If you, like many other businesses, have just received your Payroll Protection Program (PPP) loan please keep the following in mind.
-PPP loans were created in the CARES Act with the stated purpose of providing a direct incentive for small businesses to keep their workers on payroll.
-PPP loan proceeds may be forgiven, in total or partially, but there are strict rules on the use of the proceeds that need to be followed.
-Total forgiveness can be achieved if a business’ pre Covid employees are kept on the payroll or rehired, all of the proceeds are used for either payroll costs, rent or mortgage interest, utilities and 75% of the forgiven amount is used for payroll costs.
-Many businesses will find the above threshold difficult to meet. In these cases a complicated formula has been devised in order for a business to determine the amount of loan forgiveness.
In order for a business to maximize its loan forgiveness it should carefully monitor and track the expenditure of the PPP proceeds. That is why we recommended that PPP loan proceeds be in a separate bank account and not the business’ operating account and that only qualified expenses should be paid from this account.
By keeping the funds in a separate account after the eight-week period you know that the remaining balance will not be eligible for forgiveness.
Other rules for calculating forgiveness that must be followed are:
–Payroll cost equal 75% of the amount of the PPP loan proceeds.
-The percentage of reduction in headcount will reduce the amount forgiven proportionately.
-A per employee reduction of greater than 25% of their wages will reduce the forgiveness amount dollar for dollar.
For those businesses that are deemed to be essential a PPP loan is a godsend but nonessential businesses such as restaurants and retail establishments it can be a double edge sword. If workers that are paid but not performing any duties some of or all of their pay may not be forgiven.
As you can see there is a need to be vigilant in actively monitoring the use of the loan proceeds in order to maximize the loan forgiveness and to avoid repayment of loan proceeds for which your business may not gotten any benefit.
If you need any assistance or have any questions please feel free to contact us.