I received the Paycheck Protection Program funds, now what?
For my corporate and small business clients that have received funds from the Paycheck Protection Program stimulus package, the big question now is how to secure the all-important forgiveness aspect of the program. Although the loan itself is very attractive…. a 1% interest rate on a 10-year amortization schedule… the real benefit is the forgiveness aspect of the program, which essentially makes the loan a grant that does not have to be paid back. In addition, if the loan is forgiven, it is not even considered cancellation of indebtedness income by the IRS, in other words…. It’s tax free income! So, what are the requirements for forgiveness?
In order for the PPP loan to be forgiven, the proceeds of the loan must be used for qualified expenses. In order to prove that the loan proceeds were spent on qualifying expenses, I tell clients that there are three words that apply here: accounting, accounting, and accounting. In order to have the loan forgiven, it will be important to document that your expenditures were qualified expenses under the Act. It is very important that you to go to great lengths to make sure that this is a slam dunk. I am advising clients to actually keep the loan funds in a separate bank account so that the accounting is simple and clean when applying for forgiveness. I realize this is not required and may be overkill, but the clearer the accounting, the more likely that the Bank will forgive the loan. Keep in mind that your bank will not simply take your word that you spent the money on qualified expenses. Documentation is key here, particularly in showing that loan funds were spent on qualifying payroll. You will need to document the number of full-time equivalent employees on payroll that were paid under the program. If all of the loan proceeds are spent on payroll expenses, your accounting should be fairly straightforward and simple.
Keep in mind that all loan proceeds do not necessarily need to be spent on payroll to secure the forgiveness aspect of the program. However, non-payroll expenses cannot exceed 25% of the loan in order to qualify for forgiveness. Amounts in excess of 25% will reduce the amount of forgiveness proportionally. In addition, these non-payroll expenses must be incurred for qualifying expenses defined broadly as mortgage interest, utilities, rent, etc.
Ultimately, the forgiveness aspect of the program will be determined and defined by your lender. While there are general guidelines provided by the Act, each bank will likely have their own metrics for approving that loan proceeds were spent on qualifying expenses in order to secure the forgiveness. Securing and obtaining this forgiveness is critical for most businesses and I would suggest consulting with your tax or accounting professional to make sure you meet the guidelines and are documenting your expenses appropriately. Again, the actual loan is not bad from a business perspective, but having the loan convert to a grant that does not need to be repaid is likely what drew you to the program to begin with.