PPP Explained: How to Meet Your Payroll Costs During Lockdown

In recent weeks, we’ve heard a lot about the need to protect “essential businesses” as they are defined by the federal government. At CJBS, all of our clients are essential businesses, because every business is essential to the employees who depend on it to meet their basic needs.

We understand the strain of meeting business expenses, and above all payroll, in such difficult circumstances. As your CPA, we are here to help you navigate the CARES Act, and lend a helping hand (latex-gloved, of course!) to guide you through the process of accessing financial support.

The relevant component of the CARES Act is the Paycheck Protection Program (PPP), which allows small to medium-sized businesses to borrow up to 250% of monthly payroll costs or $10 million, whichever is less. Depending on how it is used, up to 100% of the amount borrowed will then be forgiven by the government in order to facilitate a speedy recovery from the shutdown. Any portion not forgiven can be repaid at 1% interest rate within two years.  All payments are deferred for 6 months and interest will continue to accrue over this period. You may also prepay your loan without penalties or fees.

As has been widely reported, most of the $349 million originally put into the program ended up in the hands of publicly traded companies. Clearly, this was not the intention, so large public companies with access to capital markets have been asked to repay these loans by May 14, 2020, with additional detailed guidance to follow. On April 24th, the government approved an additional $310 million for this program. New guidance has been issued to ensure that the these added funds are disbursed to businesses that really need it.

So, what do you need to know?

To qualify, you must have been in business on or before February 15, 2020, with fewer than 500 employees and paying payroll taxes. (We can advise in the case of complicating factors such as seasonal employees, or if you have more than 500 employees combined in multiple affiliates, in which you may be eligible to apply for separate loans.) You must also certify, in good faith, that, “current economic uncertainty makes this loan request necessary to support the ongoing operations.”

When approved, you should receive your first distribution from your lender in no more than ten calendar days from date of approval. The amount to be forgiven is then calculated on your costs over an eight-week period from date of approval. You have until June 30th to rehire employees that were laid off. If they refuse to be rehired, perhaps they are earning more on unemployment, a good-faith written offer to rehire should be made, documenting their rejection in order to exclude that employee from the forgiveness calculation. It’s worth noting that this may forfeit their eligibility to continue to receive unemployment.

 To qualify for forgiveness, 75% of the loan should be used to pay payroll costs, which include:

  • Salaries, wages, commissions, additional tips or other compensation, up to $100,000 annually per employee;
  • Vacation, parental, family, medical or sick leave (excluding sick or family leave credits allowed by the Families First Coronavirus Response Act);
  • Separation or termination pay;
  • Group health care benefits, including insurance premiums;
  • Retirement benefits; and
  • Housing stipend.

The remaining 25% of the loan can cover:

  • Mortgage Interest on debts incurred before February 15, 2020;
  • Rent on a leasing agreement, including equipment rental;
  • Payments on utilities including electricity, gas, water, transportation, telephone and internet access for service that began before February 15, 2020.

This seems simple enough, but the devil is in the details, and more specifically in the reporting requirements! The strict guidelines require a thorough paper trail demonstrating that you qualify for forgiveness. To accomplish this, we recommend opening a separate operating bank account to manage the loan disbursements. Alternatively, a separate virtual account on your books can be used to keep track of things, if a new account is not preferable or available. It should also be noted that the loan forgiveness will not be considered taxable income and expenses related to forgivable loans won’t be tax deductible – you can’t have your PPP cake and eat it too! Disallowing a double tax benefit.

The good news is that we’re here to help you make sense of this opportunity and/or explore other avenues for financial relief. PPP may not be the best solution for every company. It may be better to look at other sources of revenue to get you through this time in the most beneficial way. Either way, our goal is to help guide you through this process to identify the solution that is best for your business.

The CJBS team can conduct a cost-benefit analysis to determine what is right for your unique situation. If you are having trouble submitting an application or obtaining a loan, we have close relationships with various financial institutions that are ready to assist our clients with funding.

As this process evolves, we will continue to bring you information and keep you up-to-date as we await additional guidance. During this time of social distancing, we are never more than a phone call or email away to answer your questions and provide the information you need. Together, we can get through this.

Stay safe and healthy,

The CJBS Team