Maximize Your PPP Forgiveness with Careful Planning
Q - What can PPP be used for?
Answer: i. payroll costs ii. costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; iii. mortgage interest payments (but not mortgage prepayments or principal payments); iv. rent payments; v. utility payments; vi. interest payments on any other debt obligations that were incurred before February 15, 2020; and/or vii. refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020. However, at least 75 percent of the PPP loan proceeds shall be used for payroll costs.
Q- Can I pre-pay payroll? How about back-pay? Is it based on payroll you PAID during the period, or the pay-period it relates to?
Answer: Right now there is some open clarification needed on how strict timing will be for PPP. Right now, its best to assume that costs must be BOTH incurred AND paid during the period (i.e. no back-pay or pre-payments).
Q - What constitutes payroll costs for forgiveness purposes?
Answer: Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of GROSS salary, wages, commissions, or similar compensation; cash tips or the equivalent (all up to $100k annual wages per employee);leave payments; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees.
NOT INCLUDED is Employer portion of payroll taxes...meaning you still have to pay the 7.65% payroll taxes...that does not come out of PPP funds.
For sole proprietors/LLCs - your owner pay is based on a calculation, NOT how much you actually pay yourself. This calculation is your 2019 Tax Return Schedule C net profit (line 31), divided by 52, multiplied by 8 (i.e. 8 weeks of payroll). You will be forgiven for EXACTLY that amount - no more, no less. No documentation of how this money was actually spent should be needed. If you received the full 2.5x payroll loan and have no employees, this will come out to 73.8% (slightly less than 75% but Treasury has said that is fine).
Q - Is forgiveness all or nothing?
Answer: No....thankfully. You can qualify for partial forgiveness. This can happen if you don't hit the 75% payroll minimum, or if you don't have enough "other" expenses in addition to payroll to get it fully forgiven. This can also happen if you don't get back to your previous average headcount (see below).
Q: Can I increase my employees' pay to meet the thresholds?
Answer: Yes - offering hazard pay may be a way to do this. Though remember, you still need to get your headcount back up to pre-Covid levels. That said...if you are a Corp and have yourself on payroll...exercise caution here. Small increases might be ok, but I wouldn't go doubling your paycheck and expecting. to be forgiven for it.
Q: How is headcount calculated? Can I replace employees or does it have to be the same ones?
Q: Do I have to pay people even if they aren't working? Can I delay the 8 week period and use it when I'm expecting to need my employees back to work?
Answer: The 8 week period starts as soon as you get the loan. You cannot DELAY it. You can save the money for later...but you won't be forgiven for it. To get forgiven for the loan, you would need to pay your employees relatively normal wages...even if they aren't working at all.
Q: Can I get PPP AND unemployment?
Answer: If you are using PPP to pay yourself - not during the 8 week forgiveness period, generally no. In certain cases if your PPP loan is very small, you may be able to claim the 8 weeks of owner pay over your 8 weeks on your UI certifications and still qualify for some benefits. In most cases though, PPP will make you ineligible for benefits.
Similarly, your employees should not be getting paid by you with PPP money and still filing unemployment. The entire purpose of PPP is to "save jobs" and get people OFF of unemployment.
That said, right now there is nothing that precludes you from filing to get your unemployment back to when you stopped working, then not certify for the 8 weeks you have PPP, and then starting to certify again if you are still out of weeks after the 8 week period is up.
Q1: Can I get PPP and the EIDL advance and/or loan?
Answer: Yes, but the EIDL advance/grant will likely need to be subtracted from your PPP loan forgiveness. So if you are forgiven for $10k of your PPP, but got a $2k EIDL loan, your forgiveness would be only $8k. The $2k EIDL advance then becomes a loan over 2 years at 1% interest.
As far as the EIDL LOAN - you can get both that and PPP, you just must be able to document that you used them for a "different purpose". Guidance on what constitutes different purposes is vague.
Q: What if I DON'T spend at least 75% of my PPP on payroll?
Answer: This will reduce the amount of non-payroll costs that can be forgiven as well. Per the Treasury Interim Final Rule - "Not more than 25 percent of the loan FORGIVENESS amount may be attributable to nonpayroll costs."
What this appears to mean is that the amount of non-payroll costs you can get forgiven is a direct function of the amount of payroll costs you pay out. Here's an example for you:
You get a $100k total PPP loan, which means to get full forgiveness, you'd have to spend AT LEAST 75% on payroll costs. (Meaning you could spend 75k on payroll and have 25k you could spend on rent, utilities, etc).
Some of your staff doesn't come back. You end up only paying out $50k in payroll costs over the 8 weeks. In this example, you no longer have a full $25k to spend on rent and utilities that will be forgiven. Instead, here is how you would determine your forgivable amount available for non-payroll costs:
Take your total payroll costs that will be forgivable (the $50k lets say), divide by 75% ($66,666 which represents the total max that can be forgiven of your loan). Take this amount and multiply by 25% to get the max you can spend on non-payroll costs that will be forgiven ($16,666 in this example).
Watch my Youtube Video on PPP forgiveness HERE