To small business owners, CFOs, CPAs and trusted advisors are essential workers right now. For many, the PPP loan is the lifeline keeping the heart of their business beating. But there’s no free lunch here.
The PPP comes with its own set of instructions to limit how the money can be spent. If you want to maximize the amount that will be forgiven, you must abide by stricter guidelines on how to spend and document the spending of your loan. Here are 5 steps to manage your PPP loan funds wisely.
NOTE: Lenders are the final arbitrators for forgiveness so the process and proof may differ based on your lender.
1. Be aware of the 8 week time frame
PPP loan funds are to be used for payroll and certain operating expenses during an 8-week (covered) period starting from the day your lender makes the first PPP loan disbursement and before June 30th, 2020.
Mark the dates on your calendar close to the end of that 8-week period to ensure you use the funds in the required timeframe.
2. Open a new business bank account
Put the loan funds received in this account.
Everything that you use the money for should come from this account. It will be much easier to record how the funds were used if all of that information is in one place.
3. Use the funds on the expenses that the SBA is likely to forgive
According to the PPP Interim Rule, the actual amount of loan forgiveness will depend, in part, on the total amount spent over the covered period on:
§ payroll costs (I’ll breakdown what is considered in this category later)
§ payments of interest on mortgage obligations on real or personal property incurred before 2/15/2020
§ rent payments on lease agreements in force before 2/15/2020
§ utility payment under service agreements dated before 2/15/2020
4. Use at least 75% for payroll
The PPP Interim Final Rule also states that 75% of the PPP loan funds must be used for payroll costs. Calculate 75% of the funds you received and use at least that amount.
If you have no employees, PPP loan funds can be used to replace your business owners income calculated based on your 2019 Form 1040 Schedule C line 31 net profit amount (up to $100,000 annualized and excluding any qualified sick and family leave subject to the Families First Coronavirus Response Act paid leave credit).
If you have employees, PPP loan funds can be used to replace business owners income calculated based on your 2019 net income and payroll costs, including:
§ salary, wages and tips up to $100,000 gross annual pay per employee (whose principal place of residence is in the US)
§ costs for employee vacation, parental, family, medical, and sick leave except qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act
§ covered benefits for employees (including health insurance and retirement contributions)
§ state and local taxes on employee compensation paid by employer (e.g. SUTA)
5. Keep impeccable spending records
Assuming you will place the money in a separate bank account, it should be quite easy to show the flow of money in and out of the account.
Other important documents to prepare for your lender when requesting loan forgiveness are:
§ The federal quarterly payroll tax form 941 and the state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records that reflect the 8-week covered period
§ Evidence of any employer retirement and health insurance contributions
§ Evidence of business rent, business mortgage interest payments on real or personal property and business utility payments if PPP loan funds were used for these purposes during the covered period
There you have it!
I’ll be following my own advice to a tee.
What are you going to do when the PPP loan funds run out? The PPP funds are primarily to be spent on payroll — what about your other expenses? I bet I can help you stretch that $!
Click here to get a free 30-minute consult for a COVID-19 90-day cash management plan tailored to your business.