The federal government’s paycheck protection program, or PPP, has already provided millions of dollars of business relief in these difficult times. Yet, it remains a source of controversy, concern, and confusion for many. Despite the program’s relief for some, there are still others who are left not knowing how they can use the funds – or if they can use them at all. Let’s run through some of the common rules, requirements, and reservations that are surrounding the PPP.
What the PPP Can and Can’t be Used For – and why this is a Problem
The most significant feature of the PPP is in its dept forgivability. As a 100% forgivable loan, recipients of the PPP do not have to pay the funds back – ever. However, in order to meet the forgiveness requirements, business owners must make sure that the rules are being followed:
100% of the loan amount must be used in the 8 weeks following funding: Loan recipients have 8 weeks to use the full loan amount from the date in which it’s received. For many businesses, this is a source of controversy – 8 weeks is not enough time to fully restore employment levels. This is especially controversial for businesses that cannot open up due to government restrictions. If the employer is closed or there is no work, then employees cannot be paid and the money is essentially not useable. In other cases, employees that have been laid off or furloughed are collecting unemployment and would rather stay on unemployment and not risk going back to work in until it’s safe. The 8 week period presents a challenge for many loan recipients. Currently legislation is being proposed to extend this forgiveness period.
75% must be spent on payroll expenses: The PPP is primarily designed to get employees paid when a business needs assistance. However, there is also a provision for other critical expenses. 75% needs to be spend on “payroll expenses” – and many are unsure of exactly what that means. Here’s the official requirement:
“Payroll costs consist of compensation to employees including salary, wages, commissions or similar compensation; cash tips or the equivalent; payment for leave; allowance for separation or dismissal; payment for employee benefits including group health care coverage and insurance premiums; retirement contributions, payment of state and local taxes assessed on the compensation of employees.”
Essentially, most (but not all) payroll expenses are covered in the PPP. Not all payroll expenses are created equal, which is something we will discuss later. In addition, owners have to exclude certain employees, as they are fully or partially not eligible. These include:
- The compensation of an employee whose principal place of residence is outside of the U.S.
- The compensation of an individual employee in excess of an annual salary of $100,000
- If the borrower took credits under the Families First Coronavirus Response Act (FFCRA) for sick and family leave wages, those costs are also excluded.
It’s important that these employees are separated or business owners may risk noncompliance. The other 25% of the loan proceeds can be spent on rent, utilities, and mortgage interest – which is a huge benefit for businesses.
Where to Put the PPP Funds and Why Using a Separate Account is Problematic
Once businesses receive funding, and are ready and able to use them, the question remains – where can they be held? Many sources have recommended a separate bank account which would only be used for the “forgivable expenses”. While this is generally a good option, there are some issues with that method.
Not all Payroll Expenses are Forgivable: Most employers are funding their payroll and payroll tax deposits from an established account just for the PPP. This means that they are using the total net amount of the employee’s check to determine forgiveness. However, not all items on the check are involved in the calculation for forgiveness. Above are normal inclusions and exclusions; other items might be:
- Expense reimbursement
- Deductions from pay remitted to third parties outside payroll
- Other deductions such as reimbursable expenses
- Employer social security and employer Medicare that are not an allowable payroll expense
Here’s is the eventual problem; when it’s time to apply for forgiveness, business owners will now have to sift through paychecks and filter out non-qualifying expenses, as these expenses are not included in the final funding use report. So while business owners may think they’re using 100% of the PPP loan, there may be some hidden payroll expenses that do not qualify.
A Better Way – Use the PPP Account to Fund your existing Payroll Account
The problem with switching payroll accounts is evident. A recommended method – one that business owners can take to maintain compliance – is to create a separate account with PPP funds not used for payroll. It should be used to transfer the correct expense amounts to the main payroll account.
- Run payroll and fund it out of an existing account: just as one would normally do if under normal operating conditions, running payroll and funding it out of an existing account allows for a faster – and less risky – way of determining expenses. This avoids having business owners determine correctly their eligible employees, eligible expenses, and other requirements that will hit after the 8 week time period ends.
- Use payroll reports to determine allowable payroll costs: A payroll provider may have the ability to run “forgiveness reports” which will use all the criteria on eligible employees, expenses, and deductions. Plus, a payroll provider may be able to find the required information documented on normal payroll reports. This will give the clearest picture on forgivable expenses.
- Transfer an amount equal to the allowable costs from the PPP account to the payroll account: This way, business owners can take the exact, allowable amount from the loan to fund payroll in the most compliant way.
Rather than switching to a new payroll account for only 8 weeks and risk not knowing what is allowable and what is not, business owners can use the PPP as a funding account for their existing payroll. Using this method will enable owners to stay on top of the requirements, stay compliant, and keep employees paid.