So You’ve Got Your PPP Loan. Now What?
After a rough start — including delays in processing applications and distributing funds — small businesses are now receiving funds from the Paycheck Protection Program (the “PPP”), the Small Business Administration’s (the “SBA”) loan program under the CARES Act. More businesses should see their loans approved as Congress is poised to provide an additional $310 billion to the program after the initial $349 billion ran out.
One of the main reasons the PPP has been a popular program is that the loans are eligible for up to 100 percent forgiveness, meaning that they may not have to be repaid. But in order to get your loan fully forgiven, you need to carefully follow the SBA’s guidelines. Below are some tips on how you can help ensure the forgiveness of your loan.
Use Funds Only for Eligible Expenses
The primary purpose of the PPP is to help businesses pay their employees during the COVID-19 crisis, so that those employees don’t have to file for unemployment benefits. In order to be eligible for loan forgiveness, borrowers must use at least 75 percent of the PPP loan on “payroll expenses.” Payroll expenses include more than just employees’ salaries and wages. Group health insurance premiums, retirement benefits, payroll taxes, and vacation and leave pay can also be included.
However, any amounts spent on an employee’s compensation that is over $100,000 annualized is not forgivable and does not count toward the 75 percent threshold. In addition, compensation paid to employees who do not have their primary residence in the United States is not eligible for forgiveness.
You can also use up to 25 percent of the loan on other covered expenses, which include rent, mortgage, and utilities expenses. In order to qualify, you must have had the obligation to pay the relevant expenses prior to February 15, 2020. You cannot, for example, use the PPP funds to finance a new mortgage.
If you find yourself unable to use all of the funds on eligible expenses or are falling short of the 75 percent payroll expense threshold, consider offering additional compensation to employees earning under $100,000 annualized to make up the difference.
Document How You Use the Funds
In order to have your loan forgiven, you will have to apply for forgiveness with your lender. That process will likely require you to prove that you used all of the funds on eligible expenses. Given that requirement, using a separate bank account for your PPP funds is advisable. Doing so will make it easier to demonstrate how the PPP funds were used and will prevent the funds from being comingled with other funds that were used for non-eligible expenses.
During the eight-week forgiveness period, you should collect all the documents you need for your forgiveness application. These documents may include:
- Payroll reports;
- State and local payroll tax documents;
- Group health insurance premium invoices or proof of payment;
- Copies of statements, funding schedules, and contribution documentation from retirement plan administrators;
- Signed lease or mortgage agreements, with proof of payment (e.g., checks, ACHs, bank statements); or
- Utility service contracts, with proof of payment.
Maintain Your Headcount and Employee Compensation
The SBA will reduce the amount your PPP loan is forgiven by the proportion in which your full-time equivalent employee headcount is reduced. Your headcount over the eight-week period following receipt of the loan will be compared to your headcount over either the period from January 1, 2020 to February 29, 2020 or the period from February 15, 2019 to June 30, 2019. This will allow employers with seasonal employees in January and early February to compare their headcount to a comparable period in 2019.
The PPP looks to the number of “full-time equivalent” employees, not just full-time employees, so remember to include part-time employees in this calculation. Two part-time employees who each work half of a week amount to one full-time equivalent employee.
Additionally, your forgiveness will be reduced by any amount that you reduce salary or wages in excess of 25 percent for employees who made less than $100,000 annualized in all pay periods in 2019. The SBA will compare the salary and wages paid over the eight weeks after receiving the loan to the salary or wages earned during the most recent full quarter prior to those eight weeks.
Follow the Terms of Your Loan Agreement
While the SBA administers the PPP, your lender may ask for additional information or documentation in order to approve forgiveness under the terms of your loan. Or they may ask you to submit documentation in a certain form. Make sure you understand the terms of your loan and follow your lender’s instructions.
Please visit our Coronavirus: Preparation & Response series for additional resources we hope will be helpful.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.