Steps to turn your loan into a grant
The Coronavirus Aid, Relief, and Economic Security Act, affectionately known as the CARES Act, was designed to address the economic instabilities created by the COVID-19 pandemic. Key portions were created to help small businesses weather uncertainties faced from the pandemic. However, while the act has an altruistic moniker, it is fraught with confusion, questions, and potential pitfalls (after all, this is the federal government), so the purpose of this article is to provide some clarity and information about important extensions to the act’s deadlines.
The Paycheck Protection Program (PPP) of the CARES Act is managed by the Small Business Administration (SBA); however, its loans are processed and dispersed by banks. Congress designed the PPP primarily as an incentive for small businesses to keep employees on their payrolls. With some exceptions, the PPP is open to small businesses (fewer than 500 employees) that can show that due to the pandemic “current economic uncertainty makes the loan request necessary to support ongoing operations.” The amount of the loan that an employer may qualify for is the average monthly gross payroll costs multiplied by 2.5. And, if an employer follows guidelines, the entire loan may be forgiven. On July 4, the PPP was further extended, and the new deadline for applications is August 8. There is still money left to distribute. If you have not applied for a loan and feel you may qualify, please feel free to contact us and we will help you.)
A key and substantial element of the PPP loan is that all or most of the loan may be forgiven and essentially turned into a grant. Employers who wish to receive forgiveness should keep careful records of payments made with PPP funds. Although the program is subject to the changing guidelines of the SBA and may be subject to further congressional update, it is also important to follow the current SBA guidelines to ensure that your company is in the best position to have its loan forgiven.
On June 3, an amendment to the CARES Act was signed that extends the deadlines to make it easier for recipients to qualify for complete or close-to-complete forgiveness. The new requirement is that at least 60 percent of the loan amount (decreased from 75 percent) must be used for payroll in order for the loan to be forgiven. The remaining 40 percent (increased from 25 percent) can be used for other qualifying expenses.
The updated guidelines also give borrowers more flexibility in how long they can take to meet forgiveness requirements. New PPP borrowers have up to 24 weeks to use the funds, starting on the day the company receives the loan, but must be completed by December 31. Companies that borrowed in the early round can opt for the extension or choose the original covered period of eight weeks.
Here are other some requirements to achieve loan forgiveness:
- You must pay your employees at a comparable salary level without any significant reductions in wages or head count. You may change employees, but your head count must remain constant.
- You may rehire employees furloughed or laid off as a result of COVID-19. Reductions in employment and salary, can be cured and will not reduce the amount of loan forgiveness if by December 31, you restore the number of employees or wages that were cut. There is no requirement that the employer rehire the same employees.
- You may only seek reimbursement for up to $100,000 annual salary for any one employee. This cap does not include group health insurance payments, some retirement payments, and the payment of state and local taxes based on the compensation of employees. (Employees can be paid more than $100,000 in salary, but the excess counts against the amount of loan forgiveness.)
The remaining 40 percent of the PPP loan may be used (and forgiven) for any of the following:
- Interest on mortgages in existence before February 15 of this year
- Rent on a lease agreement in existence before February 15
- Utilities for which service began before February 15
If all or part of the loan is not forgiven, repayment of the remaining loan amount will be amortized monthly at one percent interest over a two-year period for loans issued before June 5, and over a five-year period for loans issued after June 5. Payments will be deferred for six months from the date of the final determination on forgiveness.
All payroll loan amounts should be paid to employees either during the 24-week period starting on the date the loan is deposited in your account (the “covered period”), or alternatively if your company uses a bi-weekly or greater payroll period, 24 weeks from the first day of the first payroll period after the funds are received (“alternative covered period”). Payroll costs incurred but not paid at the end of the covered period are eligible for forgiveness if paid on or before the next regular payroll date. This alternative period only applies to payroll; other qualifying expenses must be paid or incurred within the covered period.
Employer’s Social Security obligation
Under the PPP, employers may not use loan proceeds to pay the employer’s share of Social Security tax. Originally, an employer could defer payment of Social Security taxes until the employer received notice from its lender that its loan was forgiven, at which point the Social Security obligation resumed. The Paycheck Protection Flexibility Act signed on June 5 changed this. Now all employers may take advantage of the payroll tax deferral provision of the CARES Act through the end of 2020. Employers must pay half of this deferred amount by December 31, 2021, and the remainder by December 31, 2022.
Emergency Injury Disaster Loan and PPP forgiveness
Companies may also apply for and receive funds for the Economic Injury Disaster Loan (EIDL) program. However, any amount received as an EIDL grant (the lesser of $10,000 total or $1,000 per employee) will reduce the amount of money that may be forgiven under the PPP by the same amount. Also note that these loans may not be used for the same purpose, though EIDL proceeds can be used for payroll, rent, mortgage payments, and utilities for periods outside of the PPP covered period.
Forgiveness process and documentation
As the PPP is administered by banks, your lender is responsible for verifying your use of PPP funds and calculating the amount that will be forgiven. On June 17, the SBA published the Revised PPP Loan Forgiveness Application and the EZ PPP Loan Forgiveness Application (named SBA Form 3508 and Form 3508EZ) and accompanying instructions. Your lender may use these forms or its own online system to perform your forgiveness calculation. The forms also list documents the SBA requires a company to submit to its lender in support of its application.
If you use a payroll provider, it may be easiest to have that provider prepare reports showing how PPP funds were used for payroll. You should contact your payroll provider now to make sure you are documenting expenses properly. For other expenses and if you don’t have a payroll provider, it’s advisable to keep PPP funds in a separate bank account and pay all forgivable expenses from it.
The SBA is still refining its PPP guidance. Rules for use and forgiveness may change over the coming weeks. We will do our best to keep you abreast of any changes to the regulations. As always, please contact us if we can help.