COVID-19 Start-Up and Small Business Update: My Paycheck Protection Program Application Is Submitted, What’s Next?
The CARES Act allocated $350 billion towards the Paycheck Protection Program (PPP). The government is working to approve an additional $250 billion for this program as the initial funding is anticipated to fall well short of employers’ applications for support.
Banks are still struggling with the application process and the Small Business Administration’s (SBA) allocation of funds to specific banks is causing many small businesses to look towards new SBA-approved lenders to support their PPP application. The anticipated additional funding is resulting in some banks opening the loan application window again to help with the initial oversubscription.
The PPP is designed to be a forgivable loan, but it will be important to be prepared for loan forgiveness application and documentation eight weeks after receiving funding. Being ready to submit the proper documentation at the end of the eight-week period will aid in getting the forgiveness approved quickly and the loan extinguished with minimal interest requirements.
The loan forgiveness component of this Coronavirus Disaster loan program makes the PPP program, in essence, a non-taxable US federal government grant.
“ASSUMING YOUR COMPANY HAS ALREADY SUBMITTED ITS APPLICATION, YOUR BUSINESS SHOULD START PREPARING YOUR SYSTEMS AND DOCUMENTATION AND SUPPORT PROCESS NOW FOR THE FORGIVENESS COMPONENT”
What Will Be Forgiven?
This Covid-19 disaster loan program is designed to support small businesses’ efforts to retain employees on their payroll. The PPP loans will allow forgiveness of eight weeks of payroll costs, benefits and state/local taxes. Additionally, PPP funds used for non-payroll costs including mortgage interest, rent and utilities can also be forgiven, but will be limited to 25% of the loan forgiveness total.
Loan forgiveness is capped at 100% of the loan principal and requires the employer to retain or restore its headcount by June 20, 2020. Loan forgiveness will not be taxable.
Can My Loan Forgiveness Be Reduced and Why?
Yes, loan forgiveness will be reduced and result in less than full principal forgiveness if the employer does not retain or restore headcount by June 30th to certain levels set forth in the guidelines. Additionally, loan forgiveness can be reduced if an employer reduces wages of their employees by more than 25%.
What Are The Headcount Requirements And How is Loan Forgiveness Reduced By Retaining or Restoring Lower Headcount Than Baseline Headcount?
The CARES Act reduces forgiveness if the employer reduces headcount from the baseline requirements. The baseline requirements are either: (a) the average monthly number of full-time equivalents (FTEs) it employed from January 1, 2020 to February 29, 2020; (b) the average monthly number of FTEs it employed from February 15, 2019 to June 30, 2019.
To minimize loan forgiveness reduction, an employer should use the lower baseline headcount.
“THE REDUCTION IN LOAN FORGIVENESS EQUALS PAYROLL COSTS INCURRED DURING EIGHT WEEK PERIOD × AVERAGE MONTHLY FTE’S DURING 8 WEEK PERIOD AFTER LOAN FUNDING ÷ THE AVERAGE MONTHLY FTE’S IN THE BASELINE PERIODS CHOSEN ABOVE.”
The loan forgiveness reduction calculation will not come into play if the employer restores headcount to the baseline headcount by June 30, 2020. However, loan forgiveness will be based on actual salary costs incurred over the eight week period, so employers who restore headcount to baseline levels will still have their balances forgiven based on actual payroll costs during the eight weeks after funding.
What Are The Reductions In Loan Forgiveness If Salaries Or Wages Decrease?
Loan forgiveness will also be reduced if the employer reduces its salaries or wages of any of its employees making less than $100,000 annually by more than 25% and does not restore the employee’s wages to at least within 25% of the original wages by June 30, 2020. In this case, the loan balance forgiveness amount is reduced by the the amount of any reduction in wages that is greater than 25% compared to their most recent full quarter for that employee.
How Should My Business Track Compensation?
Payroll that will be used for the forgiveness calculations should be segregated within the company’s payroll or accounting system, or by its payroll provider as designated for the PPP. All major payroll providers are building in tools to do this easily. Relying on your payroll provider’s documentation will be preferred by your lending bank.
Pay attention to employees who earn more the $100,000 annually ($8,333 per month, $4,166 per semi-monthly pay period, or $3,846 per bi-weekly pay period) as inclusion of salary for higher wage earners will be limited to these referenced thresholds.
In your accounting system, split payroll payments and assign a foregiveness project code only to the eligible portion. Alternatively, you can create a simple journal entry to reduce/reclassify the amounts over the thresholds for the group so that the amounts charged to the forgiveness project code are limited accordingly.
How Should my Business Track Other “Payroll Costs”?
Retain itemized employer-paid benefit and state and local tax invoices in a segregated file for easy retrieval upon application for forgiveness.
If retirement plan contributions were part of the calculus in determining payroll costs, but are typically funded annually, consider funding two month’s worth during the eight week measurement period. Obtain an interim report from the Administrator to validate your claim.
All benefits and state and local taxes that are included in “payroll costs” for the small businesses loans could/should be coded in financial systems with a project code or other designated field to provide a clear audit trail of the qualifying forgivable expenses. If your company uses Quickbooks, or another less-comprehensive accounting system, consider the use of “classes” to designate all forgivable expenditures.
How Should I Track Non Payroll Costs?
The PPP loan can be used to cover mortgage interest, rent and utilities of the small business. The loan forgiveness will allow up to 25% of the loan forgiveness to be allocated to these non-payroll costs:
- Segregate your non-payroll costs into separate buckets, perhaps using the same project codes for the PPP program payroll costs. Use different codes for other SBA loans such as the EIDL.
- Allocate only 25% of your payroll costs supporting loan forgiveness to the PPP program G/L code for total non-payroll costs
“LIKE THE LOAN APPLICATIONS AND INITIAL FUNDING ITSELF, SMALL BUSINESSES THAT ARE READY WITH THEIR FORGIVENESS DOCUMENTATION PACKAGES FIRST WILL BE FORGIVEN FIRST“
- You can always reclassify costs to limit the amounts segregated to the 25% cap.
Collect and retain all documentation of the spending above contemporaneously with receipts and payroll reports to make sure everything is organized and ready to submit. Adhere to the specific loan forgiveness calculations that will be released later.
How Can We Help?
CFOs2GO recognized the need for our clients and prospects to jump on these opportunities. We formed a task force the day after the programs were announced. This group has been working non-stop to support clients in their efforts to secure these loans. Our team has developed significant subject matter expertise at an exponential pace. We are already providing support for all phases of this program to many clients. Please contact us should you require support for your small business in this effort.
Chris Burns co-leads the firm’s Start-ups, Rapid Growth & pre-IPO Practice. His hands-on financial leadership has helped deliver increased shareholder value, growth in cash flow and profits to startup and established market leaders. His strong foundation in large public technology and CPG companies, including Oracle and Clorox, combined with twenty years of experience in industry-leading global eCommerce, software and SaaS startups, developed Chris’ ability to bring hands-on financial leadership and partnership to CEO’s, boards, their investors and staff.
Chris Chillingworth is a partner with CFOs2GO, specializing in the high tech manufacturing, software, and service industries. He has over 30 years’ experience in financial leadership including multiple roles as a CFO in both the public and private sector. He leads our financial systems, technical accounting, high tech, and corporate governance practice groups. Chris is a member of our Mergers and Acquisitions Practice Group.