The Paycheck Protection Program Loan (PPP Loan) is in place to help provide your business with relief during the time of COVID-19. This low interest, 2-year loan has a possibility of forgiveness as long as certain stipulations are followed. In order to follow these guidelines, you must first know them in detail.
Forgiveness Stipulations
8-week Coverage Period: Any qualified expense incurred over your 8-week coverage period will qualify for forgiveness. Your period starts from the time you receive the proceeds.
Staffing and pay: You must maintain the total number of full-time equivalent employees on your payroll. There are some exceptions that can be made in circumstances such as firing for cause, voluntary resignation, voluntary reduction of hours, etc..
You must also maintain at least 75% of total salary to be assessed for each employee who did not exceed $100,000 in pay for 2019.
75% rule: This rule means 75% of the proceeds must go toward payroll cost. The other 25% may go toward other qualified expenses. This is a sliding scale up until the amount of the loan.
(Example 1: You get a $10,000 PPP Loan. If you use $7,500 toward payroll costs and $2,500 toward other qualified expenses, you should have the loan forgiven.
Example 2: You get a $10,000 PPP Loan. If you use $5,000 toward payroll cost and $5,000 toward other qualified expenses, you would have the $5,000 payroll expense + $1,666.67 of the qualified expenses forgiven. The rest would be paid back over the course of the loan period at the 1% interest rate).
**Note: Independent contractors do not qualify as a payroll cost.
Qualified Expenses:
Payroll costs - Salary, wages, commissions, vacation, family, personal, parental, medical or sick leave, health benefits. These are incurred during the 8-week coverage period. If wages are incurred but not yet paid when the period ends, it's still forgivable as long as it is paid on the next regularly scheduled pay date.
Business mortgage interest (not principal) - If the mortgage is a business expense and was signed prior to 2/15/20. This must be either paid or incurred during the coverage period and paid on or before the due date.
Business rent - As long as the lease was in effect prior to 2/15/20.This must be either paid or incurred during the coverage period and paid on or before the due date.
Business utilities - Electricity, gas, water, transportation, telephone, or internet access as long as service began prior to 2/15/20. This must be either paid or incurred during the coverage period and paid on or before the due date.
**SOLE PROPS & CONTRACTORS**
If your business is a sole prop or independent contractor with no employees, your PPP Loan and it’s forgiveness may look a little different than other types of business.
Your loan amount was calculated by taking your 2019 net income, dividing it by 12, and multiplying it by 2.5. The amount is 10 weeks of income.
Your “owner compensation” is not to exceed 8 weeks of pay. Take your 2019 net income, divide it by 52, and multiple by 8. This will tell you how much of your loan needs to go toward paying yourself.
The remaining proceeds can fit into other qualified expenses such as business mortgage interest, business rent, and business utilities.
Your qualified expense must be incurred over your 8-week coverage period that starts when you receive the loan proceeds.
Have a plan
Anything that falls outside of these guidelines will not be forgiven and will be considered a part of the 2-year loan with a 1% interest rate. I encourage you to know what qualifies and make a plan to ensure the maximum amount of loan forgiveness.
Take the time to do the math. Know how much needs to go toward payroll cost or owner compensation. Know how much you can put toward mortgage interest, rent, and utilities. Be prepared to adequately document and provide proof of use of funds. Collect and keep all payroll reports, receipts, invoices, account statements, and cancelled checks that come from the use of the loan proceeds. Once you have a plan, stick to it. Remember, you can always hire a bookkeeping professional to help execute your plan. Click here to schedule a free consultation.
To learn how to record and use the PPP loan funds in Quickbooks Online, check out the post “How to Account for the PPP Loan in Quickbooks Online.”