In order to help retain employees during the current pandemic, approximately 70% of small businesses in the USA have a PPP (Paycheck Protection Program) loan. In most cases, the total amount of the PPP loan is eligible for forgiveness as long as the loan is used for qualified expenses. Recently, new legislation reduced the terms of PPP loan forgiveness that was used for payroll, rent, and utilities. The PPP is now based on 24 weeks instead of 8 weeks. So that your small business can fully benefit from the PPP loan forgiveness, we have listed 5 tips that may help you to meet the challenge.
- Use the correct application form. There are 2 loan forgiveness forms. Form 3508 is the regular form and Form 3508EZ is the simplified form. Be sure to review both forms to decide which is right for your situation. The simplified form requires less calculations and documentation. However, to qualify for the simplified form, you must meet at least one of the requirements below:
- You are self-employed and have no other employees.
- You have not reduced employee hours or their wages and salaries by more than 25%.
- Due to health directives relating to COVID-19, you lost business and did not reduce your employee wages and salaries by more than 25%.
- Your staff. By the safe-harbor due date of December 31 (previously June 30), if possible, restore your full-time equivalent furloughed (FTE) employees to the previous levels as soon as your business plan allows. You may have employees that will not return to work so it’s important that you document the refusal to work. When the forgiveness formula is applied to your loan, these actions will be of great help.
- Payroll expenses. To maximize the amount of loan forgiveness permitted under the calculation, you should run payroll and other qualified expenses on the last day of the 24 week period. Other qualified expenses include mortgage interest, rent, and utilities.
- Compensate employees. To maximize the forgiveness of payroll costs, consider paying out reasonable incentive amounts. Family members such as your spouse or children may also receive these incentives. FYI: You can only count up to $100,000 of wages per person, pro-rated for the covered year. Be sure to document all costs so that you are able to defend these payments as reasonable.
- Supporting documentation. After you receive PPP loan funds, document that date as well as all things related to the PPP loan. Document every time you spend a portion of the loan and accrued interest expense on the loan. Keep copies of all receipts, invoices, bank account statements, and journal entries relating to your loan expenditures for documentation.
At Summit CPA we offer multiple resources that will help get your business on the right track. Contact our office at 866-497-9761 to schedule an appointment with our Virtual CFO.