Posted by Aurelia E Weems CPA

What to do after you receive a Paycheck Protection Program (PPP) and what to do if you didn't receive it.

What to do after you receive a Paycheck Protection Program (PPP) and what to do if you didn't receive it.

The Paycheck Protection Program (PPP) is a form of financial assistance that many companies applied for to keep them afloat. The Paycheck Protection Program (PPP) is a loan designed to help businesses maintain their payroll. One of the reasons why PPP is so attractive is that the loan can be forgiven entirely, which means the beneficiaries do not have to pay it back.

For those who have received a PPP loan, this is a breakdown of what to do next so as to set it up and turn it into a grant at the right time. And if you haven't secured a P3 loan, we'll look at other financial aid options that are still available.

What you need to do after getting a PPP loan to prepare yourself for forgiveness

Spend the approved expenses in the correct period

The PPP loan is specially structured to help small businesses keep their workforce. For this reason, the US Small Business Administration estimates that eligible personnel costs can be waived up to 100% of loans and non-salary expenses (mortgage interest, rent, and utilities), which can be waived up to 40% of the loan (previously 25% under the old forgiveness rules). For your loan to be canceled, small business borrowers must spend at least 60% of P3 funds on their checks (previously 75% under the old forgiveness rules), and the rest of the funds must be spent on qualifying expenses that have nothing to do with paying (mortgage interest, rent, and utilities). If part of the P3 funds is used for other expenses, this amount will not be canceled. However, you can benefit from partially forgivable amounts if you spend PPP funds in any of the categories mentioned above.

The period during which these expenses must be incurred is called the "covered period," either eight weeks or 24 weeks after the day the loan is disbursed. For personnel costs, you can choose to use a covered alternative if you have a bi-weekly or more frequent payment schedule in which the eight-week period begins on the first day of the first payment period after the date, where you received the PPP loan disbursement. With the Paycheck Protection Flexibility Act approved on June 3, 2020, debtors can now extend the initial eight-week period to 24 weeks. The 24 week period covered cannot expire on December 31, 2020.

In addition to spending 60% of the PPP loan on payroll, you must keep it personal for the period covered. Salaries must also be maintained for the same period and, to be forgiven, cannot be reduced by more than 25% for employees earning less than $ 100,000 per year. 

If you've suspended or fired one of the employees, that's fine. To retain staff for loan forgiveness, you will need to rehire the employees and restore their remuneration to at least 75% of what it was before December 31, 2020 (according to the rules above, the date was June 30, 2020). Otherwise, the loan forgiveness will be reduced. However, you still have the right to forgiveness if you cannot restore the entire workforce because:

  • Business operations cannot be restored to February 15, 2020, levels due to operating restrictions related to COVID-19.

  • During the period covered, one of your employees was dismissed for a just cause, resigned, or voluntarily requested and reduced their hours.

  • Issuing genuine written offers to employees for hire, and those employees turned down the job.

  • No qualified employee can be found.

Payments, for PPP loan forgiveness, may not include payments to independent contractors. However, other payments may be included in payroll costs subject to remission and cash compensation consisting of wages, salaries, and commissions (less than $ 100,000 per employee):

  • Employers who pay tipped employees can include any wages paid to employees to cover tips they would otherwise have earned.

  • Health insurance payments and retirement benefits.

  • If you are an independent contractor or a sole proprietor without an employee who received a P3 loan, you can include your business's net income as long as it is listed on line 31 of the 2019 Form 1040, Schedule C.

  • License paid with FFRCA (Family First Coronavirus Relief Act) credits. If you pay sick leave or family leave with FFRCA credits, these funds will not be forgiven.

  • Payment of compensation.

  • Taxes on state and local employers (e.g., state contributions to unemployment insurance).

Keep your expenses well documented

You must provide all documents when showing how you used your PPP loan. The best method to do this is to keep complete records. One way to keep comprehensive documentation of the expense process is to separate business and personal finances. However, this is not a significant condition for forgiving the loan.

To begin the paperwork for a PPP loan forgiveness, record the amount, date, and creditor information in your books as soon as the PPP funds are deposited into your account.

Then watch how you spend your P3 funds within eight to 24 weeks of receiving the funds. Ensure that each expense documents the date, vendor information, and category of the PPP approved remission expense (e.g., salaries, utilities, etc.). It will also help you understand if you are spending the loan in a way that allows it to be forgiven.

Gather reports and documents

In addition to tracking your expenses, you will need to check and organize your receipts and reports to verify your expenses. Collect documentation showing interest payments on mortgages or rents, invoices, and salary reports.

Also, let the lender know what they will need from you when repaying the loan. If you need additional documents, you may want to collect them as part of this practice.

Prepare and submit your forgiveness request

The SBA has launched a waiver on PPP loans. Please make sure you send it in the format preferred by the lender. Creditors have 60 days from the date of filing the forgiveness request form to notify you if your loan has been forgiven (or how much has been forgiven on the loan). 

Loan forgiveness will be excluded from your gross income when you file your tax return. If your loan is not canceled, you will need to plan with your lender to repay it with 1% interest. 

What to do if you have not received a PPP loan

If you have not received a PPP loan, there are other options.

  • Deferred Payroll Tax: Employers typically pay a 6.2% social security tax on their employees' salaries. For payments due in 2020, businesses and the self-employed can defer these payments for the next two years. You will have to pay 50% by the end of 2021 and the remaining 50% by the end of 2022. Do note that you may not be able to defer these payments if a secured loan has been canceled.

  • Employee Retention Credit: ERC is a refundable tax credit offered to qualified employees, equal to 50% of salaries up to $ 10,000 for certain employees, which means that the maximum credit for each employee is $ 5,000. This credit applies to salaries paid after March 12, 2020, and before January 1, 2021. Your business is eligible to receive this credit if your businesses have been suspended in whole or in part due to COVID-19 or if your work experience decreased by more than 50% of gross quarterly income. You can apply for this loan using Form 7200, Prepay Employer Loans Due to COVID-19, or apply for Form 941.

  • Private Programs: Many non-profit organizations, banks, and businesses have also implemented financial aid programs. 

  • SBA's Economic Injury Disaster Loans (EIDLs): SBAs are typically intended for businesses that need financial assistance due to a natural disaster. In early March, eligibility for these loans was extended to businesses affected by COVID-19. The CARES Act extends this program and facilitates its application. 

State and Local Government Programs: Some states and local governments have established financial assistance programs, loans, and grants for small businesses in their territory. For more information, consult your local chamber of commerce.

Aurelia E Weems CPA
Contact This Member