Recommendations Related to Paychecks Protection Program (PPP) Loans
The PPP loan applications are now being processed and approvals are being received. We believe there are opportunities for those accepting these funds to achieve the best possible outcome through proper planning. Although total loan forgiveness is possible through authorized expenditures per the loan agreements, there may still be amounts that will require repayment (partial forgiveness). We also believe you and your banking partner(s) will value proper planning and fiscal responsibility as you navigate this process. Below you will find several recommendations for your consideration:
1. Physically Segregate the PPP Loan Proceeds: We recommend physically segregating the PPP loan funds you receive, from your existing operating cash in your business.
Set up new bank accounts for these funds at the bank/credit union who processed your PPP applications. Consider putting 75% of the proceeds in one account for payroll costs and 25% in another for other authorized expenses. We suggest using a “draw system” for use of the funds by transferring money from the new “PPP” accounts to your general operating checking accounts, “as you have expenditures that are consistent with those authorized in your agreement.” As a reminder, those expenses include: certain payroll costs, utilities, rent and mortgage interest. To be eligible for full forgiveness of the loan, businesses must use at least 75% of their loan for payroll costs, under the current guidance.
2. Accounting for Use of the PPP Loan Proceeds: It is yet unclear how the government will enforce the authorized use of the loan funds. Consider using an excel spreadsheet to account for the proceeds and authorized use of the funds as a planning tool. We created a spreadsheet calculator for non-self-employed businesses with payroll on our website at https://www.mbecpa.com/ppp-loan-forgiveness-calculator/. Please keep in mind that these calculations are based on our current understanding of the guidelines, and subject to change. We will be developing a calculator for self-employed business in the coming days, and will include an update on our Corona Virus Resource Center.
It is also important to note that having completed the PPP loan application, you provided a certification to the federal government that “All SBA loan proceeds will be used only for business-related purposes as specified in the loan application and consistent with the Paycheck Protection Program rule.”
3. Documentation for Use of the PPP Loan Proceeds: Documentation requirements are not clear yet, however, it can reasonably be anticipated that documentation of the expenses the loan proceeds are used for will be required. Consider making a separate file for allowable expenses the loan proceeds are used to pay. For example, payroll summaries, copies of mortgage statements showing the interest paid, utilities bills, etc.
4. Planning Related to the PPP Loan Forgiveness: There are many considerations to evaluate when accepting PPP loan funds. Funds received that are not forgiven are considered a loan with repayment terms and can have unintended or unanticipated consequences. We recommend that you engage in regular discussions with your lender with regard to how the scenario may impact your current debt service requirements and other factors. Contact your MBE service partner to schedule time to properly plan for the use of your PPP loan funds to maximize your eligible forgiveness amount.
Please do not hesitate to contact us at any time. We are all in this together!