Paycheck Protection Program FAQs: Your top 5 questions about the coronavirus stimulus program answered
By Eric Choma
Paycheck Protection Program FAQs
- How do we make sure our company's loan is forgiven so we don't have to pay it back?
- How do I figure out what our company's "eight-week covered period" is?
- How do I calculate the PPP forgiveness amount for our loan?
- What should we do with any surplus funds that won't be forgiven under the Paycheck Protection Program?
- Should we be concerned about going through a required government audit as a result of our PPP loan?
The federal government has scrambled to provide financial relief in the wake of coronavirus.
Now, the second round of the Paycheck Protection Program (PPP) has been launched by the Small Business Association (SBA). Just like the first round, this promises to be a difficult and confusing situation to navigate for borrowers.
While I do believe the Coronavirus Aid, Relief, and Economic Security (CARES) Act was created with the best intentions, there is a lot at stake and a lot of questions that have yet to be answered by the SBA to clarify loan forgiveness, known as section 1106,
Thankfully, as the controller here at IMPACT with four years of experience as an auditor at Deloitte, I was in a position to help successfully secure our funding in the first round right at the buzzer.
The SBA has released several new updates providing further clarification on frequently asked questions and want to share my insights based on everything I've learned.
Here are the 5 biggest questions I am able to answer:
1. How do I make sure we’re still eligible for forgiveness under section 1106 of the CARES Act?
Start by reading Sec. 1106 of the CARES Act. This is the official guidance released by the Treasury department.
The most important aspect to consider is your headcount. The main purpose of the stimulus was to provide emergency funds for businesses with fewer than 500 employees. The main incentive is that the balance of the loan can be entirety forgiven if you kept your employees on the payroll (or hire them back) with the funds.
If your headcount is reduced, this doesn’t make you ineligible, but instead reduces the total forgivable amount.
The American Institute of Certified Public Accounts (AICPA) released its official recommendations on 4/24, which includes information on eligibility.
AUDITOR TIP: Write down your considerations around each paragraph of Sec. 1106 and whether or not you meet their eligibility requirements.
2. How do I figure out my 8-week 'covered period'?
We are still waiting on a definitive answer from the SBA regarding the covered period for forgiveness.
Section 1106 of the CARES Act defines the start date of the covered period as the day you received the funds from your lender.
However, the AICPA has submitted an official recommendation to Congress suggesting that the 8-week period begin after operating restrictions are lifted, like shelter-in-place orders and essential business restrictions.
This would give you more time to hire back your employees and remain eligible if you had to let anyone go.
Until we get more clarity here, I suggest you create a financial model under the SBA guidance, using your funding date. But I agree with the AICPA’s recommendation. Once addressed, I plan to update my model accordingly.
3. How do I calculate the PPP forgiveness amount?
The AICPA released an extremely thorough walkthrough that takes you through each step of the calculation and how to interpret the SBA’s guidance. Use this as your guide.
Eligible costs during the covered period include:
- payroll costs (subject to a $100k annual limitation)
- mortgage interest
For the payroll costs in your calculation, they will need to be supported by a PPP-compliant payroll report (ideally this is a Form 941, but a direct export from your payroll provider is also acceptable as an alternative).
AUDITOR TIP: Document everything. The goal is to create a document that is easy to understand and recreate. If done right, an independent auditor should be able to understand exactly how you arrived at your final number. Compile the supporting documents as you go and refer to the AICPA guide for recommendations on what is acceptable.
AUDITOR PRO TIP: Use spreadsheet formulas whenever possible. This will make it easier for the auditor to verify your calculations.
4. What should I do with any surplus funds that won’t be forgiven?
If you are okay with the surplus being converting to a 1% loan that needs to be repaid in two years, then I recommend earmarking the related surplus and setting it aside.
If you would rather not carry the liability and pay the 1% interest, you can also choose to pay this back to Uncle Sam.
AUDIT TIP: Make sure every dollar of the loan is allocated and accounted for before you start employing the funds. Track all the ins and outs, and document how each dollar was used.
5. Should I be concerned about going through a required government audit?
Audits can sound scary, but as long as you do your due diligence, document how you calculated each step, and most importantly, stay open and honest, you will be fine.
As long as your intentions are not fraudulent, the worst case scenario converts any funds that aren't eligible to a 1% interest loan.
As you saw with the first round, the lack of guidance and guardrails from the SBA and Treasury Departments is making it hard to ensure the money is getting to the people who need it most.
The audits are going to be a crucial step for the SBA. While likely uncomfortable, let’s hope it motivates some companies to return the funds if they shouldn’t have applied in the first place.
If you are eligible for the Paycheck Protection Program but haven't applied yet, you need to do so immediately.
For your reference, here is live footage of the first round of funding:
These resources are finite, and the quicker you apply, the better your chance of receiving benefits.
What's more, make sure to avail yourself of all existing assistance programs — at the federal and state level. Talk to your bankers and financial professionals if you need further clarification.
Wondering where to begin?