Maximize Your PPP Funds

If your company was approved for a Paycheck Protection Program (PPP) loan, congratulations! Now, you need to use those funds correctly and accurately account for them.

The Small Business Administration (SBA) restricts how PPP funds may be used and requires the lender to collect supporting documentation in order to process forgiveness requests. Now is the time to ensure you can provide that documentation. US Treasury Department guidance was changing as the loan program was rolling out, so all business owners receiving funds should check with their tax and legal advisors for the most updated terms and conditions—and,  importantly, to understand how the program applies to their specific situation—but we have some recommendations to get you started.

Prepare to receive the funds. An eight-week period begins once your company receives the funds. You need to have a clear plan in place for the use of the funds and accounting for the expenses that qualify toward loan forgiveness.

Track those expenses during the eight-week period. Create a spreadsheet or, if your business is not currently using one, consider implementing an online accounting system. Systems like Quickbooks or Xero provide reports with the numbers you will need.

Consider keeping PPP funds in a separate, dedicated account. Documenting the funds you draw down for eligible expenses will help create a clean audit trail. Track everything and retain copies. Keep pay stubs, health insurance invoices, entries in a check register for anything related to payroll, commissions, costs for healthcare benefits and premium payments, interest on mortgages incurred before February 15, 2020, rent for lease agreements in force before February 15, 2020 and utilities for which service began before February 15, 2020, interest on debt you took on before February 15, 2020, and, if you have one, an SBA EIDL loan made from January 31, 2020, to April 3, 2020.

Monitor how the funds are used. To qualify for loan forgiveness, you must use at least 75% of the funds for payroll costs. The remaining 25% of funds can be used for eligible non-payroll costs: rent, interest payments on mortgages, interest on pre-existing loans, and utilities. Qualified sick and family leave wages allowed under the Families First Coronavirus Response Act are excluded from being considered payroll costs for the PPP. And note, for purposes of determining the percentage of use of proceeds for payroll costs, the amount of any Economic Injury Disaster Loan (EIDL) refinanced will be included).

As a side note, if your business does not currently use a payroll system, consider implementing one. It is the surest—and easiest way to provide records that show at least 75 percent of the PPP funds you received were used for payroll. If you have just a few employees, they can cost $100 per month or less. Even if you are the only employee, you should consider implementing one. Among other benefits, systems including Paychex, ADP, BenefitMall, and Gusto created reports clients can run to provide them with the documentation and calculations needed to apply for and justify the basis of a PPP loan.

Maximize the payment of expenses that qualify for loan forgiveness during the eight-week period that starts immediately after receiving PPP funds. For example:

  • Time payroll where possible to maximize payments during the eight-week period.
  • Make catch-up payroll payments to any employees whose compensation was reduced as a result of the COVID-19 crisis.
  • Any amount of the PPP funds not forgiven must be repaid within two years, but loan repayment may be deferred for up to six months. There is no penalty for early repayment, but do not rush to repay any loan balance that is not forgiven. Make sure your company’s cash position remains strong until the business crisis has clearly eased.

Pay yourself a salary if you are an S Corporation shareholder. If you have an S Corp, you will need to pay yourself a salary for your compensation to be applied to the 75 percent requirement for loan forgiveness. Many S Corp owners take out distributions during the year, and, while that is a benefit of an S Corp, it is does not constitute payroll compensation for purposes of the PPP. The PPP program also excludes payroll over $100,000 on an annualized basis for any individual making more than that for the year. You will want to work with your accountant to advise you how to handle your 2020 salary to ensure you can claim the maximum amount toward the 75 percent threshold. Also, forgiveness funds you receive will not be subject to federal income tax, but you will need to account for that money separately from other 2020 income.

Avoid any misuse of the funds. Business owners using the funds for fraudulent purposes are subject to criminal charges and will be required to repay those amounts. If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, the SBA will have recourse against the shareholder, member, or partner for the unauthorized use.

Avoid utilizing other CARES Act relief programs that nullify participating in PPP, including the Employee Retention Credit and Deferral of Payroll Taxes.

It is unclear at this time how loan forgiveness will be reduced, but it can be reduced if either of the following occurs:

  • Employees who made less than $100,000 of compensation in 2019 have their compensation reduced by 25% or more, OR
  • The number of full-time employee equivalents is less than the same number of employees during either February 15, 2019 through June 30, 2019; OR January 1, 2020 through February 29, 2020—you will choose the more favorable period to apply.

If employee terminations have already occurred, you can hire employees back by June 30, 2020 to still qualify for loan forgiveness.

You will need a Certified Public Accountant to assist you. If you do not currently work with a CPA or accounting firm, you need one now. Your CPA will review your information, help you maximize your benefit, and help ensure you adhere to the terms of your PPP loan. As just one example—if you operate on a cash-basis and make payroll outside of the eight-week period after your loan is funded, you could lose the benefit of forgiveness. You do not want to risk making a wrong decision and this is not a time to go it alone.

For additional guidance, visit the US Treasury’s website and the Small Business Administration’s website.



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About this Author

Laura specializes in income tax return preparation, compliance, and research for individuals and businesses. She also is experienced in preparing compiled and reviewed financial statements, individual and S-Corporation taxation, multi-state taxation, and income tax credits including the R&D credit.