All About PPP Forgiveness
We’re making up the rules as we go here!
It’s like playing with my little 3-year-old niece. One minute we’re building and knocking over towers. The next, she’s making me an “omelet” in her “kitchen” (where she ran to stash some blocks). While she’s super cute and will always get a pass, it’s not so easy to accept when the government or a bank does this.
If you received a PPP loan, you’re likely confused too. Especially on how to get that sweet, new forgiveness benefit.
The PPP is brand new, and the forgiveness feature is unique. The government was busy getting the funds into small businesses' bank accounts. Now we’re starting the get the details on how the forgiveness process will work.
In this blog, I explain what you need to know about forgiveness. We'll cover the forgivable expenses, tracking the spending, and the application process. Also, I’ll give you a simple calculator to help you track your funds and the key dates.
But first, a small disclaimer. The Treasury gave us the first forgiveness application in late May. Then, it was out-of-date within two weeks. The PPP Flexibility Act changed the rules. And like my niece, I expect the government to change the rules again (Congress is already talking about it).
Here’s a link to the Treasury PPP webpage if you want to see the information straight from the source.
PPP is a Loan
Before we get too deep in the rules, let's clarify how what the funding is and does. The PPP funds are a loan. Like any other loan, you must pay it back. The unique feature here is that the loan is forgivable IF you meet specific conditions.
We'll go through the specifics in the rest of this blog, but be aware that you may have to pay back the funds. If your bank denies your forgiveness application, you have to pay back the funds like any other loan. A bank can forgive the part of or the whole loan.
Now that we have the right perspective on PPP, we can jump into the nitty-gritty details.
How to Spend Your PPP
This loan is forgivable only if spent on these expenses:
Payroll
Owner draws (for sole proprietors and partners)
Rent
Utilities
Mortgage payments
There are a few caveats you need to know. There is partial forgiveness, but we don’t have all the details yet. Also, you can't include the entire amount of some of the categories above. You need to carve out the following items:
The mortgage payment principal
Employer match of FICA taxes
Owner draws to cover benefits like health insurance and retirement contributions
The PPP spreadsheet is set up to exclude these items.
You need to be aware of these extra wrinkles because you must be a speedy spender. Under the original rules, you had to spend all the money within eight weeks. Now, post the PPP Flexibility Act, you can spend it over 24 weeks. Depending on when your business gets back to full capacity, the spending due date may be here before you know it.
How to Track Your PPP Expenses
It is paramount to keep track of your spending for four big reasons.
You have to spend it fast
You can spend it on specific categories only
The bulk of the money must go toward payroll
You need to keep most of your employees and at the same pay rate
The best way to track these payments is in a spreadsheet. To make it easier for you, I created this Google Sheet to do the math keep everything organized. You should make a copy and update it when you run payroll, pay bills, or do your normal financial review.
As you spend the funds, enter each transaction into the spreadsheet. If you need to break down more detail for items that aren’t forgivable, you’ll see to do so. It’ll calculate your remaining funds so you won’t guess if you’ve spent it all and on the right categories.
Even if you incur expenses but do not pay them in the 8 or 24 weeks, you can claim them. For example, let's assume your spending period ends on November 10th. You run payroll every other week and the next pay date is Friday, November 13th. The labor expenses through the 10th count as PPP spending. Even though you haven’t run payroll and paid your employees by the 10th, you've incurred the costs.
Collecting Documents
Beyond tracking your numbers in the spreadsheet, keep copies of all the payments. This could be payroll reports, utility bills, copies of checks, and bank statements.
If you use a payroll service, most can create a report to break down the payroll expenses per the PPP rules. These reports are useful when entering data into your spreadsheet and to save as support.
Collect all these documents in a folder, digital or physical, and you’ll be so thankful later. When you apply for forgiveness, your bank will need these. You'll save yourself stress and time by having all your records on hand and ready to go!
2020 Income Taxes
When you file your 2020 taxes, you'll need your spreadsheet as well. The PPP funds won’t count as income on your 2020 tax return. Also, the forgiven expenses won’t appear on your 2020 tax return. That would be double-dipping if you claimed forgiven expenses as tax deductions.
If you haven't kept up with your tracking, you'll have a mess on your hands when you go to file your next return. You're going to need both your Profit and Loss and the PPP spending records.
You can track this is QuickBooks Online, but it's complicated so I won't go into it here. Send me a message if you'd like help setting it up.
Does it make sense why I'm plugging for you to track your spending? To get the most amount forgiven, you need to know what your spending and when.
Now that you know the forgivable expenses and how to track them, let’s go into the forgiveness process.
How to Apply for Your PPP Loan Forgiveness
As I noted earlier, the Treasury released guidelines, and not two weeks later the law changed. We just got two new forgiveness applications – a regular and brand new EZ version.
On the application, you’ll complete:
The loan and business information
When you received the loan funds and the “covered period” (the 8- or 24-week spending period)
How you spent the money
Any Economic Injury Disaster Loan Advance funds received
The max amount forgivable
Schedule A and the worksheet
Initial by several questions to certify you followed the rules
This week, lawmakers in Washington started asking for the Treasury to simplify forgiveness. The application itself is 11 pages, so here in particular I expect to see changes.
The PPP Flexibility Act
I haven't seen a lot of articles contrasting the first PPP program and the PPP Flexibility Act. I'm telling you the original rules so that you'll know if you come across outdated information.
Under the initial guidance, you'd start making payments six months after you got the funds. The forgiveness application was due 60 days after the eight-week covered period.
The PPP Flexibility Act doesn’t mention the 60 days to apply for forgiven. But, it extends the deferral period to ten months after the end of the spending period. This suggests you'll apply for forgiveness during that ten-month period. After you receive the money, you have ten months to start paying it back or apply for forgiveness.
With the spread-out spending and forgiveness timelines, it could be 2021 before you make your first payment!
Beyond the updated spending and forgiveness periods, you need to know a few other changes. These broaden how to spend the money and make it easier to get forgiveness or pay it back.
Here is a comparison of the pre-Flexibilty Act and post-Flexibility Act rules:
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Again, these rules may change as 2020 continues to be the year of crazy. Even my niece isn’t this unpredictable!
Before you apply for forgiveness, be sure to read the application from start to finish. And double- and triple-check your numbers before submitting them. I recommend you apply for forgiveness soon after you spend all the funds. While you can wait, you don’t want to risk forgetting details or to apply (it happens!).
This program's intent is to help you weather the pandemic. If you don't get the amount full forgiven, then it's not as helpful as it should be.
Now you should have a good grasp of what’s forgivable, how to track the expenses, and the forgiveness process. Don’t forget to grab your tracking spreadsheet here. It will make your record keeping a whole lot easier and help you get as much forgiven as possible.