Great news! Many small businesses who were shut out of the first round of Paycheck Protection Program funds have now had their PPP loans approved from the second round of funding totaling $310 billion. They have either received funds, or are expecting funds as early as next week.

A few lucky businesses already received funds from the first $349 billion allocated by the CARES Act.

You may recall that this first allotment went quickly, as large corporations sucked up huge chunks of the cash. Then, in a flush of patriotic fervor (perhaps fueled by bad press and outrage) many of the corporations said, “never mind – we don’t really need the money.” It is also possible that Treasury Secretary Steven Mnuchin’s promise of audit and criminal charges had something to do with their decision to return the money.

At any rate, more genuinely small businesses have now been funded, and are now wondering how to ensure that this “loan” will be forgiven.

At first glance, the rules are simple:

  • Spend at least 75% on payroll related costs.
  • Spend no more than 25% on rent, utilties, and mortgage interest
  • Spend it within 8 weeks of the date the funds are in your bank account
  • Maintain your headcount
  • Pay all employees at least 75% of their pay during the last full quarter preceding the 8 weeks.

As always, the devil is in the details. Here are a few of those details:

Payroll costs include wages, vacation, sick leave, group health, retirement, and state taxes (in Washington, that’s L&I, ESD, and PFML). Payroll costs do NOT include the employer’s portion of Social Security and Medicare (FICA taxes).

There is some pressure on the Treasury Department and SBA to ease up on the requirement to spend all the money within 8 weeks of funding, since so many businesses are shut down by state government order. The American Institute of CPAs (AICPA) is recommending that the clock starts ticking on the date that the business is allowed to resume operations. This recommendation was made on April 28, but as of today, there is no change in the rule. If you receive your PPP loan but your business is not open, you may just be paying employees to stay at home. You might note that this will artificially reduce the unemployment rate, and that it shifts the burden of payment from the states to the feds.

The requirement to maintain headcount is unclear in the original rules, and the AICPA is again stepping in to suggest using a formula to calculate it based on FTEs (full time equivalent employees).

The AICPA has also recommended that the payroll reduction calculation be modified, since the current rule requires that pay be at least 75% of the prior quarter. Simple math illustrates the problem here. If an employee was paid $1000 per week, he or she would have been paid $13,000 in the most recent quarter. 75% of $13,000 is $9750. But if the pay remains $1000 per week, the employee will only receive $8000 in the 8 week period. So you’d have to pay the employee an extra $1750 to be in compliance with the rule.

Logic tells us that this rule will be modified in accordance with AICPA recommendations. Logic also tells us that this problem could have been avoided in the first place by having a fifth grader check the math.

For now, I recommend you record your proceeds in a new short term liability account on your books called “PPP Loan” or something similar. Then pay your employees (including yourself if you are on the business payroll) and wait for more guidance. Do keep careful records of hours worked and paid, when they were worked, when they were paid, etc. so that when we get more clear guidance you will be able to go back and ensure you are in compliance.

If you are a sole proprietor with no employees or an independent contractor who has applied for a PPP, you may be wondering how your loan forgiveness will be assured. This simply has not been addressed yet, but I promise to keep you updated.

At worst, if you get a PPP and it is not fully forgiven, it will be the cheapest money you ever borrow, at 1% after a 6 month deferral period. You will have two years to pay it back.