Now That I Have a PPP Loan, What Should I Do?

The mad dash for bank financing following the CARES Act passage of the Paycheck Protection Program (PPP) Loans was nothing short of a gold rush.  Borrowers pounded down the virtual doors of banks inundating them with applications, emails, and phone calls all trying to get a slice of the forgivable loans.

Accountants and bankers tried to decipher the bill while payroll companies revised their reports multiple times, the SBA changed the rules while politicians attempted to understand what was contained in the 880-page bill they signed.  In the end, the initial $349 billion was disbursed in a spectacularly biased method fraught with discrimination of all types in merely 13 days.

Version 2.0 of the PPP is expected to be signed by the President on April 24th with another $310 billion earmarked as forgivable loans.  More businesses will vie for a slice of the government-backed loans designed to get us through the worst recession in anyone’s memory.  New recipients will receive a PPP loan from a financial institution in the coming week or so which begs the question, what now?

The Paycheck Protection Program lacks structural details necessary to complete the forgiveness calculations.

If you’re expecting clear insight into how exactly the PPP forgiveness process will work I am going to disappoint you.

So will everyone else.

The best analysis of the current state of the PPP loan was written by tax professor Tony Nitti and describes in laugh out loud detail the gaps in guidance.  (Yes, there are a few accountants who have a sense of humor, Mr. Nitti is one.)  You can find and enjoy that here.

Until those are resolved, not a single person will be able to give definitive guidance to loan forgiveness.  This post is to provide concrete steps taken from the day you receive the loan to put your company in the best position to receive tax-free loan forgiveness.

If it looks like a loan, swims like a loan, and quacks like a loan…

In the scramble to get a PPP loan, many people focused on the “forgivable” portion and forgot the “loan” word.  Because most people who participated in the PPP loan scramble basically “shot first and aimed second”, remember, this is a loan.

You filled out a loan application, provided reports to a financial institution, signed loan documents, and received the money.  In that respect, this has functioned just like every other loan you’ve had.

By definition, a loan is an asset to one person and a liability to another.  Set this up on your books as a short term note payable to the bank.  This is a liability on your books.

This money is not a grant until you qualify for forgiveness. 

If that portion of the process goes as smoothly as the rollout of this program we all have much to dread.

I’m hopeful that we can have clear guidance from the SBA or the Treasury for a standardized spreadsheet template that each bank and borrower can use to compare numbers.  In its absence, we are forced to use what we know.

Use 75% of the loan amount for payroll to qualify for forgiveness

This is the largest hurdle of the loan.  You will need to pay back at least some of the loan if at least 75% of the expenses funded by the loan proceeds are not used for payroll costs.  Some banks are interpreting this that no part of the loan is forgivable if the 75% threshold is not reached.  While I disagree with that interpretation, the decision of what is forgivable falls on the banks and each bank is forming its own policy.

What happens if your business has been closed due to COVID-19 and you have no customers?

Gyms, restaurants, retail shops and many medical providers have seen their revenue decrease by 80% or more.  You face some very challenging decisions if you are managing a business that has been forced to lay off employees.

Are you going to pull your employees off a generous unemployment package, rehire them and pay them to sit at home for less than what unemployment is providing?  Would you do that with an unforgivable loan?

I believe there will be businesses that continue to pay their employees through the shutdown who don’t receive loan forgiveness because they botched the details.  That would be a very unfortunate mistake for a business trying to do what they think is right to keep its employees’ jobs.

Make absolutely certain you are calculating the payroll details as soon as you receive the funds.

The loan disbursal started the clock.

Regardless of when you received the loan, the timer started on the day of disbursal.  Your company has eight weeks from the day the money hits your account to use this money for its intended purpose.  At the end of the eight weeks, you will need to count your expenses during that time period to qualify for loan forgiveness.  Expect to use payroll reports, canceled checks, and bank statements to prove the expenses.

Pay attention to your payroll cycle.  Your loan forgiveness depends on the date of each expense.   Biweekly or semimonthly payroll expenses may not align with the eight-week period.  It is possible you need to give bonuses to employees or switch to weekly payroll to use the 75% required for payroll.  Since you cannot prepay expenses, you will need to find creative ways to use this money.

To be eligible for forgiveness, the expense needs to be in this eight-week period.  Dig up lease documents and verify they were signed before February 15, 2020.  Take the rent payment off autopayment and write a check so you can trace the expense.  Be sure that the date of the check falls in the eight-week period so your expense is forgivable.

Do I need to have the money in a separate checking account?

There are many advisors who are strongly recommending the PPP loan proceeds are in a separate checking account.  I appreciate the ease with which you can trace expenses and it may help you if you don’t have great records.  (The fact that you have a PPP loan demonstrates that you have records good enough to apply for the loan.  Those who didn’t have decent bookkeeping didn’t have a shot at the loan.)

Comingling PPP loan proceeds with other cash is not as relevant as tracking your expenses.  With proper accounting, the uses of the loans can be demonstrated and traced sufficiently enabling forgiveness.

However, if you received the loan proceeds in a separate checking account, only transfer that money when you spend on forgivable expenses.

For example, if your payroll is $8,098, transfer that exact amount from the loan proceeds checking account to your main checking account.  Do the same for the rent. This serves as an additional step to track loan proceeds.

You don’t need to do this but if you like the additional control, it’s an inexpensive option.

This is a significant lifeline for many and even a windfall for some.

Money falling into the hands of private businesses from the government is not how cash normally flows.  Nothing about this is normal.

Diligently tracking your PPP loan expenses is the best way to ensure your loan is forgiven.  Don’t forget this is a loan until you receive notification in July that it has been forgiven.  Treat it like a loan.

Spend the money on payroll and related expenses within eight weeks to the day of receiving it.  Spend 75% of the loan on payroll and track it in a spreadsheet weekly.

The time you spend working on these details will most likely amount to high ROI time.  Tax-free revenue is rare.  Be cautious and track everything.  Let’s enjoy moving this loan from a liability to income later in the summer.