Without a doubt, the Paycheck Protection Program (PPP) Loan has been viewed as a lifeline to millions of small businesses. As you emerge from the application process, enter the funding phase, and look forward to the eventual forgiveness phase, DHJJ urges you to look back on lessons learned and strategize for the future.
Similar to what was experienced with the PPP application process, we expect to see several additional official interpretations of the forgiveness criteria. Our advice to businesses currently is three-fold:
1. Model a few different scenarios that you are contemplating: For each scenario, schedule cash flows on eligible costs over the next 8 weeks. Do your expected eligible costs equal or exceed the loan proceeds? Does the sum of the payroll costs represent 75% or more of the total? If not, what other strategies could you follow to mitigate the shortfalls?
• Translate your employee decisions into gross payroll estimates that you expect for pay dates falling within your 8-week period.
• Do not add in the employer share of FICA or Medicare taxes.
• Do not consider federal unemployment taxes but do schedule in state unemployment taxes.
• Schedule the cost you will pay for health insurance premiums. Don't forget to reduce that invoice total by the amount of employee withholding for health insurance.
• Schedule the cost of any employer contribution to retirement plans that you will make during the 8 weeks.
Other eligible costs
• Schedule the interest portion of any mortgage payments or debt incurred prior to 2/15/20 to be made during the 8 weeks.
• Schedule rent that will be paid during the 8 weeks.
• Estimate utilities that will be paid during the 8 weeks.
2. Track your progress regularly: Create spreadsheets to capture actual cash payments for all eligible costs paid in your 8-week period. Keep as much detail as possible: payment dates, check numbers, reference numbers. For payrolls note the pay date, the period covered, and track amounts for gross payroll, details of withholdings, and net payrolls. Remember to reduce payroll dollars paid for any amount paid to an employee that equates to a wage level in excess of $100,000 annually.
3. Assemble reports and summaries that will track your progress and very likely may be required to support your application for forgiveness:
• Organize electronic copies of payroll registers, payroll tax filings, bills for eligible costs (mortgage payments, rents, utilities).
• As soon as the base periods are confirmed, assemble the relevant base period payroll reports and analyses.
• Prepare a spreadsheet of payroll by employee that will enable you to compare the wages during the base period to the wages paid during the 8 weeks.
Expect questions to arise as you plan and track your expenses. We continue to monitor this evolving topic and scrutinize each new interpretation issued by the U.S. Treasury, the SBA, and the banking community at large. Over the coming weeks, we expect many terms referenced in the PPP loan documents to be better defined by the SBA and by the various PPP lenders. The IRS has clarified the tax treatment of the loan forgiveness piece, but expect more developments in this area.
As official guidance and clarification is received, you should revisit your scenario planning and your tracking documents to ensure they remain on track to maximize the available loan forgiveness.
• Mary Lynn Hoffer is a principal with DHJJ in Naperville.