Small business owners are scrambling to learn best practices after receiving government assistance.
If you managed to maneuver your way through the disaster that is the Paycheck Protection Program (PPP) and have received funding, congrats to you. You did it. You deserve to have a day or two to bask in your success of navigating through the most disorganized government program ever. But now you may be asking the question that most are pondering: what can I spend this money on so that my loan will be forgiven? As with most things that surround the PPP and the SBA lending programs, the rules are fluid, not quite set in stone, and very confusing. I have done my best to gather as much information as I could in order to guide you through this. Remember that since the government rolled this out so quickly with little or no guidance, you should try to stay as up to date on this as possible. So what’s next?
Here are some high level facts: 75% of PPP must go towards payroll, including benefits (more below). As of now, this does not include payroll costs such as systems and vendors, however, the government alleges that there will be some more information coming out in mid-May which will address payroll costs but as of now, this is not covered; 25% can go towards other bills (see below for more details)
What Bills Can I Pay with PPP Money?
In addition to payroll (75% of PPP must go towards payroll), you can use PPP towards health care benefits, mortgage interest payments, rent, utilities, interest payments on debt incurred prior to February 15, 2020 and/or refinancing an SBA EIDL loan made between Jan 31, 2020 and April 3, 2020. Utilities include electricity, gas, water, transportation, telephone or internet access, for service that began prior to Feb 15, 2020. You can also use PPP money towards gas used when driving a business vehicle. Other common utilities such as garbage collection and security monitoring may also be classified as a utility but check with your lender.
Employee benefits are also part of the 75% that is allocated towards payroll. This includes costs for vacation, parental, family, medical or sick leave; allowance for separation or dismissal, payments required for group health care including insurance premiums, and payment of any retirement benefits
What Are The General Rules Around Loan Forgiveness?
Your loan won’t be forgiven if you use the loan amount for anything other than payroll and the bills (outlined above) over the 8 weeks after getting the loan. The 8 week period begins as soon as the money hits the account. The lender is required to make a disbursement within 10 calendar days of approval.
Your loan will not be forgiven if you do not maintain your staff and payroll. Your loan forgiveness will be reduced if you decrease your full-time employee headcount. Your loan forgiveness will also be jeopardized if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019. You have until June 30, 2020 to restore to full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
What If I Don’t Comply With The Forgiveness Rules?
If you need to use the money for other things, then your PPP money becomes a loan. The interest rate on the loan is fixed at 0.5% and has to be paid back in two years. You can defer payment for 6 months; however, interest will accrue over this period. You can pay it back as quickly as you want as there are no prepayment penalties or fees. Finally, there is no collateral required on these loans.
Create A Separate Checking Account For Your PPP Money
You should devise a strategy to keep an extremely detailed audit trail for all your PPP money. It makes the most sense to keep this money in a separate account and only use this account for bills you will pay from PPP and of course, payroll. Because we are not quite sure what your bank will require in order to qualify for forgiveness, you need to be well equipped to defend every dime spent. It will be much easier if all the money is in one place. If you are going to use this separate account for payroll make sure to change that through your payroll system!
Sharpen Your Pencil
If you don’t already, you need to start taking incredibly detailed records when it comes to this PPP money. Therefore, keep statements, bills, invoices for the bills you are paying and make sure to keep extremely detailed info on worker’s wages. If you use Quickbooks or an electronic bookkeeping system, make sure you are noting all PPP monies and flagging them as such.
After 8 weeks of loan disbursement, I suggest reaching out to your lender above the forgiveness process. At this point, the SBA hasn’t outlined this explicitly so make sure to keep your ears open for any changes on this front.
Keep in mind that all of this is quite fluid and the SBA/government continues to roll out new rules and regulations surrounding all of these loans. Make sure to keep up to date on this and if you are concerned about making a mistake, consider hiring a financial professional to assist you. Finally, any inappropriate uses of PPP money could be considered fraud..so let’s try to avoid that. Good luck!
Kristin O’Keeffe Merrick is a Financial Advisor at O’Keeffe Financial Partners, LLC, located at 100 Passaic Ave, Fairfield, NJ, 973-227-3660
Investment advisory services offered through Raymond James Financial Services Advisors, Inc. O’Keeffe Financial Partners, LLC is not a registered broker/dealer and is independent of Raymond James Financial Services. Securities offered through Raymond James Financial Services, Inc., Member FINRA / SIPC.
Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James financial advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.