Or forge ahead without it
As a business owner maybe you’ve already applied for emergency federal relief from the Coronavirus Aid, Relief, and Economic Security (CARES) Act--through its popular Paycheck Protection Program (PPP).
The legislation was quickly assembled by Congress and deployed by the Small Business Administration (SBA), and applications flowed in even faster. It’s been a whirlwind. And if you’ve secured a loan, you likely put the funds to use to keep your employees working and business open--all while trying to understand how the “forgiveness” part of the loan works.
Lance Schoening, director of government relations for Principal Financial Group, sums it up: “The primary premise of PPP is that these are loans in name only.”
In other words, PPP loans were designed to be largely converted into grants. But understanding exactly which expenses qualify for PPP loan forgiveness isn’t easy. We’ve compiled seven strategies based on business owners’ top concerns.
Use our Paycheck Protection Program expense tracker (Excel) to document your expenses along the way.
1. Don’t short yourself on allowable payroll costs.
What qualifies as payroll during the forgiveness period following the loan (eight or 24 weeks) is broader than you might think. It’s not limited to salary, wages, commissions, and tips. PPP also includes:
In other words, don’t dole out bonuses with loan forgiveness in mind.
2. But don’t go beyond PPP payroll boundaries.
The most you can count toward forgiveness is $100,000 annually per employee or:
However, employer contributions for group health, retirement, and other benefits are in addition to this $100,000 cap.
PPP payroll also excludes:
3. Maintain your staffing.
Maximize your PPP loan forgiveness by retaining your full-time and full-time equivalent employees.*
“It’s not the entrepreneur protection program,” says Kimberly Weisul, editor-at-large for Inc.com and Inc. Magazine. “If you’re an entrepreneur and don’t want to bring your employees back until right before you think you’ll reopen, that makes sense from a financial point of view. But that’s not what this program is for. It's to take employees back earlier than that, even if you don’t have anything for them to do, so they remain employed.”
Here's how it works:
Your staffing level during the forgiveness period following the loan will be compared to one of two prior periods (you can choose which):
4. Avoid drastic pay cuts.
For employees earning less than $100,000, loan forgiveness is reduced for any amount of employee salary cut more than 25%.
5. Focus most of your PPP loan on payroll.
Payroll expenses must make up at least 60% of your PPP spending to maximize loan forgiveness. For additional clarification, see Frequently Asked Questions.
6. Stay within allowable expenses for the rest of your PPP loan amount.
Paychecks are the main concern of PPP loan forgiveness, but up to 40% can be spent on rent or lease payments, mortgage interest, and utilities. (PPP funds also can be used for interest on other debt but can’t be included in forgiveness.)
The guidance on allowable “utilities” expense includes what’s necessary to keep the business operational, such as gas and electric, water, transportation, phone, and internet access.
Keep in mind that all these agreements--for office space or utility service--must have been in place before February 15, 2020.
7. If necessary, forge ahead without loan forgiveness.
“Ultimately don’t run your business based solely on loan forgiveness,” West says. The long-term stability of your business should be your guiding light and might require you to accept PPP at its very favorable 1% rate for up to five years.
“Having to pay back that loan understandably may make many business owners nervous,” West says. But your first loan payment can be deferred, potentially for a year or more.