As businesses scrambled to get a loan under the Paycheck Protection Program (“PPP”) that was created under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), they must now decide how to use those proceeds so that they are both consistent with the law and maximize loan forgiveness.
If after getting the loan, you don’t really need the money consider giving it back, because if you really don’t need the money, you might not have been eligible in the first place. The law says that you have to certify “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.” The SBA recently said that “Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” So with that guidance alone, you have to decide if you need the money. If you decide you don’t need the money and don’t want to risk violating the law, the SBA has created a “limited safe-harbor” that says you can payback the loan by May 7, 2020 and rest assured that you have not violated the law.
If you decide to keep the money, here is a step-by-step guide to preserving your ability for maximum forgiveness based upon what we know today.
First, put the money in a separate account so that you can track every dollar spent. You can only use the money for certain “Allowable Uses” including:
- payroll costs;
- costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- employee salaries, commissions, or similar compensations;
- payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation);
- rent (including rent under a lease agreement);
- utilities; and
- interest on any other debt obligations that were incurred before the covered period.
Second, only funds spent during the 8 week period (the “covered period”) following your loan funding will qualify for forgiveness. The law creates some new defined terms for what amounts will be forgiven related to ongoing obligations provided those obligations arose before February 15, 2020, including payments related to:
- payroll costs;
- covered mortgage obligations;
- covered rent obligations; and,
- covered utility payments.
The lions share of the money (75%) must be used for payroll costs while the balance of the money can be used for other qualifying expenses. Practically speaking, that’s a pain to keep track of so you might want to just use your loan account for payroll and then cut partial checks for rent, utilities, and mortgage obligations with the balance coming from your normal operating account.
Third, you have to maintain your average full time equivalent headcount during the covered period using the average number of employees during the period from February 15, 2019 to June 30, 2019; or the average from the period from January 1, 2020 to February 29, 2020. If you don’t, the loan forgiveness amount will be reduced by your percentage reduction in full time equivalent employees.
Fourth, your loan forgiveness amount will be reduced by any reduction that is greater than 25% of the salary or wages paid to any employee that makes less than $100,000 per year. In other words, you can presumably reduce the wages and salaries of people that make more than $100,000, but not those that make less. The bottom line, don’t fire or reduce pay for people that make less than $100k by more than 25%.
But wait, there is one more rule. The last two rules won’t cause a reduction in your loan forgiveness if you let people go or reduced their pay during the period from February 15 to April 27, 2020, and hire people back and restore their pay by June 30, 2020.
Now get out your calculator, payroll spreadsheets, and bring in your accountant to make sure you don’t get the math wrong. In order to qualify for loan forgiveness you will need to have documentation for all of your qualifying expenses such as state and federal payroll tax filings, canceled checks, and payment receipts. That’s it, stop reading and start tracking.
Steven J. Thayer, MBA, JD 