The CARES Act:

You Applied for the Paycheck Protection Program with Your Bank, and Your Request for Funds Was Granted — Now What?

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The Paycheck Protection Program (“PPP”) is an integral part of the CARES Act and currently provides almost $349 billion to eligible businesses, nonprofit organizations, and veteran organizations. These funds are to provide financial assistance to qualifying entities in response to economic difficulties caused from the COVID-19 pandemic.

Lenders have been accepting PPP loan applications since April 3, 2020, and loan applicants are starting to receive their approvals from lenders. Unlike other traditional loans, having the loan forgiven will not count toward taxable income. Your focus should now turn to maximizing loan forgiveness.

Key suggestions to consider:

  • Create a PPP Loan file - Companies need to document every dollar spent with the proceeds of the loan and provide documentation to the lender at the end of the eight weeks. This file should contain all correspondence, evidence, receipts and support. The following documentation will be required:
    • Certification that the documentation provided is true and correct and the amount for which forgiveness is required was used to retain employees, and make interest, rent and utility payments
    • For payroll costs, Form 941 and state quarterly tax reporting forms or equivalent payroll processor records that best correspond to the covered period, with evidence of retirement and health insurance contributions
    • Evidence of business rent, mortgage interest payments or utility payments for loan proceeds used for these purposes
    • 2019 Form 1040 Schedule C, if self-employed
  • Maintaining Average Employee Count (FTE) - PPP loans are eligible for forgiveness if your organizations average monthly FTE during the 8-week post funding period is the same or higher than one of the approved comparison period dates (See Example Below).
  • Maintaining Compensation Levels - Payroll costs during the 8-week post funding period must be 75% of the PPP loan.
  • Track Qualified Non-Payroll Costs. The PPP loan allows for up to 25% of the loan proceeds to be spent on non-payroll costs, such as:
    • Mortgage interest, on loans originating before February 15, 2020;
    • Rent, under lease agreements in force before February 15, 2020; and
    • Utilities, for which service began before February 15, 2020.
    • Keeping a detailed log of these payments during the 8-week post funding period. From a practical standpoint, keep related documentation, including payment remittances, statements, or invoices.
  • Separate Bank Account - Consult with your bank to determine their specific requirements. Some companies may want to set up a separate checking account that receives and disburses the PPP loan proceeds.
    • The objective is to streamline the audit tracking, eliminate commingling and provide additional transparency during your loan forgiveness review with the bank.

      Spending the Funds

      Once the loan is funded, you have eight weeks to spend the money on authorized expenses. The 8-week period begins on the date the lender makes the first disbursement of the loan. The lender must make the first disbursement of the loan no later than 10 calendar days from the date of the loan approval.

      Employee Count (FTE) Example:

      Employer A had 75 FTEs per month from February 15, 2019 to June 30, 2019. From January 1, 2020 to February 29, 2020, Employer A had 70 FTEs. Employer A received a PPP loan originating on April 13, 2020. For the 8 weeks starting on April 13, Employer A had an average of 65 FTEs. No additional employees are re-hired until July.

      Loan Forgiveness Percentage:

      Employer A will choose the lower of 75 or 70 as its baseline FTE count. The maximum percentage of loan forgiveness is 65/70 = 92.86%.

      Change in Facts:

      Employer A hires 5 FTEs back before June 30, 2020. The original decrease in FTEs happened before April 25, 2020. With these facts, there is no reduction in the amount of potential loan forgiveness due to a reduction of FTEs since the FTE count matches the FTE count from January 2020 to February 2020.

      Mountain of Paperwork

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      Applying for Loan Forgiveness

      After the eight weeks, you will need to submit a request to the lender who is servicing the loan. The request will include all documents supporting the spending of the funds, number of full-time employees, and compensation levels. The lender will have 60 days to decide on forgiveness.

      We highly recommend contacting your bank as early as possible after your funding has been approved to determine the appropriate loan forgiveness documents. As with the calculation method of the loan amount, we expect there to be some differing opinions and guidance regarding the required documentation in the near-term, so we encourage you to over-document and track everything in as much detail as possible.

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