Now that borrowers are beginning to receive proceeds from the Paycheck Protection Program (PPP) loans, we are hearing many questions regarding appropriate use of the loan proceeds and inquiries regarding the details of loan forgiveness.
The below information is based on guidance as of April 15, 2020. The SBA has indicated more guidance on loan forgiveness will be provided, and the Coronavirus Aid, Relief, and Economic Security (CARES) Act obligates the SBA to issue regulations within 30 days of enactment of the law, or by April 26, 2020. This article is focused on small businesses, which are not sole proprietors or self-employed individuals. To read about special rules for self-employed individuals, please visit this insight.
PPP loan proceeds can be used to pay for the following costs:
Misuse of the PPP funds can result in the SBA requiring immediate payback of the loan; if knowingly being misused, the borrower can be subject to additional penalties.
While obtaining a separate bank account is not required for the PPP loan proceeds, it is recommended if the borrower has a “sweep” account which automatically applies excess cash to pay down line of credit balances. This payment on a line of credit balance could be deemed as a misuse of the PPP funds.
The amount of the PPP loan that is forgiven will depend on the amount spent over the eight-week period following the first disbursement of loan proceeds, including:
Forgiveness must consist of at least 75% payroll costs (including self-employment income and benefits) and a maximum of 25% non-payroll costs. Any loan amounts not forgiven will have a maturity of two years, with a one percent interest rate. Payments are deferred for six months, but interest does accrue during the deferral period.
To the extent the full loan proceeds are not spent within the eight-week forgiveness period, the borrower must still spend the loan proceeds on the allowable costs described above after the eight-week period.
The amount of principal and accrued interest forgiven on the PPP loan is reduced if either of the following apply:
Preliminary guidance indicates there are exceptions to the above reductions in loan forgiveness if an employer restores the FTE headcount and restores any substantially reduced wages to the February 15, 2020 levels before June 30, 2020. Further guidance is needed to determine the impact of restoring FTE headcount and wages on the loan forgiveness.
There are special planning considerations when attempting to maximize the PPP loan forgiveness. Please contact your financial advisor to help you navigate this loan program.
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