If you’re one of the small business owners in Nashville who received a Paycheck Protection Program (PPP) loan under the government’s CARES program, it’s important to make sure you fully understand what you signed up for to avoid unpleasant surprises down the road. Don’t hesitate to consult your CPA if you’re unsure about anything related to the loan. Many of those who received the loan are now finding themselves uncertain about its actual benefits.
Here are some of the things you need to know.
Will the loan be forgiven?
Loan forgiveness is one of the major goals of the PPP loans. The government and your lender don’t expect you to pay back the loan as it was designed to help you and your employees tide over the crisis. However, you do need to show that you adhered to the guidelines for loan forgiveness.
The rule is, you have to use 75% of the amount you received for employees’ salaries, within eight weeks of receiving it. You don’t need to keep the same employees or employ people in the same positions. You can create new positions that you think would better suit your business under the current situation. As long as 75% of the amount you received is spent on salaries, and the rest on other expenses like utilities, insurance, and rent, your loan will be forgiven.
If you have a valid reason for not using 75% of the loan on salaries—for example, if one of your employees resigned—the difference may be considered a loan with an 18-month payback period and an interest of 1%. If, however, you’re unable to give an acceptable reason for the loan use variance, there’s a possibility you could be investigated and face fraud charges.
How soon should you use the money?
You have eight weeks to use the money from the time you receive it. After eight weeks, your lender will review your disbursements and spendings to see if you have complied with the program’s rules and are eligible for loan forgiveness. This applies whether or not you were open for business during that period.
Many small business owners want to wait until they reopen, or at least, until the situation has stabilized, before they use the money. Unfortunately, the PPP loan was not designed with this option. Primarily, the program is aimed at ensuring workers will continue to get their salaries even as businesses shut down.
What documents should you show to prove compliance with the guidelines?
You’ll need to prepare payroll reports. If you’re using a payroll provider, ask them to prepare the report for you. If not, you can do it on your own or ask your CPA for help. You have to show proof of payment along with the report.
For the part of the money used on utilities, rent, mortgage, and others, you have to show bills, canceled checks, bank transfers, and other acceptable payment methods to back up your report.
It’s advisable to keep your PPP money in a separate account so you can accurately track where and when you used it.
Many are clamoring for changes in PPP rules to make the program more responsive to the needs of small businesses. While there’s a chance this could happen, it would be wise to assume that the status quo will remain, and you have to comply with the rules you signed on to.
Loan Forgiveness Under the PPP and SBA EIDL Programs: 10 Things Small Businesses Need to Know, Forbes.com
How the PPP Is Failing America’s Small Businesses, Inc.com