PPP Loan: YASSS! You got it, now what?
UPDATED AS OF 5/18/2020 3:04PM
Disclaimer: Ultimately it is 100% up to your lender on forgiveness and most are being transparent in that we don’t have enough guidance on how exactly its going to work. I am not a lender and this blog does not serve as support in your ability for forgiveness.
Okay so you are one of the lucky ones who got their loan funded! Here are recommendations on how to make sure its forgiven and overall best practices as well as the current unknowns.
Haven’t got the loan yet but want it? Look at my other blogs that have an overview and how to apply.
Have it and ready to apply for forgiveness? I created a blog specifically walking through the forgiveness app here.
TABLE OF CONTENTS
Let me take away some stress and talk about some rumors…
Okay, its May. And there is some seriously scary PPP Loan article titles freaking everyone out. I want to squash some rumors and relieve some stress while guiding you on what to do now.
Did the Secretary of the Treasurer say that every loan is going to be audited?!
No, what actually is written is that loans over $2MIL will go through an SBA audit and that is standard practice. Does that mean you for sure won’t be audited? Not necessarily, there could be red flag items etc. but the chances are significantly low. There was $660 BILLION in loans disbursed - they could not possibly audit all of them.
There is a clause talking about returning my funds if you didn’t “need” them or else you’re a criminal?!
Okay, there was an additional guidance in the FAQs that had some scary wording. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” This scares a lot of business owners because what is “necessary?!” Some small businesses are so freaked out that they started thinking of returning the money.
Listen, I believe this clause was written because of Shake Shack and Ruth Chris. There were a ton of giant businesses with access to capital and they wanted to add this clause to discourage companies that do not need the funds to survive to not apply. This is not written for the small 3 employee operation with their doors shut right now. It’s written to save those funds from the big companies so that YOU (yes you) can have access to it for your small business.
The reality of it: Loans were issued before ANYONE understood anything
Due to the urgency of the current crisis funds were released FAST (although it may not have felt like it was fast enough for a lot of people.) They are writing guidance on funds weeks after round one of $349 billion was funded + round two of $310 billion. Everyone applied BEFORE guidance which was the only choice that we have. That is why we are confused.
Are the funds taxable?!
It has clearly been stated that the forgivable portion is NOT taxable. But the IRS just announced that the all the expenses you use the PPP for is non-deductible. If you don’t count the income AND aren’t allowed expenses…that means its taxable! WHAT?! The AICPA is definitely challenging this and demanding more guidance.
What to do in the meantime - record everything clearly as described below. The way I’ve outlined it results in it showing the expenses because I absolutely want you to be able to deduct it. It does put the loan as “other income”, once tax time comes the tax professional can easily include or exclude once the IRS gets it together.
My opinion - It says not taxable and I think the AICPA pushing the IRS will result in it being NOT taxable.
Why do they keep changing the rules on all this stuff?
Because they are trying to keep up with everything in a completely unknown world. They wrote this Act and are constantly closing loopholes, like the big chain restaurants getting the funds, employees not returning to work and simply running out of funds altogether! These rules will continuously change as we learn more and they fix their errors. It is just the reality of our situation right now.
Receiving the wrong amounts
You received less than you should have…
On 5/13/2020 the Department of the Treasury issued guidance that if a partnership or seasonal business applied for the PPP and received less than they should have, they can apply for more. Backstory - originally there were rules on the timing of the income for seasonal and unclear on how partnership income was treated. Therefore, businesses that were early to apply could have missed out - they added an interim final rule allowing them to increase existing loans and get a second pay out as long as its reported prior to the initial SBA Form 1502 report. Huh? Ask your lender if you can do this and act ASAP.
Unknown - how does the forgiveness calculation work for the second round of disbursement? Does the 8 weeks start over? Perhaps you keep the same 8 weeks from the initial disbursement (but that seems unfair).
You received more than you should have…
Interestingly enough, due to lenders not understanding the difference between gross and net income… I’ve heard a couple cases of being over funded in these loans. As you would imagine, there is no guidance in this area yet.
Here are my thoughts:
Calculate what it should have been (you can use my calcs here)
Determine what will be forgiven based on info above
Talk to your lender about what to do
I strongly believe there are A LOT of loans that were funded with potentially incorrect amounts due to the lack of guidance, confusion and pressure on the lenders. I would assume that the unforgivable amount would simply become a loan. However, without knowing - the safest thing to do is talk to your lender about whether the calculation was correct.
Okay, so now that you have funds what do you do?
Take a breath.
I get it. These loans have never existed before. The people issuing the funds, approving the funds, writing rules on the funds are all. over. the. place. But you need to spend it, or else it definitely will NOT be forgiven.
The SBA and Department of the Treasury KNOWS that you likely will not have enough information prior to receiving funds. They are focusing on funding in order to keep businesses alive right now before issuing clearer guidance. Would it be easier if they figured everything out? Of course. But time, resources and the unknowns of it all are not going to allow that. They just aren’t, so don’t waste your energy.
What do you do with the money?
Spend it in good faith. That is all they can ask of us and you don’t need to be scared. You can only act on what you know now and what is best for your business. So that means using them on at least 75% payroll, rehire, pay your rent and utilities. It’s why you applied for it, its what they want you to use it on and YOU SHOULD.
Remember, the intent of this loan is to keep you in business and off of unemployment. Not to freak you out and want to pay it back!
What if they are jerks and rewrite all the rules and it ends up not forgivable?
First off, you really think they’ll do that on $660 billion loans and it works out for them? I do not think so! But listen, worst case scenario: It’s a 1% interest loan. Think of a $25,000 loan, that is $250 in interest annually. It’s nothing. Yes, of course you want it forgivable - but please don’t hold back because of $250.
Recording it
How to record when its funded:
For those of you who have bookkeepers you can just copy and paste this next section:
As this is first and foremost a loan (and not yet forgiven) it needs to be recorded as such. In QBO it’s add>create new account>current liabililty>”SBA loan” and categorize!
In accountant terms this is Debit: Cash & Credit: Loan
How to record using the funds:
You’ll use the funds as needed throughout the time period and record normally, as the expenses are paid from the business account you’ll categorize them as an expense like usual.
In accountant terms Debit: Payroll Expenses & Credit: Cash
What to do when its finally forgiven:
This is where you’ll need to record a journal entry to clear out the loan and then record as other income. These funds are not taxable but they do need to hit your P&L to offset the expenses they’ve covered. It’s important to clearly code this “other income” so that your CPA knows what it is when preparing your return for 2020.
The journal entry is…. Debit: Loan & Credit: Other Income
How to get it forgiven
I created another blog specifically on applying for forgiveness but here is a summary below.
Payroll costs (including benefits, commissions, tips, leave, state and local taxes)
**Exception for independent contractor/sole prop
Mortgage Interest (on a mortgage existing prior to 2/15/20)
Rent payments (on a lease existing prior to 2/15/20)
Utilities (for which services began before 2/15/20)
Only up to 25% of the funds can be used for non-payroll expenses.
You need maintain your staff and payroll:
Number of staff - keep the same full time employee (FTE) count as 2/15/2020. (FTE is 30 hours, if you have 2 people at 15 hours that equals 1 FTE.)
Level of payroll - you cannot decrease salaries by more than 25% for any employee. See more detailed explanation in best practices.
Re-Hiring - You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between 2/15-4/26/2020.
Best practices once you get the funds
DOCUMENT your face off.
I mean technically you should always be doing this right ;)
Make sure that your payroll is set up and running properly, you have the funds in your business bank account and all expenses paid is from that account.
Some business owners have asked if they should set up a separate business account, I personally do not see how this could be useful but I also don’t think it would hurt. Per the current guidance it is not required. What is important is simply proving the expenses.
Payroll reports, payroll returns and paystubs will be crucial
Maintain the lease agreements, utilities bills, mortgage interest statements and all corresponding payment confirmations.
Watch the calendar
The date the loan is funded is when the 8 week period starts. However they did include an alternative payroll covered period where if you pay your employees at least bi-monthly, you can have your 8 week period start on the pay date starting right after you received it.
This alternative period does NOT apply to mortgage, lease and utilities though.
Understand that forgivable expenses must be incurred during 8 week period
This only relates to the forgivable loan amounts (eligible expenses above).
Expenses must be incurred during this time frame as well. This means that you can’t just prepay a bunch of payments to fit into this period.
Example: 8 week period ends on 6/25 and you try to force in July’s rent before that closes - since its related to July it won’t be forgivable.
Keep an eye on overpaid wages
The max wage to any one employee during this period is $15,385 - this is for salary earners over $100k. Anything above this will be unforgivable.
Wages must be restored to atleast 75% per employee
If you had some pay cuts due to the pandemic, the loan is only forgivable if you restore each employees wage to at least 75% of what it was in February 2020.
For instance if a worker was paid $12,500 for Q1 the calculation would be as follows:
$12,500/13 weeks in Q1 = $962 per week is normal pay
$962 x 8 weeks = $7,696 would be comparable for the 8 week period
$7,696 x 75% = $5,772 is the lowest amount that can be paid for this worker without losing forgiveness on the loan.
Guidance on employees who quit, voluntarily reduce hours or are fired…
They will not be counted against your forgiveness calculation for full time employee equivalents. However, you do still need meet the 75% threshold for wages with fewer staff.
If you also got the EIDL grant…
Whatever you received for the EIDL grant (many received ($1k per employee), will reduce the amount forgiven for the PPP loan.
HUH?
For example, if you get $1k from EIDL and a $10k PPP loan, your PPP is only forgivable up to $9k now and $1k will turn into a loan at 1% for 2 years.
PERSPECTIVE: That 1k at 1% is WAY better than any credit card or loan you'd receive.
TIP: Hold onto it in savings for a rainy day, pay it back once you get through this storm. (Did you like my cheesy analogy?)
How do I apply the 75/25 rules for forgiveness? On the total loan amount or the amount after I remove the EIDL grant?
They are still working out guidance on this. However, based on current information - it is to be applied to the NET amount (PPP less EIDL grant) in order to maximize forgiveness on the remaining amount.
Sources: https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses
Okay, as usual - if this helps you please pay it forward and donate to meals on wheels people and/or comment a sweet note below.
