The Paycheck Protection Program

In the wake of the coronavirus pandemic, the Paycheck Protection Program (PPP) was established and the U.S. Small Business Administration (SBA) began distributing loans to businesses in need. The goal of the program is to incentivize businesses to keep all of their employees on payroll; applicants had to affirm that they needed the funds in order to continue operating and employing their workforce. If you’ve been approved for a loan, you’re likely trying to stay on top of the requirements to have it forgiven. There’s a lot of information out there to digest and, since this is a new program, guidance is still evolving even though funds have already been dispensed. To get you started, we’ve provided answers to common questions with the information currently available.

• I’ve received funds, will I be audited?

There’s been a bit of an uproar in the media over major corporations being granted loans from the SBA when many feel they shouldn’t have applied for them in the first place. In response, the U.S. Treasury recently released a statement in the hopes of offering clarification to borrowers. If you received a loan for your business that is under $2 million, you’re granted safe harbor and the SBA will assume you’ve met the conditions to prove your financial need for the loan. This decision is based on the SBA’s assumption that if your loan was less than $2 million, it is less likely that you would have been able to acquire enough capital in the present economic environment via other means than those who received larger loans. If you received a loan for more than $2 million, the SBA will be reviewing your loan to confirm that your self-certification for the necessity of the loan was acceptable and sufficient. Interestingly, if you received a loan for exactly $2 million, it is unclear if your loan will be audited or guaranteed safe harbor.

• What are the requirements for loan forgiveness and when can I apply for it?

The climate surrounding the pandemic has made operating a business both logistically and financially challenging for many, so we expect that most business owners applied for a PPP loan with the intent of also applying for it to be forgiven. You can apply for forgiveness eight weeks after you’ve received the funds; the application is now available. The first requirement is that you satisfactorily proved you had an economic necessity for the funds in order to continue operating your business and paying your
employees. Beyond that, the main requirements for forgiveness are that you spend the funds according to the guidelines provided, within the allotted timeframe, and clearly document all expenditures so you can prove you spent the funds appropriately.

• How and when do I need to spend the funds?

Present guidance says that funds should start being spent as soon as they’re received and must be exhausted within the proceeding eight weeks (56 days). However, if you’re on a biweekly or more frequent payroll schedule, you can begin your eight week (56 days) period on the first day of the first pay period after the loan was disbursed. In either case, the date the loan was distributed counts as part of the 56 days. You must use 75% of the funds exclusively on payroll for full-time employees (independent contractors don’t count). Your loan provider will check to confirm that your payroll expenses are equal to the average 2019 amount you provided when you applied. You don’t have to hire back the same employees if you’ve already exercised layoffs, nor do you need to maintain the same positions at your company – your loan provider is only concerned about the amount spent. Shifting current employees into different roles or hiring people to fill new demands at your company are also eligible usages for payroll expenses. The remaining 25% of the funds can be spent on other business necessities such as rent, utilities, and interest on debt you incurred prior to February 15, 2020 (mortgage interest is acceptable, but funds cannot be used for principal payments).

• Do I have to document how I spend the funds?

Yes, you’ll need to hand over all documented expenses when you apply to have the loan forgiven. Your lender will want to see records for the eight weeks of payroll, rent payments, and any interest payments. Some businesses may elect to open a separate bank account to track their usage of the funds, but this is not mandatory; just be sure to keep your bookkeeping records up to date.

There is much uncertainty surrounding the coronavirus pandemic and how it will economically affect businesses, but the U.S. Small Business Administration’s Paycheck Protection Program seeks to provide some stability in the meantime. As long as you truly needed additional funds to help your business stay afloat and retain your staff, you should not need to worry when it comes to being audited or applying for forgiveness. Just remember to properly spend your loan funds according to the SBA’s guidelines and document all of the payments you make. With that in mind, be sure to stay in contact with your legal and tax professionals, as new guidance is continually being provided on the program.