The dust is still flying from the mad dash of companies filing for a Paycheck Protection Program (PPP) loans under the CARES Act. Even with a delay in the start of the application window, some companies have found out in the past 24 hours that their loans have been approved and the funds will soon by on their way.
The intent of PPP loans is to help companies over the next eight weeks with covering the cost of payroll plus some operating expenses while keeping their employees and organizations working during the COVID-19 pandemic. But, as we all know, this loan has a very special provision, the ability to have it forgiven – 100%.
One would bet that every company that took the loan has a goal to qualify for total loan forgiveness. So, what can you do to maximum your chances?
First, your eight week window begins with the date you receive the first penny from your lender, which is within 10 days of your loan approval. That means, that the moment you take funds, you must begin tracking your expenses and actions. During those eight weeks, your lender will be looking to see how well you were able to achieve the parameters set by Act and will compute your percentage of forgiveness.
Here is what they will be looking for:
Employee Headcount Cannot Change
One of the goals of the Act is to keep Americans employed. Therefore, to qualify for maximum forgiveness, a business cannot have a change in their employee head count during the applicable test period. You will need to determine your FTE (full time equivalent) employee count for the period of February 15, 2019 to June 30, 2019 OR January 1, 2020 through February 20, 2020. If you need assistance with computing this number, please reach out to your MidwestHR Payroll Specialist.
Once you have this number, your headcount must remain at this number (or above) for the eight week period. If you have laid off or furloughed employees, you will need to call them back. If an employee is/was terminated (either voluntary or involuntary), they need to be replaced.
Salaries and Pay Rates Must Remain (Close to) the Same
Another goal of the Act is keep pay stabilized. Therefore, to maximize forgiveness, pay rates for employees cannot change more than 25% per employee. Each employee’s gross pay will be reviewed. If an employee’s pay rate decreased 25% or more, their payroll totals for the eight week period will not be eligible for forgiveness.
Spend At Least 75% of the Loan on Payroll
To maximize your loan forgiveness, NO MORE THAN 25% of your total loan funds should be used on non-payroll related expenses covered by the Act (rent, mortgage and utilities). You will need to produce invoices for those expenses when you submit for loan forgiveness. For the the cost of payroll, those totals do include covered benefit expenses for health, dental and vision. If more funds are used for non-payroll related costs, those amounts would not be eligible for forgiveness.
Other Things You Need to Know
Outside of top three things (above) that contribute to your loan forgiveness, here are some other items that can affect the amount for consideration :
- PPP loan funds can only be used up to the pro-rata equivalent of $100,000 annually in compensation per employee. Therefore, make sure to not submit excess income for those employees to your forgiveness amount.
- PPP loan funds cannot be used for wages paid under the Families First Coronavirus Response Act for Paid Sick Leave or Emergency Family Medical Leave.
- PPP loan funds cannot be used for ANY OTHER reason but payroll and approved expenses. Any amounts used for non-approved expenses will not be forgiven.
Start the Forgiveness Process
Begin working immediately with your lender on your forgiveness process. This will include completing the application form(s) (they will supply), keeping your payroll check journal reports for all payrolls during the eight week period, keeping invoices and proof of expenses on anything in which PPP loan funds were used to pay (rent, mortgage and utilities). Once you exhaust your loan amount, you can apply for loan forgiveness.
What if the Whole Loan is Not Forgiven
This should be something you begin considering, immediately. If you do not qualify for full forgiveness, your loan payments will begin six months from the start of the loan for a term of two years. You may choose to make installments at the low interest rate or pay off your balance, in full, without penalty.
One Last Suggestion
It has been HIGHLY recommended that companies put PPP loan funds in a separate banking account and not mingle the funds with other assets. Some lenders are insisting on this parameter. This will allow you to use those monies specifically for approved purposes of the loans, payroll and approved expenses, while making it easier to track by you and the lender.
MidwestHR will continue to monitor developments in this subject and will provide updates as they become available.