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Paycheck Protection Program - Loan Forgiveness Best Practices

Posted on April 29, 2020

Loan Forgiveness Blog

Congratulations on receiving your loan funds from the Paycheck Protection Program (PPP). Peoples Bank of Alabama is proud to have helped 900+ businesses provide paychecks for more than 10,000 employees in our communities. If you are one of those businesses, thank you for allowing us the opportunity to be your PPP resource. No matter who assisted you in obtaining these funds, that was only the beginning of the PPP loan process.

So, now what? The SBA outlined how you can spend this money and more importantly, how you can avoid having to repay this loan in the future. Remember this is a 24 month loan at 1% interest. There are no loan payments required for the first 6 months; however, the unforgiven balance must be fully repaid over the remaining 18 months.

While we expect the SBA will continue to tweak the rules of the program, we can share with you what we know right now. In addition, we have provided in this blog some “BEST PRACTICE” suggestions we received from CPAs and attorneys that may make complying with these rules easier. We encourage you to seek the advice of your professional advisors for help and answers to your specific questions.

How can I spend the loan proceeds?

You have 56 days (8 weeks) to spend the loan proceeds from the date the money was made available (the day the money was deposited into your account). In addition, a requirement to receive loan forgiveness is that 75% of the loan proceeds MUST be spent on payroll. Here is a list and some notes we've gathered:

  • At least 75% of the loan proceeds are to be spent on payroll costs, including benefits:
    • Salaries, commissions, tip wages, and draws/disbursements, etc.
      • Note: Under current SBA guidance, loan forgiveness associated with owner compensation for individuals with self-employment income who file a schedule C is limited to 8 weeks’ worth (8/52) of 2019 net profit, excluding payments of benefits or other eligible uses of funds available to corporate borrowers.
      • We are awaiting further guidance from the SBA on this topic, but please check with your accounting advisor before filing for forgiveness.
    • BEST PRACTICE: Bonuses may be eligible but it is wise to wait on the SBA to issue more guidance.
    • Remember that $15,342 ($100,000 / 365) x 56) is the maximum amount of money you can use towards the salary of anyone earning over $100,000 per year. Any amount paid more than this must come from your normal operating funds.
    • Benefits include health insurance, other employee benefits, paid time off, vacation pay, family medical leave and state and local taxes assessed on an employee’s compensation.

  • The remaining 25% can be spent on other costs like:
    • Interest on mortgage obligations, incurred before February 15, 2020
      • You can pay your regular mortgage payment, but you can only count the interest amount toward the 25% forgiveness.
      • BEST PRACTICE: Be sure your bank statement shows the interest portion of each payment.
    • Rent, under lease agreements in force before February 15, 2020
      • “Rent” includes all lease payments (i.e. real estate, equipment, vehicles, etc.).
      • The business can pay rent to the business owner, when applicable, as long as it was being paid prior to February 15, 2020.
    • Utilities, for which service began before February 15, 2020. Utilities include:
      • Power, gas, water, garbage, internet, cell phones, office phones.
      • We do NOT know if it includes cable, pest control, subscriptions, security and fire alarm services, etc. but are awaiting further guidance.

BEST PRACTICE: You must document EVERYTHING! Here are some tips from the experts:

  • Open a separate bank account to hold these loan funds. Then, transfer money into your regular operating account or payroll account to apply toward payments.
    • A separate account may keep you from co-mingling the loan proceeds with your operating cash thus making it easier to track where the loan proceeds were spent.
    • If you use online banking to transfer funds between accounts, use the “memo” function to document what the money was used for.
    • To open a new business account at Peoples Bank, please contact your local relationship manager or branch.
  • Talk now to your payroll provider or CPA to let them know you have a PPP loan. They may help you set up codes in your accounting system to track the flow of these funds making it easier to document for forgiveness.
  • If you don’t already have a payroll provider, bookkeeper or CPA, now may be the time to find one or start using an accounting system.
  • KEEP ALL RECEIPTS! If you use the loan proceeds to pay for benefits, utilities, or interest payment, keep the receipt so you can document that later.

How does Loan Forgiveness work?

We are still waiting on final guidance to be issued by the Small Business Administration and plan to provide a spreadsheet tracking tool to help with this process. We will update this blog and our COVID-19 page as more information becomes available.

To qualify for forgiveness, here is what we know so far:

  • Payroll costs, including benefits:
    • At least 75% of the loan proceeds must be spent on payroll related costs
    • Forgiveness amount may be reduced proportionately by:
      • Any decrease in full-time equivalent (FTE) employee headcount as compared to the prior year,
        • BEST PRACTICE: Consult your payroll provider or CPA about how to calculate pre-loan FTE head count, so you can monitor the number of jobs retained or brought back
        • The SBA is looking at the total number of jobs, and not the specific individual that was terminated or re-hired.
        • BEST PRACTICE: Consult your payroll provider, CPA or attorney to discuss how unemployment insurance benefits may be affected for those employees who choose not to return to work when called.
      • Or, a decrease in salaries/wages by more than 25% for any employee below $100,000 as compared to prior year.
  • BEST PRACTICE: The 56 days may begin in the middle of a payroll or billing cycle. Talk to your CPA or payroll provider about using cash-based accounting to track the payroll and benefit payments for your employees during these 56 days.
  • Self-employed individuals may have different rules concerning benefits they can pay themselves. Please check with your accounting advisor before filing for forgiveness.
  • Interest expense:
    • Keep your bank statement to show the amount of interest that was paid on each payment.
    • Again, use the cash method to account for payment of the interest or utility cost for payment during the 8 weeks.
  • Rent expense:
    • BEST PRACTICE: Have your lease available so you can show the amount of rent you are obligated to pay.
  • Utilities:
    • Keep all receipts so you can document where you spend the money.
    • Create a spreadsheet so you can enter in the cost of each item, the date, how it was paid, and how much you transferred from the special account (or used of the loan proceeds).

How do I request loan forgiveness?

  • The earliest you can request loan forgiveness is June 30, 2020, despite when the 8 week period ends. The forgiveness Period only includes those expenses paid during the 8 weeks from the time the loan proceeds are made available, not before or after.
  • You will need to provide all documentation to the bank in an electronic format (i.e. PDF) and have them grouped together by topic (i.e. payroll and benefits, interest, rent, and utilities).
  • You will certify that these documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent and utility payments.
  • The SBA has given the bank 60 days to decide on the loan forgiveness.

If you have a specific question, fill out a PPP Loan Question Form and we will route it to the best resource to answer it. We'd also love to know how this loan has helped your business survive during these challenging times. We’d like to provide all the positive comments to the SBA and our Congressional Representatives and Senators to let them know how much we appreciate their work. To provide these comments, please fill out our PPP Loan Feedback Form.

Our Peoples Bank of Alabama family looks forward to the time we can all resume normal business hours and access. We are here to serve you.

Kevin Kilpatrick

Kevin Kilpatrick

Kevin Kilpatrick is Senior Vice President of GCap Financing, a division of Peoples Bank of Alabama. Kevin has 33 years of banking experience which has taught him that borrowers need more than a good idea to be successful. The most successful business leaders surround themselves with the best team of advisors they can find. Kevin’s knowledge of SBA, USDA and other loan products qualifies him to be a valuable advisor to his customers for financing requests between $50,000 to $10,000,000 for the purchase of real estate, equipment, business acquisition, startup and franchises, refinancing existing debt and to provide working capital. Kevin may be reached by filling out this contact form.