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Payroll Protection Program Loan Funding – Now What?

by | May 5, 2020 | COVID-19 | 0 comments

With the Payroll Protection Program being in the second round of funding, more businesses have received funds and are now trying to ensure their loan is forgiven. Questions such as how to keep track of the funds used, what expenses qualify and what happens if employees are not working are being asked. Here are a few things you should know:

The Payroll Protection Program is a loan and will accrue interest from the date of receipt. Borrowers have the option to apply for forgiveness of their loans and accrued interest based on the following guidelines.

75% or more of the funds must be used for payroll costs including:

  • Salaries, wages, commissions, vacation, and family medical leave
  • Employee health benefits including gross health insurance and retirement
  • State and local payroll taxes paid on the associated wages

Up to 25% of the funds can be used qualifying expenses including:

  • Rent
  • Utilities
  • Interest on debt obligations that were incurred prior to February 15, 2020 including mortgage interest payments

Expenses not included:

  • Compensation for employees whose principal residence is outside the US
  • Compensation for an individual in excess of a $100,000 annual salary
  • Federal employment taxes including the employer’s share of the FICA and Federal Unemployment
  • Compensation paid under the qualified sick and family medical leave where a credit was allowed

The intent of the Payroll Protection Program was to keep or get employees off unemployment, thus providing employers with the funds to pay the payroll costs. If your employee workforce has been reduced, you may be limited on the amount of your loan forgiveness.

Adjustment for workforce reduction

  • During the 8 week “coverage” period after receipt of the funding, the monthly average of your full-time equivalent employees will be divided by your monthly average full-time equivalent employees during either of the following periods:
    • February 15, 2019 to June 30, 2019 or
    • January 1, 2020 to February 29, 2020
  • The loan funds forgiven will be adjusted by the same percentage that your workforce has reduced

Adjustment for wage reduction

  • The portion of the loan funds forgiven will also be reduced if employees are brought back with a reduction of wages in excess of 25% of their total salary during the most recent quarter they were fully employed

When businesses get down through the 8 week coverage period and “request” forgiveness of the loan, the lenders will be asking for verification of how the funds were used. How the applicable expenses are tracked during the coverage period is important. Our approach has always been to keep it simple. That means:

  • Track your expenses in your accounting system as you normally do.
  • Setup a spreadsheet or separate log showing the expenses as they are paid based on the allowed expenses listed above.
  • Keep copies of any paperwork supporting those payments in a file that can easily be turned over for review by the lender.
  • Include the expenses for the full 8 weeks even if they exceed the amount of the loan.

As a reference, the US Chamber of Commerce as prepared the CORONAVIRUS EMERGENCY LOANS Small Business Guide and Checklist.