The Paycheck Protection Program (PPP) was created under the Coronavirus Aid, Relief, and Economic Securities (CARES) Act to provide relief to small businesses adversely impacted by the COVID-19 coronavirus pandemic. The plan to issue forgivable loans to businesses needing to make payroll in uncertain circumstances was intended to help businesses stay afloat while still paying their workers rather than enacting furloughs or layoffs. 

After the hotly debated disbursal of all of the initial PPP funds, which ground the program to a halt before many small and struggling businesses were able to apply for or receive loans, the Small Business Administration (SBA) began accepting applications again on April 27th for a second round. Calculation of a loan is based on gross payroll plus contributions toward employee health plans (medical, dental and vision but not disability), employer contributions to retirement funds and employer contributions to state and local payroll taxes (but not federal, so Social Security or Medicare contributions cannot be included). 

If a business is granted a PPP loan, there are (evolving) rules, some strict and some open to interpretation, that business owners need to be aware of. This article is not intended as advice or a complete summary of the PPP, but rather a list of some of the key considerations, limitations and requirements. For full PPP details and updates, visit the SBA’s PPP page.

1) If your application for a loan has been successful, the day the funds are deposited in your account marks the start of the 8 weeks in which your appropriate spending may accumulate toward loan forgiveness. Appropriate spending limits non-payroll expense amounts to no more than 25% of the total note. Payroll expenses include: 

• Cash compensation: Salary and hourly wages (including premiums for hazard pay, shift work, tips, etc). Also, vacation, sick, medical or family leave as long as it is not FFCRA-related; severance; spot bonuses; and relocation costs. One-time merit bonuses in lieu of an annual increase could be interpreted as appropriate. However, only a pro-rated portion (8/52) may be included in the forgivable calculation. Cumulative cash compensation may not exceed $15,385 for the 8-week period, the equivalent of no more than $100,000 annualized.
• Employer contributions toward health including dental and vision insurance premiums and contributions to retirement plans. Premiums must be paid to the insurance carriers during the 8-week window, so make sure those invoices are paid in this period. 
• State and local payroll taxes such as state disability and unemployment, but not FICA or FUTA. 

2) Limitations: Double-dipping is not allowable, so things like payments to employees that are being covered by the Families First Coronavirus Response (FFCRA) Act because they contract the COVID-19 virus or are caring for someone who has the virus are not allowable. 

• Originally, the SBA indicated that payment to independent contractors would be allowable, but then they reversed that decision because independent contractors can apply for PPP loans themselves (which would also count as double-dipping the PPP funds pot). 
• Hang onto your employees: If you decrease your full-time employee headcount or decrease salaries and wages by more than 25% for any employee who made less than $100,000 in 2019, your loan forgiveness will be reduced. 
• Quoting number 7 on the official PPP Loan FAQs: 
  • Question: “The CARES Act excludes from the definition of payroll costs any employee compensation in excess of an annual salary of $100,000. Does that exclusion apply to all employee benefits of monetary value?” 
  • Answer: No. The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including: 
    • employer contributions to defined-benefit or defined-contribution retirement plans; 
    • payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and 
    • payment of state and local taxes assessed on compensation of employees.”

3) The 25% “other expenses” rule: Up to a quarter of the loan can be used toward non-payroll forgivable expenses including rental of property, mortgage interest, utilities such as gas and electric though some are interpreting that water, telephone and internet expenses can be included. Reimbursing employees for telephone and internet costs being incurred now that they are working from home might be included. Sticking to official forgivable expenses reduces the amount of the loan you will need to pay back, so especially because the rules are a moving target, doing your homework about the evolving interpretations of allowable expenses is essential.

4) Tracking! Absolutely, you must track very closely any expenses incurred and dispersed during your 8-week timeframe down to the penny. The bank that issued the loan will require this information to judge whether your loan is eligible for forgiveness. Highly detailed information that illustrates your situation is important: payroll summary reports, spreadsheets of each specific expense and documents that verify your number of full-time employees and pay rates. Bear in mind that some banks might want loan recipients to submit documentation to an online portal and some might want it mailed or expedited to a specific address or sent in yet another way. Banks are not required to have identical rules on how they process the loans or make judgments on which ‘open to interpretation’ expenses are forgivable. Lenders must make forgiveness decisions within 60 days of when you submit your documentation.

5) Document, document, document: The loan forgiveness is at the discretion of the bank. It is not guaranteed. The bank that issued the loan is responsible for obtaining your documentation on how the money was spent along with your carefully researched documentation of reputable sources that support your spending choices (especially needed for any of the ‘interpretable’ expenses). Since the bank is in charge of certifying the amount of your loan forgiveness and the amount you’ll need to repay, diligence on this is critical. If your accountant told you that extra hazard pay was allowable, or you read in a reputable law journal that remote employee telephone and internet expenses were okay, that is all information to document. Because there could be different PPP rule interpretation among banks and opinions contrary to what loan recipients understood to be true, documentation is not so much recommended as required. 

6) If you are deferring employer Social Security tax payment: Companies are currently eligible to defer paying the employer portion of the Social Security tax, not Medicare, but only until they are granted official forgiveness of the PPP loan. At that point, the amount of deferral taken is locked in and half of the total amount must be paid by the end of 2021 (you can pay it when you want during 2021 as long as is fully paid by the end of the fourth quarter in 2021). The other half is due by the end of 2022. Whether or not your PPP loan is forgiven, you must pay all deferred Social Security tax back. One idea to manage this is setting up a liability account to track what you owe.

7) Payback rules: Using PPP loan funds to pay employees and other allowable costs according to the rules renders the loans forgivable. If the loan money is not completely used by the end of the 8-week period, any balance remaining will need to be paid back over the course of 2 years at a 1% interest rate. There is a 6-month hiatus after the loan forgiveness/non-forgiveness decision is made to start the payback process. If your lender deems a portion of the loan money your company believed was spent on allowable expenses is not allowable, they may add that back to the non-forgiven portion. The odds are high that you will have some portion of your loan that will need to be paid back. Our accountants advise that those funds continue to be utilized for expenses allowable under the PPP rules and tracked accordingly. 

8) The PPP is evolving. Because this program was set up quickly to provide fast relief, the creators did not have time to thoroughly vet and outline specifics for every eventuality of every rule. This means that as the program plays out, its rules and interpretations are evolving. Keeping an eye out for changes can help you better understand how they might impact your business.

If you need help determining and tracking your eligible payroll costs, the Wise payroll team can provide support and tools for the job. Reach out to start a conversation.