• If you have received both EIDL and PPP Loan, then let the lender know about this. At the end of 8 weeks, the portion received from EIDL will be counted towards PPP forgiveness amount.
• Independent contractor’s compensation is not included in the PPP loan. They may be eligible for their own PPP loan.
• If you are self employed and all 1099 or schedule C/LLC and no payroll, then you can write yourself a check as a compensation from the PPP loan.
• Please note that the determination of the forgivable loan attributable to retirement contributions needs further guidance.  However, most actuaries believe it is the portion of the contribution attributable to 8 weeks.  For example, if someone is making a $100,000 contribution, about $15,385 (= 100,000 X 8 / 52) could be included in the forgivable loan amount. We are looking for further guidance if 2019 or 2020 contribution can be used towards the contribution.
• Part time employees are part of the PPP loan calculation. It is FTE calculation as defined by the Affordable Care Act.  Part time employees are counted in the FTE Calculation.
• Lender may request additional information such as bank statement, transaction history to evaluate the forgiveness of the loan
• There is additional guidance from SBA recently about the laid off employees, offered to rehire:

Directly from the SBA:

“Question: Will a borrower’s PPP loan forgiveness amount be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?

Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.

We are expecting further guidance from SBA about the PPP loan in upcoming weeks. It is very important to stay in touch with your financial advisor and CPAs who can help you navigate through the rules and changes.