The Paycheck Protection Program (PPP) was created by the Small Business Administration (SBA) to encourage small businesses to keep their employees on payroll and continue operations. It’s part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act and offers forgivable loans of up to $10 million. Loan proceeds can be used to cover payroll, utilities, and several other expenses.
If you’ve applied for the PPP and received approval, congratulations! Now you may be wondering what you need to do to remain compliant and increase your chances of maximum loan forgiveness. We’ve created this handy guide to educate you on PPP best practices so you can thrive as a borrower.
How to Manage Loan Proceeds
Unfortunately, you can’t use the money you receive from the PPP on anything you desire. If you’d like your loan forgiven, you must allocate the funds toward eligible expenses which include the following:
- Payroll expenses
- Salaries and commissions for employees
- Paid, sick, medical, and family leave costs
- Insurance premiums
- Rent and interest on mortgage obligations
- Utilities such as electricity, gas, water, transportation, internet and phone services
- Interest on debts incurred before the covered period
It’s a good idea to open a separate bank account and keep your loan proceeds in there. This way you won’t commingle the funds with other accounts and be able to keep a clear record of how you spend them.
Tips for Keeping Proper Documentation
If you’d like to be eligible for loan forgiveness, it is your responsibility to document your spending. In the event you’re using the loan toward payroll costs, you’ll need to provide documents that confirm the number of full-time equivalent (FTE) employees on your payroll as well as their pay rates. These may include reports from your payroll company, Form 941, income, payroll, and unemployment insurance filings from your state, and documents that show retirement and health insurance contributions. You’ll also need to share receipts, account transcripts, and other documents that prove you used the money on your mortgage interest, rent, and utilities.
What to Expect From the PPP Loan Forgiveness Process
There are four stages to the PPP loan forgiveness process. Let’s take a closer look at each of them.
Use the PPP Loan Proceeds
First and foremost, you must use your PPP funds on eligible expenses for eight weeks after you receive them. Keep in mind that you cannot use more than 25% of the loan forgiveness amount on non-payroll expenses as 75% of your loan must be used for payroll costs.
Maintain a Headcount
If you decrease your FTE employee headcount, your loan forgiveness will be reduced. So you need to keep track of how many employees stay with you during the eight-week covered period.
The PPP will not forgive a portion of your loan if you reduce salaries and wages by more than 25% during the eight-week period. This is relative to the most recent completed quarter, which should be the first quarter of 2020 and applies to all employees who earn less than $100,000.
Submit Documents to Your Lender
Once the covered period has come to an end, you’ll have 90 days to submit your forgiveness documents to your lender. They’ll have 60 days to make a decision on your forgiveness. Fortunately, any loans forgiven under the PPP will not be taxed as income.
Pay Back the Loan
If any part of your loan is not forgiven, you will need to pay it back with a 1% interest rate over a two-year term. While you’re paying back the loan, you must continue to use the funds on eligible expenses.
Clark Raymond is committed to supporting small businesses in the area during the coronavirus era and beyond. If you’d like assistance with the PPP or have any questions on the forgiveness process or your rights as a borrower, we encourage you to contact us today.