April 27, 2020
You have finally secured the much sought after Paycheck Protection Program Loan. Now what do you do? Many business owners still are unsure of how to handle the money and how to spend it.
The CARES Act requires that a PPP loan recipient certify that the funds will be used for purposes that are authorized under the act. Therefore first thing to do is keep in mind the program’s allowable uses of the funds. The allowable uses are:
employees that is salary, wage, commission, or similar compensation; payment of cash tip or equivalent; payment for vacation, parental, family, medical, or sick leave; allowance for dismissal or separation; payment required for the provisions of group health care benefits, including insurance premiums; payment of any retirement benefit; payment of state or local tax assessed on the compensation of employees; any prepayment of or payment of principal on a mortgage obligation; rent (including rent under a lease agreement); utilities (gas, water, sewer, electric, heat, telephone and internet).
It is important to remember the rent, utility and interest on mortgage obligations must have been established before February 15, 2020.
The SBA issued an Interim Final Rule on April 2, 2020 that requires PPP applicants to certify that “[t]he funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments.” At least 75% of the forgiven amount must be used for payroll costs for your entire loan to be forgiven. The other 25% can be spent on any of the allowable uses. While this requirement is not actually in The CARES Act, the Treasury Department and the SBA issued the guidance to keep the fund spending inline with the purpose of the act which is to retain employees. If a PPP loan is used for unauthorized purposes, the loan can be converted into a recourse liability. In addition, the recipient will not qualify for the loan forgiveness provisions.
The amount of the forgiveness for the loans will be reduced if you reduce your workforce during the eight-week period compared to prior periods or reduce the salary or wages paid to an employee by more than 25% during the 8-week period compared to the most recent quarter. You can avoid a reduction in the amount of the PPP loan forgiveness if you rehire all the employees laid off (going back to February 15, 2020) or increased their previously reduced wages, no later than June 20, 2020. The full-time employee (FTE) count does not mean you have to have the same employee just the same number of employees.
There are other provisions in The CARES Act the may affect your forgiveness amount. PPP loan forgiveness amount excludes compensation to employees for qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act or qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act.
Borrowers need to maintain documentation of the use of their PPP funds. The CARES Act expressly requires that the borrower be able to adequately document the use of the funds in order to obtain forgiveness. PPP loan borrowers are required to submit a request for loan forgiveness to the lender that is servicing the loan. The request will need to include a number of items, such as documentation to verify the number of full-time employees and their pay rates, as well as documentation to prove expenditures on eligible mortgages, leases, and utility obligations. This documentation may include cancelled checks, payment receipts, transcripts of accounts, and other documentation.
The CARES Act provides businesses with a number of potential tax breaks in The CARES Act. These tax breaks include: Employee Retention Credit; FMLA Credit; Health Insurance Tax Credit; Deferment of Payroll Taxes; Business Interest Deduction; NOL Carryback and NOL 80% Limitation. Please view our detailed document on the provisions and view the sections on Business and Emplyee Provisions.
PPP borrowers will need to file an application with their lender after the 8-week period. The business owner will be required to submit a certification that the amount for which forgiveness is requested was used for appropriate purposes. Lenders are required by the terms of the act to make a determination on loan forgiveness within a 60-day period after the application is submitted.
Although this all may seem daunting, the best thing to keep in mind is to plan and document! Make a plan for the spending and document everything. Stay in touch with your lender so that you don’t miss any important deadlines. Consult with your tax professional to review the tax implications the PPP funding will have on your business.
