What Can You Spend Your PPP Forgivable Loan on?

If your small businesses managed to secure a Paycheck Protection Program (PPP) loan before the well ran dry, your next task is figuring out how to use it. Here’s a list of the expenses that qualify for forgiveness (meaning you don’t have to pay the loan back).

Remember, your lender will perform an audit at the end of the 8-week forgiveness period to see how you spent the loan. Be sure to keep the relevant paperwork we list under each section, so you can sail through the audit.

Salaries & Wages

A minimum of 75% of your PPP loan must go to compensating your employees, excluding those who earn more than $100,000 per year. We are still waiting for guidance from the Small Business Administration on salaries over $100,000 and business owner/family salaries.

For the audit: Payroll processing reports, tax reports, or other reports such as paid time off (vacation or sick leave).

Healthcare Benefits

This is for paying any premiums due to the company’s group health insurance plan. Company owners and family are included if they’re on the group plan. However, it appears that payments to the owner’s policy or Health Savings Account contributions do not qualify for PPP loan forgiveness.

For the audit: Insurance invoice(s) and proof of payment.

Retirement Plan Contributions

If you offer your employees a Defined Benefit Plan, Defined Contribution Plan, or SEP IRA, you can use some of your PPP loans to continue funding that plan. There’s no specific guidance about benefits paid to the owner or owner’s family, but we doubt that it would be forgiven.

For the audit: Retirement plan statements, funding schedules, and proof of remittances.

Non-Payroll Expenses

Operating expenses that don’t directly benefit employees — a few of which we’ll list below — can’t total more than 25% of the loan. If you go over that percentage, you’ll have to pay back any excess amounts.

Rent

To be forgiven, the expense must be both incurred and paid during the 8-week loan period. Any rent that was already due before the date of the loan doesn’t qualify. Also, the lease must have been signed before February 15, 2020.

For the audit: Signed lease contract, proof of rent payment (canceled check, ACH, bank statement, or wire).

Utilities

This covers electricity, gas, water, phone, internet, etc. It’s not clear what the SBA means by “etc.” Service contract agreements must have been in effect before February 15, 2020.

For the audit: Proof of payment for each utility.

Interest on Business Loans

You may use some of your PPP loans to pay the interest on your business mortgage, practice acquisition loan, a build-out loan, or any loan secured by business personal property. The mortgage/loan must have been in effect before February 15, 2020.

For the audit: Bank statement or loan invoice showing principal and interest, plus proof of payment. You may wish to pay principal and interest separately during the 8-week PPP loan period so there’s no question in the auditor’s mind.

 

The pandemic has inflicted major damage on many of America’s small businesses. And the financial relief red tape makes the situation even more difficult. Xendoo can help make sense of it all and take some of the bookkeeping worries off your shoulders, so you can focus on getting back to the “new normal.” See for yourself what a difference we make with a one-month free trial.

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

Business.com | May 20, 2020

How to Improve Your Financial Literacy

For many entrepreneurs and small business owners, there are not enough hours in the day…

The New “Automatically Necessary” PPP Loan Rule: Is It a Free Pass?

The original Payroll Protection Program (PPP) rules included strict requirements to prove that the loan was necessary to save your business, and imposed hefty financial and criminal penalties for those that tried to get a handout when they didn’t really need one. But on May 13, 2020, the Small Business Administration (SBA) lightened up on small businesses.

The Relief: FAQ #46

In this new release, the SBA stated that loans of less than $2 million are automatically assumed to be necessary, even if the loan applicant doesn’t explicitly declare it. This is great news for small businesses who have been confused by conflicting guidelines and worried about whether they made a mistake answering the “necessity” question on their PPP loan application.

Why the SBA’s change of heart? They figure that any business whose maximum qualifying loan amount is less than $2 million (2.5X the average monthly payroll cost) is extremely unlikely to have any other sources of liquidity that wouldn’t significantly damage the business. They would rather devote their limited auditor resources to larger loans where there would be a greater return on their effort if they find compliance issues.

Are Small Businesses Completely Off the Hook?

The short answer is no. Even if you don’t answer the question about necessity, the SBA assumes that you have claimed: “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”

That means you still must meet the necessary requirements and are subject to a compliance review. Though the chance of that happening is small as of right now, there’s always a possibility that someone — perhaps a disgruntled employee or someone who sees you getting a loan when their own small business didn’t — could file a complaint with the SBA about your fraudulent loan application.

What Actions Are Businesses Subject to if the Loan Wasn’t Necessary?

The first thing that would happen is that you would have to pay the loan back. If you do that as soon as you’re notified by the SBA, it “will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning the necessity of the loan request.”

If you don’t pay it back, the possible consequences include fines, penalties, interest, and prosecution for perjury.

What Other Ways Can Businesses Protect Themselves?

Given the fast-changing guidance from the SBA, we suggest that you attach an addendum to your loan application stating that you are relying on FAQ #46 in assuming that the loan is necessary due to the current economic uncertainty

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

How Does the CARES Act Affect Unemployment Benefits?

Many Americans are now getting some form of economic assistance from the CARES Act — the federal government’s multi-pronged effort to save jobs and small businesses from devastation by the COVID-19 pandemic. Whether you’re an employee, employer, or self-employed sole proprietor, there are new benefits and new rules to follow. Here’s a rundown.

Unemployment Benefits for Employees

  • Additional $600 per week added to the amount an eligible (laid off) worker receives in unemployment compensation. Effective April 5, 2020, through July 31, 2020.
  • Additional 13 weeks of eligibility for unemployment benefits. So if your state’s normal cap is 26 weeks, it’s now extended to 39 weeks. The additional $600/week applies to these extra weeks (up to July 31) as well.
  • Unemployment benefits for self-employed individuals and independent contractors. Normally these types of workers don’t qualify, but now they do if they are fully or partially unemployed or unable to work due to COVID-19. They also qualify for the $600 per week benefit.

How Layoffs Affect Your Payroll Protection Program Loan

If you’ve laid off employees so they can get employment benefits possibly higher than what you can pay, it could affect how much of your PPP loan is forgiven.

That’s because the loan terms state that you must not allow your payroll expenses to decline by more than 25% (by either letting employees go or significantly reducing their pay). What’s more, at least 75% of the loan money you receive must be spent on payroll costs. If you don’t meet those criteria, you won’t get 100% loan forgiveness, meaning you will have to pay part of it back.

You can avoid this problem by hiring back the employees you let go. Do it by June 30, 2020, and there won’t be any penalty. 

How Layoffs Affect Your SBA Economic Injury Disaster Loan

The short answer is that they don’t. The Small Business Administration doesn’t attach any payroll strings to this type of loan, so you can lay off your employees and they can access full unemployment benefits.

How 1099 Workers Affect Your Payroll Protection Program Loan

Businesses can’t include payments made to independent contractors — those whose earnings are reported on IRS Form 1099, not W-2 — in calculating payroll costs. Contractors are considered sole proprietors of their own business and can apply for the PPP themselves.

How Tax Credits Affect Unemployment Benefits

Business owners can take advantage of a variety of payroll, leave and unemployment tax credits to reduce their expenses during the COVID-19 pandemic. This strategy may help you retain some employees, while those that were laid off can get their full unemployment benefits.

  • Self-isolating employees: Can receive up to 80 hours of paid sick leave. The full amount can be deducted from payroll tax.
  • Revenue loss: Employers can receive up to $5,000 per employee per quarter if the business experienced at least a 50% decline in sales revenue compared to last year
  • PPL loan: you can’t apply for these tax credits if you also have a PPL loan.

Confused about your financial relief options during the COVID-19 pandemic? Xendoo can help. Give us a test drive with a one-month free trial.

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

How To Receive PPP Forgiveness as a Sole Proprietor

The Xendoo team has compiled many resources on the PPP to help small business owners everywhere. Check out our additional resources here:

What do I need for my PPP application?

Your Guide to PPP Loan Forgiveness

Paycheck Protection Program Guide

Many business owners that are sole proprietors are searching for information on how to make sure their PPP loan is fully forgiven. The PPP loan can be forgiven entirely if it’s used properly and if businesses can prove that.

But, as a sole proprietor, how can you prove the funds were used on a payroll if you don’t have payroll?

A concept called owner compensation replacement was introduced to help answer that exact question.

As a sole proprietor, your loan is based on your 2019 net profit divided by 12 – this is what gets you to a monthly average net profit. Your loan amount should be equal to this number times 2.5. This means that your PPP loan should roughly be ten weeks worth of your net profit. Since as a sole proprietor, you likely do not have payroll to spend those funds on, owner compensation replacement will help you receive forgiveness.

How does this work?

As a sole proprietor, you can automatically receive eight week’s worth of net profit forgiven – this is the “owner compensation replacement” concept. For the funds to be fully forgiven, the remainder of your PPP funds will need to be spent on the approved expenses which have been mentioned: rent, utilities, and mortgage interest.

The amount of owner compensation replacement eligible for you to claim for forgiveness is calculated as follows:

Take your reported net income in 2019 on your Schedule C and multiply that by 8/52 or 0.154.

Sole proprietors will still need to prove expenses to receive forgiveness. It is strongly recommended to keep very careful and clean documentation of all expenses that were paid using the PPP funds. Expenses for rent, utilities, and mortgage interest will need to be proven to receive forgiveness. For the owner compensation replacement, sole proprietors will need to provide their 2019 Schedule C. This will allow you to be able to claim the eight weeks of net profit for forgiveness.

Please note that the updated guidance provided by the SBA does not allow for self-employed individuals to claim the entire amount of the PPP fund as income replacement. To receive forgiveness, the funds must be used as outlined. 

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.