Many of you have received the first round of PPP loan proceeds while others of you are still waiting. For those waiting, the second round of relief should come soon. Once you receive the funds, the most important step has been accomplished, providing the liquidity and stability your company needs to help weather this storm.
The next phase is the debt forgiveness relief option. While the rules are in flux, and the actual requirements will vary by bank, we believe these practices will most enhance your accountability and provide the most possible debt forgiveness. This 8 week measurement period is extremely important. As soon as you receive the proceeds from the loan, the 8 week loan forgiveness period begins.
• Consider the timing of the closing of the loan and the funding of the cash, which starts the 8 week period. As of today, SBA is indicating that you have up to 10 calendar days forward to schedule the loan closing. For a business that is on limited operations, deferring the closing date would allow more eligible expenses to be paid during the 8 week forgiveness period.
• Mark the 8 week forgiveness period on a calendar and add each eligible expense to the calendar to see how it coincides with the forgiveness period. Make adjustments to the timing of payments if needed. Pay weekly payroll instead of bi-weekly if doing so will increase the payroll forgiveness.
• Open a separate bank account for the PPP loan proceeds. As you pay qualified expenses (see list below) from the business operating account, use the proceeds from the PPP loan to reimburse the operating bank account for those qualified expenses.
• In your accounting software, establish a separate general ledger account for the loan proceeds, and then for the canceled debt amount.
• Maintain a file with copies of canceled checks for qualified expenses including utilities, rent and interest, and statements and receipts as much as possible.
• Be prepared to provide a copy of your current lease agreement. We do not know if this will be required, but it has been mentioned as part of the verification process. If you do not have a lease but have a history of lease payments, it is possible this will suffice. A document explaining the lease terms and payment history may be helpful. We expect this to be clarified in the next couple of weeks.
**Sole proprietors will be required to submit a copy of their 2019 Schedule C to qualify for debt forgiveness for owner’s compensation. If you have not already filed your 2019 tax return, begin gathering your tax information and submit it to your tax preparer. Also, you are required to provide proof of business operations for February 2020. Acceptable documentation includes invoices, bank statements, a general ledger of business activity or employee earnings report. The documentation for employee payroll, rent, utilities, and business interest is the same as above. Owner’s health insurance and retirement contributions are not included in the amounts forgiven.**
Payroll Costs (At least 75% of the amount forgiven must be used for payroll expenses defined below.)
1. Gross Wages, Commissions, Tips, etc. (as will be reflected on Forms 940/941, with Cafeteria Plans, it will be the 940 amount)
(The SBA guidance on the wage forgiveness calculation is still uncertain. Currently, the guideline calculation is not truly gross wages, but net wages after Social Security, Medicare and Federal Income Tax Withholding. However, this seems to contradict the language in the Act and common and logical tax and accounting definitions. We are watching for updates.)
2. Retirement Plan Contributions (employer portion)
3. Employee Benefits
a. Health Insurance Premiums (employer paid)
b. Group & Executive Disability Insurance Premiums
c. Vision Insurance Premiums
d. Dental Insurance Premiums
e. Other Supplemental Benefits
4. State and Local Employment Taxes (e.g., state unemployment taxes)
If after the 8 week period, you have remaining funds that were not used for qualified expenses, the balance will be subject to a 2 year loan at 1% interest with no payment for six months from the date of the loan.
We expect additional guidance on documentation for the loan forgiveness to be released soon, and we will send updates as we receive them. Please let us know if need assistance or have any questions.
You can count on us.
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