This is a continuation, of sorts, to yesterday’s blog,

Mazal tov!  You, like more than a score of our clients, have gotten your PPP (Payroll Protection Program) loan.  Which provides you – and especially your employees- with 8 weeks of payroll, as you (and we) negotiate our way out of the pandemic quarantines.

But, it also means- RIGHT NOW- we should be documenting our systems, so that when that first payment comes due- six months from the day the funds appeared in our bank account, that we can negotiate the loan to be forgiven.

As you recall (from reading all my blogs of course), the PPP program is a loan- that must be repaid within two (2) years, at an interest rate of 1%.  Unless we can immediately (upon demand for repayment) document to our lender that we complied with the special terms of the program; that  means the entire amount of the loan is forgiven.

What are those two items?

The first, which in our estimation could have been the most onerous (because it is most loosely defined), is that a loan recipient must be able to prove that (at the time of the loan application) that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant”.  I was pretty sure legitimate small companies would face less scrutiny in this regard than those public companies or hedge funds that felt entitled to this money.  And, rightly so.

It turns out my supposition was correct.  Because just yesterday (Wednesday), the rules became a little clearer.  The SBA stipulated that any firm that obtained a loan UNDER $ 2 million (yeah, that covers most of us legitimate small businesses) are “deemed to have made the required certification concerning the necessity of the loan request in good faith”.  Still, I suggest we all include the justification clause in our requests for loan forgiveness.  (As you can see, I am a ‘belt and suspenders’ kind of guy.)

Along those same lines, the SBA stated on 3 May that any public company will have a tough time (read impossible) to justify receiving PPP funds.  And, yesterday was the deadline to return those funds to the till with zero consequence.  Furthermore, the Feds made it clear that any firm which received $ 2 million of more of PPP funds will be audited.

The second factor  is pretty straightforward.  We either comply or we don’t.  We either used the loan proceeds to keep our employees on our payroll- to the tune of 75% of the loan proceeds, with the rest applied only to mortgage interest, rent, and/or utilities- or we didn’t.

For most of our clients, we are recommending that they use 85% to 90% to cover their payroll, employer taxes (social security and Medicare- only the employer portion, though), and state and local unemployment taxes.  Since the loan is based upon 80% being payroll protection (the loan proceeds were based upon an average month’s payroll times 2.5, so [2 months payroll]/[2.5 months loan proceeds] works out to 80%); social security/Medicare costs are 7.65% of payroll; and unemployment ranges from 0.75% to 7% of payroll, you can see that by covering ‘burdened’ payroll ranges from 87% to 90% of the loan.  And, we haven’t mentioned those health care costs for our employees.

Having covered the minimum- with no real cost to our cash stockpile, means we can safely use the rest for rent or mortgage interest and utilities.

Now, remember that the loan does not cover any payroll amounts that exceeded $ 100K- and was based upon historical levels.  So, doubling someone’s salary to attain that 80% will probably not pass scrutiny under this program.  But, paying folks a little more (so they can buy their own masks or have their own thermometers and test kits at home) could be justified.  And, if an employee is refusing to come back to work (not because – as opposed to some WrongWing claims that they enjoy earning $ 600 a week in unemployment- they are fearful of contracting COVID-19 by prematurely returning to work without having vaccines or broad-based testing (see my comment above), we must send them a letter notifying them of the terms of our offer to return, at the same rate of pay and for the same job they held before the quarantine.  If they then don’t return, that justifies our including their pay in the total (or offering it to another individual) without violating the terms of the PPP.

What the report should say

Our report will include last years average (or, if you are a seasonal employer, the similar period from last year) to justify each and every expense we include in our report.

When do we start this report?  Right now.  The second we got the PPP funds deposited in your account.

For our clients (and ourselves), we are preparing an 8 week income statement- with reference to last year’s average or last year’s similar period.  It will also be annotated with any extra expenses that were incurred to accommodate a return to full business (extra cleaning supplies, yellow cordon tape, plastic protections around cubicles, extra cleaning crews to maintain safe conditions for employees and customers, etc.).

Why start now?  The obvious answer is why not?  But, really, four months from now we won’t remember the choices we made or why these costs were incurred.  And, having the documentation ready after 10 weeks means we can audit those findings and ensure that we have dotted our i’s and crossed our t’s to pass lender scrutiny.

We also want to include all sorts of documentation to prove our point.  Bank statements to prove checks for payroll were written, 941’s and unemployment forms for payroll, mortgage invoices, rent notices (and lease agreements if no rent bills are employed), utility bills- all of these will be part of the report we plan to present to the lenders on our client’s behalf.  We probably will include transaction reports for the 8 week period, too.  (You may term these general ledger reports.)

Many employees are salaried- the documentation for those folks is easy.  When folks are paid hourly, we need to be able to compare the hours worked and paid during the 8 weeks of note to last year- and be able to explain any differences.  (This is the reason why we suggested that our restaurant clients delay filing for PPP for two weeks; to wait for the quarantine period to end and to be able to certify to clientele that it is safe for them to frequent the establishment.  Because many of them will be limited to 25% or 50% of their previous maximum density- which requires fewer staff.  And, that means the 75% rule for payroll will be harder to attain.)

We included two sample financial reports below.  (Note that one does not include the justification for seeking the loan.   We were unwilling to compromise our client’s data by including that piece of the package.)

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PPP Loan Forgiveness Request

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