by Trent Krassow

Over the last month, millions of small businesses have applied for and some have even received the lauded Paycheck Protection Program (PPP) funds. During that same period, numerous guidance documents have been published by the Small Business Administration (SBA) and the United States Treasury (Treasury). Some of these publications have clarified rules, provided forms for use, etc., and some – well, some have created more questions.

The most recent guidance, issued 5/3/20 and available here, may change the assumptions of many who have tracked this issue, and it is certainly possible that future guidance will further change the application of some of the concepts presented below. If you have questions on any of this, please feel free to contact our office directly at 970-352-0661.

There are a few key areas we would like to address based on this most recent guidance:

Forgiveness of the loan (it is not automatic!!)
Use of the funds
Clarifying the definition of payroll (this has been in dispute since the program rolled out)
Recommendations to help navigate the forgiveness process

Forgiveness:

Forgiveness must be requested – it is not automatic
Forgiveness is requested through the bank that funded the loan originally
Forgiveness may be requested 8 weeks after the date of funding

Use of funds:

75% is to be used for qualified payroll expenses
- How is payroll defined?
  - Gross payroll up to $100,000 annualized per employee, plus
  - Employer costs of benefits, plus
  - State and local payroll taxes, such as state unemployment
  - Does NOT include employer side FICA and Medicare
  - Example:
    - An employer borrows $100,000 through the PPP.
    - All employees are paid less than $100,000 annually.
    - The loan funds on 5/4/20, so the 8 weeks ends 6/29/20.
    - The employer has $80,000 of gross payroll expense during the 8-week period.
    - In addition to the $80,000 gross wages, the following payroll-related expenses were paid:
      - Employer FICA and Medicare of $6,120
      - Employer match to retirement contributions of $1,600
      - Employee health insurance of $4,000
      - State unemployment tax of $2,100
      - Payroll costs eligible for forgiveness:

$80,000

+ 1,600 retirement match

+ 4,000 Health Insurance

+ 2,100 State unemployment insurance tax

$ 87,700 forgivable payroll costs*

*Note that the employer side FICA is not included. Assuming that this business met the requirements for the remaining $12,300 and did not reduce headcount, the entire amount would be forgiven.

What are other approved expenses for the other 25%?
- Expenses incurred after the funding of the loan for which agreements were in place prior to 2/15/20:
  - Rent
  - Mortgage Interest for facilities (principle payments are excluded)
  - Utilities:
    - Gas
    - Electric
    - Internet
    - Phone
    - Water
    - Sewage
- Uses outside of approved uses may result in non-forgiveness of some or all of the loan, and in some cases, may result in the government bringing charges of fraud against the borrower.

Recommendations:

Open a new checking account in which to deposit the entire PPP loan amount:
- Use this account to only pay approved expenses
  - Only pay those expenses from this account
  - If you use EFTPS to pay federal payroll deposits, consider making two payments for each payroll:
    - Federal withholding, FICA and Medicare withholding from employee checks – transfer this amount from your PPP funds to your EFTPS payment account.
    - A separate payment (same day) to pay the employer side FICA and Medicare. Transfer this amount from your operating funds separate from your PPP funds to your EFTPS payment account.
  - If you use a third-party payroll provider for your payroll, you will likely need to keep track of the amount of employer paid FICA and Medicare, as this portion will not be forgiven.
  - Document your payroll costs and ensure that the amounts out of the new account match your payroll reports