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10 tips to ensure PPP loan forgiveness

Jacob Owens May 11, 2020

More than 10,500 small businesses in Delaware have received a U.S. Small Business Administration loan through the Paycheck Protection Program, the federal government’s attempt to bolster the nation’s shaken small business class amid the coronavirus ...

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[embed]https://www.youtube.com/embed/4SoRiaFdwLg[/embed] More than 10,500 small businesses in Delaware have received a U.S. Small Business Administration loan through the Paycheck Protection Program, the federal government’s attempt to bolster the nation’s shaken small business class amid the coronavirus pandemic that is threatening many to close forever. “We’ve never seen this before,” said John Fleming, director of the SBA Delaware District office, noting that the PPP is an extension of the SBA’s traditional 7(a) loan. “We've never done a loan program like this with no personal guarantee.” The PPP, which still has about $120 billion in available funds as of Monday morning, was created in a matter of weeks as Congress and the White House sought to stem the financial havoc wrought by the pandemic that has required lockdowns across the country. The loans, typically worth tens of thousands of dollars but ranging up to $10 million, are convertible to forgivable grants if at least 75% of the funds are used for payroll expenses over eight weeks. The remaining 25% can be forgiven if used for fixed costs like rent, utilities, and mortgage interest. While the foundation of the program is rather simple, the environment in which employers operate isn’t. Here are 10 tips about PPP loans to ensure that the funds are forgiven. They were provided during a May 8 webinar attended by more than 470 people and presented by Delaware Business Times, the Delaware Small Business Development Center and the SBA and sponsored by BNY Mellon Wealth Management, Harvey Hanna & Associates, and Union Park Volvo.

Keep detailed records and open a new deposit account for the loan. Because banks were rallied to expedite the processing work on PPP loans, applications varied among lenders. Officials advised to keep copies of all pertinent forms close at hand. Because an accounting of the loan proceeds will be forthcoming for recipients, officials also encourage recipients to open a checking or savings account specifically for the monies to keep clear divisions as to how it was spent.

Recipients will have to apply for forgiveness. A recipient receives funds from their lender, which will only recoup its monies from the SBA after a recipient applies for forgiveness. A process for applying for forgiveness has not yet been established as the earliest recipients haven’t yet reached the end of their eight-week period. However, officials encouraged at minimum that employers keep copies of Internal Revenue Service payroll tax filings; state income, payroll, and unemployment insurance filings; documents covering mortgage, lease and utility payments; and written notification of any employees who declined rehiring offers.

A laid-off or furloughed employee can decline an offer to be rehired under the PPP without impacting a loan recipient. An employee that declines to be rehired under the terms of the PPP will be excluded from loan forgiveness reduction calculations. An employer needs to keep a record of the refusal in writing though, officials warned. Many workers are reportedly turning down such offers because they may be earning more than their prior wages on the federally subsidized unemployment stimulus program. The SBA warned that such employees turning down a rehire offer may be ineligible to continue receiving unemployment benefits, as employers are instructed to inform state unemployment offices of such offers.

Falling short of 75% target doesn’t cancel the forgiveness. If a business falls short of the goal of spending 75% of the loan on payroll costs, an employer doesn’t have to worry about losing out on the entire forgiveness offer. The SBA will prorate out the amount you fell short, for example 1% of proceeds will be converted to a two-year loan if an employer spends 74% on payroll over eight weeks.

Receipt of loan proceeds starts the clock. The day that you receive PPP loan proceeds, the program’s eight-week clock begins. Many businesses may not yet be ready to fully serve the public due to differing degrees of lockdown amid the pandemic, but unfortunately the program doesn’t allow for any leeway in the spending of funds. Congress has talked about altering the time provision of the program due to these concerns, but for now officials advise that recipients plan to spend the money right away.

The money can be returned. Much has been made about large employers and publicly traded companies that are returning PPP loans after public criticism, but more importantly any recipient can return unspent funds. If loaned funds are not spent by the end of the eight-week forgiveness period, the money can be returned to the SBA without penalty. Any amount that is determined to not be forgiven is converted into a two-year loan with a 1% interest rate.

The $100,000 limit for employees does not include benefits. Congress placed an income limit of $100,000 per employee in order to limit the follow of funds to high-wealth workers, but that limit only refers to cash payments. Benefits to such employees are not counted into the calculations.

An EIDL grant must be subtracted from the forgivable portion of the PPP. The Economic Injury and Disaster Loan (EIDL), or 7(b) loan, is the SBA’s other prime loan program to assisted affected businesses. To date, more than 7,500 Delaware businesses have received those loans, with more than $27 million disseminated in cash advances. Both programs cannot be used for the same purpose though. If EIDL funds aren’t used for payroll, your PPP eligibility will not be affected. With a $10,000 advance forgiven grant, however, the EIDL funds must be declared when applying for the PPP and subtracted from the PPP’s forgivable amount.

Employee payroll taxes can be counted toward payroll expenses, but not the employer’s taxes. Payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of payroll tax. For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.

Don’t use funds on expenses not specifically approved. Officials advised recipients to stick to the eligible expenses as provided by the SBA and U.S. Department of Treasury. The agencies published a guide of frequently asked questions that is routinely updated to provide clarifications on many specific questions. While some businesses have inquired about using PPP proceeds to cover interest costs on vehicle loans, only mortgage interest is covered under federal guidance to date. Any funds spent on ineligible expenses are converted into a two-year loan at 1% interest at the conclusion of the eight-week window.

By Jacob Owens jowens@delawarebusinesstimes.com

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