The federal Paycheck Protection Program (PPP) is arguably the most powerful tool so far provided to small business owners in response to the COVID-19 crisis. One of the main reasons for this is that the program provides a pathway to loan forgiveness, essentially converting the funds disbursed from debt into a one-time grant to participating businesses.
As with the program’s initial eligibility terms and conditions, the loan forgiveness terms and conditions are being hotly debated as to whether the current configuration of the program is appropriate or should be changed. For example, Congress passed the Paycheck Protection Program Flexibility Act, or Flex Act, in June. Among its provisions, the law expanded the covered period for PPP forgiveness eligibility to 24 weeks, giving businesses extra time to spend their PPP money.
Nonetheless, there are many voices advocating for additional adjustments, modifications or corrections to the program’s loan forgiveness terms (see this op-ed from the Boston Business Journal as just one example).
So, what is a small business owner to do in this highly unusual circumstance? The answer is twofold: first, preparation and then, patience.
Step One: Preparation
Preparation is where your focus today should go. The good news is that the PPP loan forgiveness process boils down to two main priorities: spending on eligible costs, and tracking/proving that you spent on those eligible costs.
When it comes to spending PPP funds on the right things, the overall goal of the program is to see you spend at least 60% of your PPP loan funds on payroll costs, such as salaries, wages, vacation pay, parental and family leave, employer medical and group benefits, sick leave, employer retirement benefits, bonuses, commissions or hazard pay. For the remaining 40% of your PPP funds, the applicable expenses include mortgage interest, rent or utilities that are at the same levels as you incurred prior to February 15, 2020.
And when it comes to tracking and proving your spending, begin by recording the PPP deposit as a loan on your books. Then, over the next 24 weeks, complete bookkeeping properly on all financial activities (expense amount, vendor/payee, category, date, purposes and receipt or record). After that, you will be ready to proceed with the PPP Loan Forgiveness Application process.
Step Two: Patience
Now comes arguably the harder part: patience.
Applications for loan forgiveness will be processed by your lender. You will need to fill out a PPP Forgiveness Application form and submit that to your lender. After you submit your application for forgiveness, the lender you secured the loan from is required by law to provide you with a response within 60 days.
And yet, Congress is currently debating and drawing closer to approving additional regulatory changes and relief programs, which (if prior actions are any guide) means that the terms and conditions for PPP loan repayment could change. In fact, the AICPA recently reported that “Those discussions also may include major changes relaxing the forgiveness requirements for the smallest loans, possibly those up to $100,000 or $150,000.”
Furthermore, the SBA and the Department of the Treasury are committed to releasing an extensive series of detailed, additional guidance updates along with the rollout of a new web-based platform for managing the program. The tentative deadlines for these developments are in early-to-mid August and could certainly draw later.
The important point to note is that the only ‘actual’ deadline that is truly critical for loan forgiveness applications is that the end of the PPP forgiveness process doesn’t come until 10 months after the end of the loan’s covered period. After that point, if you have not applied for forgiveness, it will indeed auto-convert to a loan that requires repayment.
In short, you need to begin preparing today — that is for sure. But you have received the funds, so the sense of urgency that applied to the application for funds should not be the same as your sense of urgency toward applying for forgiveness. Of course, that 10-month deadline is real and should not be trifled with.
But between now and then, a lot can happen. So, stay tuned, stay in touch with our team, and together we’ll get through this period with your business needs first in mind.
Matt Brady, CPA