As businesses begin to receive funding of loans under the Paycheck Protection Program, it is vitally important to properly track the spending of the proceeds and accumulate the necessary documentation that will be needed for calculating the amount of any loan forgiveness.
A business may receive forgiveness of a loan issued under the Paycheck Protection Program if the business can demonstrate that it paid and incurred covered costs during the 8-week period beginning with the date of the origination of the covered loan. The Frequently Asked Questions document currently posted on the website of the United States Treasury states that the 8-week period begins on the date the lender makes the first disbursement of the Paycheck Protection Loan to a borrower. Covered costs include certain payroll costs, payments of interest on a covered mortgage obligation, payments on any covered rent obligation and payments of a covered utility payment. The Small Business Administration stated that a business receiving a loan under this program must spend at least 75% of the proceeds on payroll costs.
In addition to the requirements regarding allowable expenses, the amount of any potential loan forgiveness is decreased if the business reduced the number of its employees as measured before and after the loan is received. The amount of the forgiveness is also reduced by the amount of any reduction of total salary or wages of any employee paid in the covered period in excess of 25 percent of salary and wages of the employee paid during the most recent full quarter in which the employee was paid before the covered period. This provision applies to any employee who was not paid, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000. The Act does include certain provisions which allow for restoration of head-count by June 30, 2020.
Given the nature of the forgiveness, businesses should immediately create accounting systems which will track the use of the funds with a focus on the documentation that will be required upon application for forgiveness. Given that the loan funds must be spent on covered payroll costs, rent, interest on covered mortgages and utilities, businesses should, as practically as possible, pay for those expenses directly from the loan proceeds. Businesses should consider segregating the loan proceeds into a separate bank account to allow for tracking of unspent proceeds and better demonstration of spending on allowable costs. Alternatively, for businesses already processing payroll from a separate bank account, a business could also reimburse the payroll directly from a segregated bank account that had been established for loan tracking purposes.
While it is likely additional SBA guidance will be issued which will provide more clarity regarding loan forgiveness and what is needed to support the loan forgiveness application, the CARES Act provides that loan forgiveness applications will include items such as:
Documentation verifying number of full-time equivalents on payroll and pay rates for the periods including:
• Payroll tax filings reported to IRS;
• State income, payroll and unemployment insurance filings.
Documentation including cancelled checks, payment receipts, transcripts, or other documents verifying payments on covered mortgage obligations, covered lease obligations and covered utility payments.
Businesses receiving an Economic Injury Disaster Loan (EIDL) and a Paycheck Protection Program loan should also ensure that funds received from the two programs are not utilized to pay the for the same expenses.
Please don’t hesitate to contact us if you have any questions or if can assist in helping you track expenditures under this loan program.