A week and half ago, the Treasury and SBA released its highly anticipated Payroll Protection Program Loan Forgiveness Application. I considered writing about it last week but as there were rumors of additional guidance and potential changes in the works, I held off. Those rumors are still out there and there are two bills in Congress that would have impacts. I had promised a post about how to put out the flaming hot ball of tar you have been holding in the form of the PPP loan and so for now, as we are approaching the four week mark for some of the loans, let’s discuss forgiveness.
The PPP Loan Forgiveness Application can be found at https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness-Application.pdf
Before you begin the application, you should gather the following information:
The forgiveness application starts with information about your business and your employee headcount and then asks you to list your compensation and eligible non-compensation costs. The sum of these costs is your potential forgivable loan amount before adjustments.
The application then lists adjustments to the forgiveable amount which include a reduction if your average compensation per employee full time equivalent (FTE) was not at least 75% of the average compensation for the first three months of 2020. It also includes an adjustment if your FTE workforce was lower than during the first three months of 2020, subject to an exception for restoring FTE by June 30, 2020.
Your PPP loan forgiveness amount is the lesser of your adjusted forgiveable amount, the total PPP loan amount or the total payroll costs divided by 0.75 (which is a representation of using 75% of the forgivable loan proceeds for payroll costs.).
The Treasury continues to keep a list of frequently asked questions which provides a little more in depth information regarding certain scenarios. You may want to refer to them as well. They can be found at https://www.sba.gov/document/support--faq-lenders-borrowers
The important takeaway from my review of the forgiveness application is to keep great records of the eligible expenses and supporting documents for each.
The forgiveness application will be submitted by you to your lender and not the SBA which means that each lender may interpret forgiveness a little bit different from another lender, as we saw in the PPP loan application process.
While absolutely possible for you to complete your PPP forgiveness application on your own, if you have any hesitations about doing it yourself, please hire your CPA to help you. We actually enjoy helping
The US Treasury and Small Business Administration (SBA) have promised that all Paycheck Protection Program (PPP) Loans over $2 million that seek forgiveness will have the pleasure of an audit. While the size of the loan makes audits on loans over $2 million mandatory, there will be many others under the $2 million that will also have the audit experience. Are you ready?
If you fail your PPP audit, part or all of your loan forgiveness may be in jeopardy in addition to prosecution by the Department of Justice under the False Claims Act. The audit and prosecution may not be the only worries. You may also be subject to investigations and reviews by the Pandemic Response Accountability Committee, Congressional Oversight Committee and the Special Inspector General for Pandemic Recovery. States may also jump on the bandwagon with their own enforcement initiatives.
What is a borrower to do? Below are some steps you will want to consider regardless of your PPP loan size.
First, if your loan is over $2 million or you are a publicly traded company, you will be audited so start your engines and prepare now.
Second, regardless of your PPP loan size, prepare now. It will make the forgiveness process easier and you will be ready should the auditor choose you.
Begin preparing your documents now. The support you prepare now and before an audit are considered to be much more persuasive than documents you prepare after the audit begins. Setting aside a little time to keep your records now will save a lot of time creating them after the fact. Organize yourself and your records. Keep receipts, reports and invoice documents organized.
Third, document your analysis of your necessity to borrow loan funds to support your ongoing operations. Document your evidence as well. When you borrowed the PPP funds, you certified certain things including prior loans, the absence non-qualifying business activities, relationship with Congress and the SBA, current legal actions and obligations, and the big promises you made:
To the extent you have document and analyses to support your certifications, now is the time to gather them together. If your documents or analysis are currently missing, now is the time to create them.
Judgement is required to certify that the loan request was necessary. Document your assumptions and project your revenue and expenses in times of normalcy and in this time of uncertainty. The analysis results and your supporting documents should support your certifications. If you have cash surpluses or savings for your business, be prepared to discuss why the cash alone would be insufficient to maintain operations and why the loan is needed.
(Update - As of this morning 5/13/2020, the SBA has issued an additional response to their frequently asked questions (see question 46) where they have provided safe harbor for all PPP loans under $2 million in regards to determining that current economic uncertainty makes the loan request necessary to support ongoing operations. This is good new as it relieves a burden to prove certification for one of the elements for a large group of the PPP loans.)
As part of this gathering process, take the time to assess the risk that your certifications may be found untrue or inaccurate. The court of public opinion has already ruled against larger companies who qualified for the loan under the program and were forced to return the funds for public relations reasons. The real courts will ultimately decide if the funds were necessary so do what you can to mitigate that risk in your documentation gathering process.
Take the time to create a file of documents to support each certification you made on your application, including the ones you provided to the lender with your application (payroll run reports, payroll tax filings, etc.).
Fourth, start thinking about loan forgiveness. We are still waiting for final guidance on loan forgiveness calculations (the hot flaming ball of tar mentioned in last week’s blog is still on fire) but you can start keeping meticulous records of how you use the funds. Keep payroll run reports. Gather your lease agreements and mortgage records. Keep copies of invoices and checks or bank EFT records. There should be supporting documents for each expense you plan and hope to have forgiven.
You will also want to have supporting documentation to verify that your employee headcount and pay remained within the requirements for loan forgiveness.
Fifth, if you have a loan over the $2 million threshold for a mandatory audit or are a public company, consider holding a trial run of an audit or a “mock audit” now to find the holes that you will need to fill before you have the real thing.
As I tell my clients when they ask about an IRS audit, if you are prepared, have your documentation and support and haven’t done anything wrong then there is no need to fear being audited. That advice applies to the PPP loan audit too. Take the time now, before the audit, to prepare – keep accurate and adequate records, assess the risks and mitigate them, and keep moving forward.
all"Forgive Them For They Know Not What They Do"
With the passage of the CARES act Congress gave the Small Business Administration (SBA) and the Treasury a whole bunch of money, which some think was not enough, to distribute to businesses in need of help to survive the COVID-19 impact on their business. Most of these funds were to encourage employers to retain employees and keep them employed and productive. One of the many programs that came out of these funds is the Payroll Protection Program or PPP. It provides a possibly forgiven loan of up to 10 weeks of average weekly payroll if used on payroll and some rent, utilities, and a few other expenses.
There was a mad rush to apply for these loans due to the possible forgivable nature of them.
Round One ended with many businesses receiving the loans and many more that did not. It included loans to larger small businesses that qualified under the program but were then later publicly shamed for having taken the loan because they had access to capital markets (How dare they apply for and get something that Congress said they could?). Many returned the funds for public relations purposes not for lack of need.
Round Two ended with more small businesses receiving the loans and many more that did not.
With the program, we were given some general guidelines around forgiveness but few specifics. Essentially, successful applicants have been handed a flaming ball of tar and told to hold on to it until they would be given information on how to put it out in the future. To date, we have not received the final guidelines as to how to calculate PPP loan forgiveness. We have been given a set of answers to frequently asked questions that grows by a question or two every couple days but not the final regulations. This has left me and thousands of other accountants starting every answer to a question about the PPP with “Under current understanding…” and ending it with “we will let you know more when we are given more.”
So…under current understanding your PPP loan forgiveness will be:
Amounts paid during the eight weeks after receiving your PPP funds for Payroll Expenses:
If Payroll Expenses as described above are equal to or greater than 75% of the total loan proceeds, then you may also include the following other covered expenses in your forgiveness calculation:
You must also retain your headcount and a few other conditions to have any of it forgiven.
It will also be your responsibility to track and prove each expense you are seeking forgiveness for.
Some are suggesting you need a separate bank account to hold these funds, but I don’t believe you do unless you need it to help you track the spend.
Another catch is that under current understanding, the business expenses paid for with forgiven loan proceeds are not deductible meaning your taxable profits go up which also means not-tax free. (The Senate has introduced a bill to change this.)
It is my opinion, humble or not, that if getting the PPP loan was difficult, getting it all forgiven may be even more difficult. I think there will be many PPP loan funds that remain as loans for a variety of reasons including you may not have been able to open your business for part of the eight weeks on record.
If you are not a great record keeper, now would be a good time to reach out to your accountant and engage them to help you track what you will need for forgiveness.
We will get back to you when we know more.
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