Life Area: Professional
Topic: Paycheck Protection Program
Another View of PPP
This blog post is for my clients and audience member businesses, sole proprietors, and independent contractors that received or will receive Paycheck Protection Program (PPP) funds.
If you were lucky enough to be allocated some of the PPP money, congratulations, many applied but few were selected. The money from the first tranche of the program dried up in just 13 days, the second tranche was gone in less than 24 hours!
So, I know what you are thinking based on my interaction with clients: “I must spend all this money so I can get it all forgiven.” My advice is to: Get that thought out of your head!
The new Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Emergency Injury Disaster Loan (EIDL) and the Families First Coronavirus Response Act (FFCRA Act) initiated various loan programs, tax credit programs, and deferral programs that all intermingle with one another. If you opt for one program, it may preclude you from using another one of the programs.
Your goal should not be to spend all the proceeds so that everything is forgiven. If that happens, great, but that should not be your goal.
PPP is a two-step process
The Paycheck Protection Program is a two-step process:
- Get the Money – you did that!
- Spend the Money – this is what this blog post is about, and the calculations are a little tricky when it comes to what is forgivable or not!
Your goal should not be to spend all the proceeds so that everything is forgiven. If that happens, great, but that should not be your goal. You received this money to pay for expenses in the normal course of business over a designated eight-week period. You should spend the money as you would in the normal course of business based on your cash forecasting. The driver for spending the funds should be made on an economic basis, not based on making an expense forgivable.
The forgivable expenses are pretty straight forward. If you have to ask yourself “Does this expense qualify to be forgiven?” – it probably doesn’t. I have listed the qualifying expenses below. Simply put, qualifying expenses are payroll and related (at least 75% of the PPP funds) and certain business expenses including mortgage/lease payments and utilities (can not exceed 25%).
You don’t want to put yourself in a situation where you spend all the loan proceeds thinking all expenses are forgivable, only to find out that some were not. Under that scenario you have a short-term loan (24 months) and no immediate funds to pay it. Remember, at some point you will be sitting in front of a bank officer to review and justify the expenses you paid with the PPP money. The bank is deciding for the government what expenses qualify to be forgiven, and this decision is not taken lightly.
Forgivable expenses are broken down into two categories, payroll costs and other costs. You must spend at least 75% on payroll costs and no more than 25% on the other costs. You can spend more than 75% on payroll costs, but the calculation to determine the forgivable payroll may make some payroll costs not forgivable. Stated another way, just because you spend the money on payroll costs, that doesn’t automatically make it a forgivable expense because of the head count calculation.
Payroll Costs include:
- Gross pay
- Employer paid health, vision and dental insurance (not eligible as sole proprietor or independent contractor)
- Employer paid retirement benefits (not eligible as sole proprietor or independent contractor)
- State Unemployment-SUTA (not applicable to sole proprietor or independent contractor)
Other Costs include:
- Rent only-no CAM (auto leases are not considered rent)
- Business loan interest
- Utilities-gas, water, electric, telephone landline and internet
Before you go spending the PPP money, sit down with your accountant and prepare a cash flow projection along with an analysis on what part if any of the proceeds will be forgivable. Regarding the payroll costs that will be forgivable, the average number of employee’s calculation will come into play, so all the payroll costs may not be forgivable. You also might have trouble spending 25% on the other costs and this most likely is where you will get the unforgivable expenses.
Critical points to keep in mind:
- A portion of the PPP money will not be forgivable
- It’s not a bad thing to end up with money that is not forgiven
- SPEND ONLY WHAT YOU NEED TO SPEND!
- If you end up with unspent PPP money you have two options:
- Give the remaining amount back
- Turn it into a low interest loan, you might need it
Don’t put your business at risk. Protect your business and your employees by using the money as it was intended to be spent and track these expenses carefully so that you can facilitate a fast, no-surprises accounting when the time comes.
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