UPDATE: THIS POST IS ALMOST A YEAR OLD AND NO LONGER IS USEFUL INFORMATION.
(Way too many folks are landing on this page and I want to dissuade them from using this as a reference — there have been so many changes to the PPP since this was published. Make sure you restrict any internet searches to posts made in the past month!)
I’m getting this question a lot:
I have someone telling me that they can use all 100% of their PPP for payroll instead of the 75/25 rule of payroll/rent+utilities. Is that correct?
Yes, it is — and yes, you absolutely want to include all of your payroll costs in the forgiveness application calculations!
Some folks are in the situation whereby they have more payroll costs than 75% of the loan will cover. In fact, in some cases, the entire PPP loan — 100% — will be used on payroll costs. And that’s a good thing when it comes to requesting forgiveness, for reasons I’ll explain.
In my firm, for example, I’m paying staff tax-season rates right now, and I have a new employee as of January 2020… but my loan total was calculated based on the average of all of 2019 — so it’s much lower than my actual current payroll costs. I’ll be using 100% of my PPP funds for payroll (and then some). By including all my payroll costs in the forgiveness application and projection calculations, I don’t have to worry about going to the effort of submitting rent/mortgage interest and utilities costs (which are very low for me anyway, as my staff is entirely work-from-home).
But it’s not just a matter of having low overhead and not wanting to spend administrative effort to gather mortgage interest and utilities cost substantiation… it’s more importantly because for forgiveness, we’re all aiming to hit three important tests: the FTE reduction, wage/salary reduction, and 75% of forgiveness hurdles. These are all based on payroll measurements, so it’s best when plugging in your forecasting calculations to first include all the payroll you can… and then just make up the difference with non-payroll costs. The total forgiveness cannot exceed the loan total, so there is no harm in taking this approach.
It is, after all, a Paycheck Protection Program.
Reminder: owners themselves (be they sole proprietors, partners, or shareholder-employees) cannot have more than 8/52 of their 2019 compensation forgiven for PPP purposes, which does mean that for a business owner with no employees, they will not be able to use 100% of the funds for payroll. But for everyone else, yes!
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I’ve been doing regular 40-minute free zoom sessions for my clients for a couple months now, mostly centering on questions concerning PPP & EIDL applications and forgiveness.
1) I have taken six webinars on the new PPP forgiveness rules in the past week — and gotten six different interpretations. They vary widely, on topics such as the EIDL advance subtraction, incurred and-vs-or paid, what an acceptable utility is… as well as some flat-out mistakes (such as including owner compensation in FTE/wage reduction calculations — this is simply not okay). There was even one where the person doing the presenting and the person answering questions in chat were conflicting with each other. So keep in mind that just because someone (including me) sounds confident — this does not mean they are right. They’re just AN expert… there is currently no such thing as THE expert. Just do your best with the information you have — the smartest approach to take is to do whatever you can to make it easy for your banker to just glance at your substantiation and decide it’s sufficient to support your calculations, whatever interpretation you choose.
2) This tool is a DRAFT. For one, there are some small errors in it that I’ve reported to the AICPA; but more importantly — we know this guidance is going to change. In fact, there is pending relief legislation in Congress (to extend the forgiveness period or remove the 75% rule) that may render most of what we’re doing now useless (including the fact that we don’t yet know when we’ll be submitting anything for forgiveness).
However: some folks are more than half-way through their forgiveness period and we have to plan based on the law as it stands now… and hitting the FTE reduction, salary/wage reduction, and 75% of payroll tests is hard. So as a tool for forecasting, as well as establishing your goals and gauging your progress, I encourage you to fill this spreadsheet out to the best of your ability, so you aren’t surprised by a large loan balance at the end of this.
3) Remember, you will only fill out the sections on the application that are highlighted in BLUE. The spreadsheet bases all calculations on that data. Grey fields are calculated, and green are ones that pull from data you entered elsewhere. The instructions aren’t entirely complete, and there are a couple small errors, but it’s still the best tool I’ve found out there (including my own). The spreadsheet formula cells are locked, but you can resize any areas you need to in order to view the full content. Lastly, it seems maybe folks with Macs or using cloud spreadsheet software may have challenges getting their systems to recognize it’s not read-only.
Best of luck, and I’ll try to post other examples for other entity types as time allows.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
The Small Business Administration gets some kind of perverse joy out of releasing guidance on Friday nights. Last week, it was the new PPP loan application, and this week, it’s the guidance to accompany it.
The Journal of Accountancy did a nice job summarizing each of the new documents on Monday — I definitely recommend reading their brief write-up under the heading “Provisions of note in 2 new interim rules”.
Accrued interest will be forgiven with the rest of forgiveness (no guidance on interest calculation for partial forgiveness) (page 7)
Still no confirmation one way or the other re: EIDL advance subtraction (page 8) — is this only for EIDL advances that meet the characteristics outlined in the CARES Act, or all EIDL grants?
Paid OR incurred (not paid AND incurred) — which means unpaid costs from prior periods are in fact eligible (page 9)
Supplements to salary/wages are included: e.g., bonuses, hazard pay, and additional wages paid to replace tips (except to owners in excess of 2019 income) (page 11)
Payroll to furloughed employees is included (page 11)
Owners are limited to 8/52 x 2019 compensation (shareholder-employees can also include health insurance and retirement employer contributions, but not Schedule C sole proprietors or partnership partners)
Otherwise not limited to 8/52 of costs (except owner payrolls) (page 12-13 utility example)
Prepayments are allowed (only mortgage interest specifically excluded) (page 13)
Salary/wage reduction (page 19) appears to take hours-worked into consideration for salaried employees — but heads-up: that is not reflected in the AICPA workbook
Similarly, loan forgiveness will not be reduced for exemptions (page 22), but only an FTE solution is offered; I suspect this means that for the wage reduction spreadsheet, only employees working during the 8-week forgiveness period should be included. (I’ll be asking AICPA to clarify this in the instructions.)
And although not new, I felt they drove home the point that we should make sure to maintain written records of any employees who voluntarily resigned. This will be part of the documentation when substantiating the forgiveness application.
There will be an opportunity to respond to SBA questions regarding loan forgiveness substantiation before a decision is made (page 9)
There will be an appeal process if eligibility is denied by SBA (page 10)
The lender will have to review but not audit (independently verify) all documentation and calculations supplied by the borrower, before submitting to SBA
The lender may rely on third-party payroll processor records (not required to review source data unless these records are not available) (page 11)
Lenders may rely on borrower representations, but must confirm calculations and substantiation (page 12)
No date yet by which forgiveness application is due – but bank then has 60 days to submit to SBA and SBA has 90 days to respond (page 12) …so it could easily be well over 5 months before you find out whether you got forgiveness.
In summary, I’d say some of these were already clear from the forgiveness application but they finally put it in writing; and some actually confirmed something I could only guess at before; but a few examples actually drove home some important new — or previously vague — points; others were just confirmation that we still don’t know some things, such as the all-important EIDL question.
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UPDATE: AICPA has partnered with a Fintech lender to create an online version of their forgiveness tool — www.PPPForgivenessTool.com — available free of charge. More on the project here. The spreadsheet below still works, and I personally prefer it, but the online tool is easier to use if you don’t already have background into how the PPP rules work.
My husband and I have collectively spent nearly 18 hours preparing, updating, editing and testing our PPP Forgiveness spreadsheet, as well as comparing it with colleagues’ versions… only to be stymied at every last moment — each time we were ready to “go live” with it, some new guidance, analysis or interpretation was released that had us going back to the drawing board. At this point I’m joking with my clients that it’s a mythical creation.
And it might have to stay that way — the AICPA has done such an incredible job with their version that I’m not sure we can do any better.
It’s not pretty, and it’s a bit clunky, and there’s no budget tool or FTE calculator included — but the logic is sound and it does a lot of the calculations for you. And they’ve made it public! Just scroll down to where it says “PPP loan forgiveness calculator“.
CPA Practice Advisor notes, “As the AICPA has emphasized throughout this process, questions surrounding guidance make critical decisions unnecessarily challenging and complex for PPP loan recipients and those who are considering applying for the program.” They created a loan forgiveness calculator last week that reflected both the latest SBA guidance and additional AICPA recommendations, and presented it to Treasury. Unfortunately that was not the version that became the final application (released this past Friday night).
“The AICPA loan forgiveness calculator provided more support and details than the SBA loan forgiveness application, and we will continue to encourage Treasury and SBA to leverage our recommendations,” said their VP of Firm Services.
So they reconciled their previous version with the forgiveness application, released it to the public — and you should use it.
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Because some politicians involved with the drafting of the forgiveness rules had been saying on twitter that a longer time-frame and more flexibility on how the funds can be spent were key to making the PPP more effective, we had been hoping for an application reflecting these characteristics — but it did not turn out that way. The entire thing at this point feels like “too little, too late”.
What Were Hoping For But Did Not Get (The Bad News)
An extension to the 56-day (8-week) forgiveness period (at least for restaurants, bars, cafes and other fully- or partially-closed businesses)
Simplified rules for FTE and salary/wage reduction calculations
EIDL advance funds used for non-PPP purposes exempt from forgiveness subtraction (per analysis by many colleagues, this is still the case; but on the application it is not apparent, and many banks will not understand the subtle distinctions)
What We Did Get (The Good News)
Unpaid rent and utilities from a period prior to forgiveness can be paid during the forgiveness period
Rent and utility payments made shortly after the forgiveness period can also be included, if for services during the 8-week timeframe
Forgiveness period — as it relates to payroll costs (including employer portion of health insurance and retirement) — can be delayed to coincide with the first pay period after disbursement
If an employee was fired, quit, or voluntarily had their hours reduced due to non-pandemic reasons, their FTE and salary/wages will not count against the employer
Safe harbor for salary/wage reduction (however, additional complicated calculations are required)
Safe harbor for FTE reduction (however, additional complicated calculations are required)
Clarification on various calculations (e.g., FTEs, forgiveness phase-out, and forgiveness reductions)
There is a lot more to unpack, of course, but those are some highlights. I recommend the following excellent articles for step-by-step explanations and analysis (no, I do not have any affiliation with Forbes — I just think they are writing some of the best material on the topic these days). Also, many thanks to colleague Andrea Carr CPA for preparing a Fillable Version of the SBA PDF Forgiveness Application.
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No, I have not analyzed it yet, and my birthday is this weekend, so please understand that I may not have feedback on it until Monday. (Unless it keeps me up all night obsessing over it.) Thanks for your patience!
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
One of my favorite aspects of the work I do is engaging with people and sharing knowledge. With so much confusion in the current climate, especially surrounding small business survival, I’ve been pleased to have opportunities to dispel some of the misinformation out there and bring clarity to extremely challenging topics.
Among the most recent appearances were ABC 7 Chicago, WRLR Radio, and Q&A sessions with State Representative Will Guzzardi — at his most recent Town Hall — as well as professional organizations Bookkeeping Buds and the Logan Square Chamber of Commerce. (See the Speaking Engagements section of my Services page for links to all the above and more.) My interview with Block Club Chicago went on to inspire a favorite recent blog post.
And at times I’ve even been so lucky as to share the stage with clients, most recently Chris Busse of Penguin Foot Pottery and Dinah Grossman of Spinning J Cafe & Bakery. These folks inspire me daily and are one of the reasons I do what I do (well, two of the reasons). Their companies have focused on taking care of employees above all else — not only their safety, but also their financial well-being and health benefits. And they have harnessed their own creativity, resiliency, and flexibility as true entrepreneurs to carve out a new space for their offerings in a vastly different world, redefining themselves in the process.
Spinning J is offering homemade comfort food and groceries — full dinners available for pick-up or delivery, along with take-and-bake rolls and their famous pies. The decision to stretch their prep time so that staff work 24-hours-a-day in shifts, and to have their own employees run deliveries, allows them to maintain social distancing while keeping the paychecks coming. And by offering grocery staples, they are helping their vendors and maintaining supply chains as well.
If you are a small business owner looking for ways to pivot your business and re-imagine yourself, see my recent blog post on Small Business Advice. If you run a professional or public organization and are looking for an impassioned speaker full of knowledge on small business relief options, reach out to me to see if we’re a good fit. And if you want to learn pottery or eat comfort food from the safety of your home — or any number of other amazing offerings — check out my awesome clients.
Things are scary right now — we’re seeing how size and capital are rewarded in tough times, not just good ones. We’re recognizing that operating on cash flow and not having savings is risky. And we’re keenly aware of how our employees depend on their jobs for their health insurance.
But it’s not all grim… we’re not entirely powerless. There are loads of resources out there, and if we went into entrepreneurship in the first place, chances are we have some of our own: Creativity, Resilience, and Flexibility: – Creativity? Brainstorm. Imagine a new world, not a return to the old one. – Resiliency? You’ve likely overcome struggles before, or know other business owners who have. Tap into this. – Flexibility? Take off the blinders and open up your view to all the possibilities out there.
With that in mind, here are ten valuable pieces of advice for what to do next.
1) If you still have staff you’re paying, I recommend taking advantage of the Employee Retention Tax Credit that you get by reducing your required regular payroll deposits, and applying for the balance on Form 7200. I know that Gusto (my favorite payroll company) is helping many of its clients through this process, which provides immediate cash in the form of certain payroll tax payments that don’t have to be made (in essence an advance on the credit). Treasury has indicated that you cannot take ERTC and PPP at the same time (though it sounds like they are working on a way for folks to take advantage of ERTC and simply have it deducted from the PPP forgiveness should the business end up with PPP funding).
2) Payroll Tax Deferral – similar to the above, in the sense that you only benefit from this if you have staff still on payroll (or yourself if you are a shareholder-employee), but this one is just a delayed payment of the employer portion of Social Security taxes. Again, I know Gusto is doing this for their clients on request. And again, guidance initially indicated that you couldn’t do payroll deferrals and PPP, but has since indicated that you can defer these payroll taxes until the end of the PPP forgiveness period, and the original due dates for the deferment will stick. More info here.
3) EIDL – the Economic Injury Disaster Loans are still an option for farmers only. Only the advance is forgiven, and there’s no way to know how much of an advance you’ll get (though in general it seems to line up with $1K per employee), but if you need cash, you should apply. If you request $25K or less, there’s no personal guarantee or collateral required.
4) Regarding the Paycheck Protection Program: – Get your PPP application in order if you have not applied already. I’ve got a whole list of lenders accepting applications in this blog post. – Similarly, work with your accountant to establish a plan for tracking the loan for forgiveness, so you have everything set up properly from the moment the funds are received. There’s a lot we don’t know about the forgiveness calculations from SBA. Make a plan to structure your forgiveness-period payroll to ensure the maximum amount of the loan will be forgiven. – And make sure you have a business checking account! Some folks are using personal checking accounts for their business – these rules about this changed four years ago, but some were apparently grandfathered in, and these small business owners are finding that the banks will not even consider their applications as a result – even though they’ve been banking there for ages. The banks are prohibited from depositing PPP funds into a personal account.
5) Pivot Your Business: If you haven’t already, start redefining your business model now. Even once the stay-at-home order is lifted, it might be quite some time before people are comfortable shopping or dining or drinking out. Research alternative models; ask around as to what other businesses are doing; investigate new revenue streams; communicate with your employees.
Some examples: – switching to online sales and other new/expanded sales channels (even for service-based businesses like entertainment, makeup/hair lessons, art/hobby and cooking classes); – offering virtual shopping and curbside pickup; – pairing with other businesses to deliver/ship care-packages; – going to a 100% take-out model with a contactless pick-up window; – having staff take care of customer ordering and deliveries instead of GrubHub or Caviar, or switch to a co-op bike delivery service; – provide services for free and ask for tips, donations, or pay-as-you-can; – increasing your marketing and social media presence, improving your website; – offering in-demand products along with your usual offerings, such as groceries or alcohol; – teaming up with your local Chamber of Commerce to establish a virtual neighborhood store, and more.
This is likely the #1 most important thing you can do to come out on the other side once this is behind us. And don’t just take my word for it. Lots of resources are out there to help you reinvent yourself. Among them: five things to recognize now: you’re not alone; what you do now will determine your future success; recognize that the future has already changed; we can never over-prepare… and this too shall pass.
6) Go on unemployment. If you’re no longer able to pay yourself, or you’re paying yourself a substantially reduced salary, you may be eligible. Shareholder-employees have been eligible since Day One for the full amount (they receive W-2s from their own companies and have been paying into the system all along), and as of yesterday, self-employed folks such as sole proprietors and partners in partnerships are able to apply. Even if you received PPP funds, you can claim backpay for the period of time between when you stopped being able to pay yourself and when the PPP funds arrived.
7) Remember that there is currently no 10% penalty for withdrawing retirement funds – if you feel confident that you can survive this period but need cash now to do it, consider accessing those accounts now.
8) Cash flow forecasting is something I wish all small businesses did, but they don’t. Consider working with your accountant to build a cash-flow projection system to figure out how to get through this. CashFlowTool.com is a great resource, and they offer free webinars on how to forecast, if you don’t have a professional you can go to (or even if you do).
Once you’ve gone through the effort, you can then see: – Are there any weeks where it looks like there will be a cash shortfall? – If so, what is the plan to address that? – Can we adjust in- and outflows to attain a better cash position by:
Reducing days sales in accounts receivable
Extending repayment days in accounts payable
Negotiating better terms with suppliers on purchases
Reducing operating expenses
Delaying capital purchases
Sell equipment that is no longer needed
Run specials on any slow-moving inventory to convert it to cash
Have owners contribute additional equity or loans to the company
9) Apply for small business grants — the focus has been on PPP, EIDL, ERTC and other federal relief efforts, but remember that there are public and private resources available at the state, county and city levels as well. You can just google “COVID relief” and the name of your industry and see the various options.
10) And I know this sounds insane… but try to take moments, tiny little vacations, away from your anxiety. I have to tell myself this every day. There is so much that is out of our hands; we have to work on the things over which we have control, and try to let go of what we don’t. The world isn’t working the way we want it to, or maybe even thought it did. For a lot of us, that’s a shock, and the emotional weight of that can pull us down. To survive this, we’ll need to shake off the anxiety and plan for a brighter future.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
ABA Banking Journal reported last night that the SBA has updated its Payroll Protection Program FAQ confirming that PPP “borrowers who attempt to rehire employees that were laid off will not have their loan forgiveness amounts reduced if those employees decline the offer to return to work”.
The exact wording of FAQ #40 is here:
This is huge news for some of my clients who run restaurants, cafes, retail, and other types of businesses where working remotely is not an option, and where working conditions are cramped and staff are unable to maintain 6-foot social distancing. Understandably, some employees are hesitant to return to a job that puts their health and the health of their families and communities at risk, especially if those staff members or their loved ones are immuno-compromised.
There has been a lot of political talk about this situation, criticizing furloughed employees for this choice, but let’s all try to remember that the only folks making more money on unemployment are generally earning less than $45,000 annually — and these are the people we’re asking to put their lives in danger for our economic benefit. It’s not exactly a fair criticism, in my opinion.
That said, it certainly negatively affects the small business owners I serve, and I have been challenged by these dual needs pulling my heart in opposite directions, as I can empathize with both perspectives. The business needs to spend 75% of the PPP funds on payroll, and maintain 75% of the prior full-time-equivalent hours for their staff. So if staff are unwilling to return, then the entire PPP forgiveness is put at-risk.
This new FAQ lifts that burden for employers, which I applaud. It does make it clear that the unemployment benefits for those employees may be in jeopardy as a result, but at least the owner does not have to shoulder the burden of being the bad guy who reports them (at least, not according to this FAQ — state unemployment laws may have other requirements).
Two recommendations for business-owners who receive PPP funds and are challenged by this situation, where former employees do not want to return to a risky work environment because they are making enough on unemployment:
Offer returning staff a hazard-pay bonus to make it worth the risk. Obviously this isn’t an option for those who are immuno-compromised, since no amount of money is worth their life; but for everyone else, consider increasing their pay temporarily with weekly retention bonuses. This will increase company loyalty, help meet the 75% payroll rule for PPP forgiveness, and assist in rebuilding the business. You can easily set up a “Hazard Bonus” payroll item in your payroll software.
Point out to staff that returning to work will leave them additional unused weeks of unemployment pay for future use, if the business ends up having to close again after the PPP funds are exhausted.
Finally, some good news. Awaiting further guidance on PPP forgiveness and will be posting more as I learn more.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
UPDATE 6/10/20: Sec. Carranza indicated today that new EIDL applicants will begin to be accepted next week — they are still working through the queue of previous applicants, but as they get a handle on that, the system will be available again (currently it is only available to farmers). I have a client who applied on April 8th who received their loan this past week, so I can confirm that they really are still in-motion… when you see money suddenly show up in your bank account with “SBA TREAS” in the description, that’s probably it.
As of 11:15 am Central Time, April 27th, this is the news (above) from the SBA website on Economic Injury Disaster Loan (EIDL) funding. To me, it sounds like they’re saying that unlike the PPP, the EIDL did maintain a queue of existing applications. More to come soon — check back on their website regularly.
Gusto recently released a solid, comprehensive write-up on the EIDL with step-by-step instructions on how to apply. Check it out.
I’m also getting a lot of questions about random amounts that are showing up in the accounts of folks who applied for both EIDL and PPP — so here are a few tips:
Remember, the EIDL funding comes straight from the SBA, not a bank, and so the bank feed description will usually read something like “SBA Treas.” Whereas PPP comes from the bank through whom you applied.
Also, EIDL funds tend to be even numbers, whereas PPP funding is more often for odd amounts (and you’ll usually know what this is before the amount arrives).
You will always have to sign for a PPP loan before it is disbursed. Whereas you may receive the EIDL advance with no paperwork beyond the initial application, and no notice ahead-of-time that it will be funded.
Presumably there should be less confusion between these amounts and the IRS Stimulus Checks, as those are for personal accounts, versus EIDL and PPP, which are for business accounts.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
