July 06, 2020
Strategies to Maximize PPP Loan Forgiveness
The COVID-19 pandemic has had a tremendous effect on all our lives. Schools and business closed, employees shifted from offices to working from home, millions were placed on unemployment, and the federal government took several measures to ease its financial impact on Americans and the economy. One of the most widely discussed federal programs, the Paycheck Protection Program (PPP), was introduced by the U.S. Small Business Administration as part of the CARES Act.
The program was rolled out in hopes of helping small businesses survive the economic shock of COVID-19 and allowing employers to maintain their staff at pre-pandemic levels. The SBA allocated over $650 billion dollars to the PPP, which was delivered in two rounds of loans. The complexity and lack of clarity around the program caused a lot of initial confusion, which prompted the SBA to provide ongoing guidance regarding the program’s rules.
Borrowers seem primarily concerned about the program’s forgiveness clause. The program allows up to 100% of the loan proceeds to be forgiven if the dollars are spent on qualifying expenses within a 24-week window of the loan’s origination date and meet underlying criteria. The first step to obtaining forgiveness is to spend at least 60% of loan proceeds on payroll costs. Payroll costs include cash compensation, capped at $100,000 annualized for any individual, as well as retirement and health benefits for staff. The additional 40% can be spent on approved expenses, mortgage interest, rent payments and utilities. The borrower may return any unused portion or keep the excess amount as a loan for a five- to 10-year term at a 1% interest rate.
The required proof to receive loan forgiveness rests squarely on the business owner. To help keep a clear and transparent history of transactions, all business owners were encouraged to deposit PPP loan dollars into a separate bank account. Moving funds from the PPP loan bank account to the business bank account will show each individual transaction, along with the date and amount. Proper recordkeeping will help ease the forgiveness process and leave business owners with the greatest probability of avoiding an unwanted loan when it concludes. The SBA has indicated that documentation should be preserved for a six-year period.
For any business that furloughed staff, it is important to restore staffing levels by Dec. 31. Failure to do so may result in a lower forgiveness amount. This step includes restoring staff’s pay rate and number of hours worked. Each business owner should provide a letter to each employee with a formal offer to return to work. If a member of the staff declines to return to work, resigns or is fired for cause, it will not affect this test in terms of head count. There is also an exemption to the staffing requirement if staff is not needed due to a decrease in business activity as a result of COVID-19-related compliance.
Employee compensation should be restored to pre-pandemic levels to maximize forgiveness. This includes hourly and salary employees who earn less than $100,000 on an annual basis. Any employee or owner who earns more than $100,000 will be limited to a pro-rated pay rate for the 24-week forgivable period. Employees earning over $100,000 per year can be paid $1,923 per week.
Lastly, the Treasury Department provided clarification for any business owner who has a PPP loan less than $2 million. A safe harbor provision was provided for such loans and loan certification will be deemed to have been done in good faith. As we have seen throughout the PPP rollout, the guidance from the SBA is subject to further clarification. It is important to work with your professional services team to stay on top of any updates and seek to maximize your loan’s forgiveness in coordination with reopening or ramping up your practice. In addition, your professional services team should be speaking with you about other programs being made available by the federal government.
If you’re interested in a comprehensive planning approach customized to you and designed to enhance your overall financial well-being, the practice integration advisors at Buckingham can help.
This commentary originally appeared June 24 on DentalTown.com
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About the Author
Brian is enthusiastic about his role in supporting a team that strives to deliver an exceptional client experience. He appreciates the importance of a well-rounded team working collaboratively to develop, implement and monitor a plan that helps clients achieve their distinct goals.