Now's the Time to Prepare for PPP Loan Forgiveness
Although there is talk in DC about new stimulus programs, now is the time to wrap up the original PPP loan and begin thinking about the application for loan forgiveness.
Initially it appeared many businesses would have trouble achieving full forgiveness. Congress changed the rules a number of times, but some rules remain constant, such as the payroll cap of $100,000. At first, they talked about several restrictions to forgiveness but in the end, if you play your cards correctly, forgiveness is virtually assured.
8 Weeks vs. 24 Weeks
Given the number of businesses that remained “shuttered” beyond the initial 8-week spending period Congress is now allowing businesses to spend the money over a 24-week period. Because of this extension, only certain businesses face a spending restriction that will limit the forgiveness. If you opt into the 24-week period forgiveness is almost guaranteed. Even if you reduce staff to match reduced demand you should have enough payroll and rent to cover the loan. You still need to be aware of the head count reduction adjustment, but even that is less of an obstacle than you might think (more on that later).
75/25 vs. 60/40 Rule
Another issue businesses are having is getting staff to come off unemployment and get back to work. This made meeting the requirement that you spend 75% of the loan on payroll difficult for those businesses. Congress reduced the 75% payroll requirement to 60%. This is not an all or nothing requirement. You do not need to spend 60% of the loan on payroll to get any forgiveness. If you spend less than that it will just limit the amount forgiven. Combine that with the new 24-week period and forgiveness is made much, much easier. Also, note, the new rules allow for more “other” expenses to be considered. For example, you can now consider 6 months’ rent rather than just two.
Head Count Reduction (FTEs)
It may now be possible to spend the entire loan on payroll but you still need to maintain your wage levels and reduce your forgiveness for any reduction in staff. Staff levels for the forgiveness period need to be maintained compared to staff levels for either 2/15/2029 to 6/30/2019 or 1/1/2020 to 2/29/2020. Any reduction in staff will reduce the amount that is forgiven.
On its face this seems problematic. Businesses need to maintain staff levels through the entire 24-week period prompting many to opt for the 8-week period instead. Looking a little deeper, however, it is clear the FTE adjustment is on total payroll spent in that period and not the loan amount. So even if there is a reduction in staff total payroll costs likely will be enough to achieve full forgiveness.
Exceptions
It appears most businesses, if they eventually do fully open, will achieve close to, if not full, forgiveness. There are some businesses that will still have trouble.
Self-Employed
This is a unique category especially for self-employed businesses with one or two employees. The initial loan was based on line 31 of the 2019 schedule C, or the 2019 business profit. The loan was 2.5 months of that profit capping that profit at an annual $100,000. Forgiveness was limited to 8/52 of that profit guaranteeing full forgiveness could not be achieved. This has been increased to 2.5 months of the 2019 profit to allow for full forgiveness. The issue some will face is the FTE reduction. If the application included payroll for staff owners may need to keep them employed to mitigate that reduction. If business is still slow that may not be worth it. You have to run the numbers.
Owner-Employees and a wrinkle on the $100,000 limitation.
This refers to partners and owners of S-Corporations. With the spending period increasing from 8 weeks to 24 weeks it appears the maximum wages included for forgiveness was increased to $46,154 ($100,000/52x24). That is true for non-owner employees but not true for the owners. Owners are restricted to the self-employed limit of 2.5 months capped at the annual limit of $100,000, or $20,833. You can still add retirement contributions to that figure but it is a dramatic difference. There is one more major change. Those owner-employees who did not make at least $100,000 in 2019 are limited to 2.5 months of their 2019 compensation. For example, an owner-employee paid $80,000 in 2019 will be limited to forgiveness of just $16,667. Again, this is consistent with the treatment of the self-employed.
If the applications for the PPP loan was done correctly these limits should still allow for full forgiveness, in almost all cases. If the application for the PPP loan was not done correctly it is possible the business will need to pay some of the PPP back.
Application Process
The PPP loan forgiveness application process is run by the banks. Some banks have portals and others require a paper application. The banks want these loans forgiven and out of their portfolios so be patient. You have 10 months from the end of the covered period to submit Small Business Administration Form 3508 and request forgiveness of the loan. That gives businesses plenty of time to decide to opt into the 8-week or 24-week covered period. Businesses can apply when they are ready as long as their bank has started accepting applications.
SBA Audits
Over $2,000,000
If the loan is over $2,000,000 it will be audited. Since forgiveness is now likely, especially if the business opts into the 24-week period, expect the SBA to focus on the initial application’s accuracy and the necessity of the loan.
Necessity
The initial application included an affidavit that the loan was necessary given the economic uncertainty due to COVID-19. Have good, contemporaneous records outlining the company’s strategy using figures and dates where possible. Any references to news reports of the time, and how they impacted your planning, can only help. Of course, if your business was shuttered this will be a minor issue as the negative impact will be obvious.
Initial Application
This will be where most loan recipients run into trouble. There was so much uncertainty and panic (rumors of the money running out in 48 hours), during the initial application process that some businesses applied for, and received, too much money. Review your initial application. Make sure you have all the payroll records, leases and other qualifying bills that tie out to the amount you requested. The bank asked for the payroll records but not the other documents. Make sure all this is in order before you apply for forgiveness. If you find you received too much money, pay the difference back. Do not try and use the new rules to get the excess amount forgiven.
Under $2,000,000
If the loan is under $2,000,000 you still might be audited. Everything above applies except the necessity affidavit will be deemed to have been signed in good faith. You should still have a folder detailing your business plan. This is all new and you should prepare for everything.
Final Notes
If your business has been adversely affected by COVID-19 (meaning you don’t manufacture N95 masks), your application for the loan is accurate and you spent the money on payroll and related qualifying expenses, you can expect full forgiveness of the loan. If you applied for too much money now is the time to fix it. As we have been since the beginning of the pandemic, the team at Livingston & Haynes is here for you and your business. Contact us anytime with your COVID-19 related questions.