Your Paycheck Protection Program Loan Has Funded. Now What?

The Paycheck Protection Program and Health Care Enhancement (PPPHCE) Act was signed into law on April 24. Although the legislation authorized additional funding for the Paycheck Protection Program (PPP) it did not generally change the PPP loan eligibility requirements, application process or loan forgiveness rules.

Many security, fire and systems integration firms have obtained these loans and have put the proceeds to good use. This article will explain the types of expenditures for which the PPP loan proceeds may be used and the conditions under which they are eligible to be forgiven.

The PPP loans have been heavily covered by the media and I have written several articles and appeared in webinars on the subject. We helped our clients to obtain over $15 million in PPP loans and we are assisting them in navigating the requirements for loan forgiveness.

There is a lot of misinformation out there, partly because the rules were hastily crafted and have been interpreted in several ways. The most important thing to keep in mind is that the individual lenders are tasked with approving, servicing and obtaining forgiveness for the loans.

Don’t miss this companion article: How to Restore Payrolls to Pre-Pandemic Levels

By law they were given little ability to review the loan applications (ex: there are no credit requirements), but they are subject to review by the Small Business Administration (SBA) according to vague and changing guidelines.

It is important to understand that while the stated purpose of the PPP loans are to help small businesses, the actual intent appears to be keeping wage earners off of the unemployment rolls long enough for economy to begin recovering. The loans were made to assist employers in covering:

• Payroll costs;
• Costs related to group health care benefits during periods of paid sick, family or medical leave, and insurance premiums;
• Payments of interest on mortgage obligations (principal payments are excluded) incurred before Feb. 15;
• Rent payments under lease agreements that were in effect before Feb. 15;
• Utilities, for which service began before Feb. 15;
• Servicing interest on other debt obligations incurred before Feb 15;
• Refinancing an SBA Economic Injury Disaster Loan made between Jan 31 and April 3.

PPP Loan Forgiveness Application and Eligible Costs

On May 15, the SBA published the Paycheck Protection Program Loan Forgiveness Application. The application does not answer all of the questions surrounding forgiveness of a PPP loan, but it does provide some guidance on the most important aspect of the program forgiveness.

Future supplementary guidance on loan forgiveness from the SBA in the form of additional rules or FAQs may provide clarification around the mechanics of, and technicalities associated with, loan forgiveness. In the meantime, I have analyzed the application and the current guidance and have determined the following:

Applying for Loan Forgiveness — Although the SBA published the application and mandated its use for PPP loan forgiveness, the lenders are administering the process and will make the forgiveness decision (subject to the SBA rules). You should contact your lender for more information as to how and when to submit the application and to understand your lender’s forgiveness process.

Don’t Mess Around — The CARES Act requires that the PPP lender make a decision on loan forgiveness not later than 60 days after the date the PPP lender receives the Application.  Wait too long and you may be out of luck, but don’t expect a decision the day that you send your application.

Eligible Costs for Forgiveness — Borrowers are eligible for numerous costs to be forgiven. These include the payroll costs incurred and paid during the “covered period” or the “alternative payroll covered period.”

The covered period is the 8-week (56-day) period beginning on the first date on which a borrower received PPP loan proceeds or the loan disbursement date. Under the alternative payroll covered period, borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the 8-week (56-day) period that begins on the first day of the borrower’s first pay period following the PPP loan disbursement date.

Following are various costs that may be forgiven:

• Payroll costs are considered incurred on the day that the employee’s pay is earned. Don’t get confused, read on;
• Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction. This clarified questions about payroll earned before the loan is funded. If the checks or ACH’s are distributed during the 60-day period after the loan funds, the expenses are eligible;
• Payroll costs incurred but not paid during the borrower’s last pay period of the covered period or alternative payroll covered period are eligible for forgiveness if the payroll costs are paid on or before the next regular payroll date (otherwise, payroll costs must be paid during the covered period or the alternative payroll covered period). No need to rush to write the check;
• For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the covered period;
• The dollar amount for which forgiveness is requested may not exceed eight weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual. If you only paid yourself $52,000 last year, your payroll costs are limited to $8,000;
• The SBA has issued Interim Final Rule 1, which contains further information on calculating payroll costs.

Nonpayroll costs are an area that has created the most confusion. Be very careful to follow the rules closely and to update your understanding before filling out the application. Eligible nonpayroll costs include:

• Interest payments on any business mortgage loan on real or personal property incurred before Feb. 15;
• Prepayments are not eligible for forgiveness;
• Principal payments are not eligible for forgiveness;
• Business rent or lease payments pursuant to lease agreements for real or personal property in force before Feb. 15;
• Business utility payments for a service for the distribution of electricity, gas, water, transportation, telephone or Internet access for which service began before Feb. 15;
• Eligible nonpayroll costs must be (i) paid during the covered period (not the alternative payroll covered period), or (ii) incurred during the covered period (not the alternative payroll covered period) and paid on or before the next regular billing date, even if the billing date is after the covered period;
• Eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount.

This should help you to categorize your expenditures for payroll expenses. Remember that not only is it important to spend the PPP loan proceeds on the proper expenses, it is also important to restore your payroll amounts to pre-pandemic levels.

Mitch Reitman is Managing Principal of Reitman Consulting Group, a member of the SSI Editorial Advisory Board and an SSI Industry Hall of Fame inductee.  He can be reached at [email protected].

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