The $349 billion Paycheck Protection Program, or PPP, is expected to receive its second tranche of new funding later this week. This should mean more small businesses, many of whom already have an application in queue with their business banking institution, may be approved for a PPP loan soon. For those businesses, as well as those awarded loans from the first tranche in mid-April, the question quickly becomes: “What do I do next?”. In addition to maintaining an open line of communication with your lender to help you manage your timing and accounting expectations, the tax and accounting professionals at ShindelRock recommend owners:
- Deposit the PPP loan funds into a new bank account with your lender to ensure a clean audit trail.
- Track expenses carefully. You’ll need to document and support your eight-week expenses for your lender. As expenses are incurred, make sure you’re documenting them (i.e., payroll should be run on the same cycle if possible – if not possible, consider running a special payroll within the eight weeks in order to pay all payroll expenses incurred during that period, rent and utilities should be paid as they become due).Reconcile expenses daily and weekly to make certain calculations are consistent with the forgiveness parameters and to ensure the prove-up with your lender will be complete and accurate.
- Monitor how the funds are used. To qualify for loan forgiveness, you must use at least 75 percent of the funds for payroll costs, as defined by the CARES Act. The “other” 25 percent of the loan funds may be used to cover eligible non-payroll costs that are incurred during the eight-week period, which are: rent from a pre-existing lease, interest payments on mortgages, interest on pre-existing loans and utilities. A separate balance sheet showing the funds’ exact uses will be helpful in proving authorized use for eventual forgiveness. Of course, business owners using the funds for fraudulent purposes will be subject to criminal charges.Forgiveness may be reduced if either of the following occurs:
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- Employees who made less than $100,000 of compensation in 2019 have their compensation reduced by 25 percent or more; OR
- The number of full-time employee equivalents is less than the same number of employees during (A) either February 15, 2019, through June 30, 2019 or (B) January 1, 2020, through February 29, 2020 [you choose the more favorable period to apply].
If your business received a PPP loan and you need assistance managing it, or if you have questions about an owner’s responsibility within the loan program, please contact your ShindelRock tax professional.