Was your company among the 4,460,265 small businesses that received the Paycheck Protection Program (PPP)? If you applied for and received a PPP loan, it’s likely that you have been confused at one time or another about the specifics of the program. This isn’t an uncommon feeling, as millions of people struggle to understand the requirements of their loans and how they can use the money correctly so that the loan will be forgiven.

To help you digest the conflicting information out there, here is what we know, including resources for you to continue your research.

The Loan’s Terms

The bare basics of the PPP loan are as follows: The PPP loan has an interest rate of 1% with a minimum five-year maturity rate and a maximum maturity rate of ten years (from the date you apply for loan forgiveness). The covered period—the time during which you can apply for and a lender can grant a PPP loan—is February 15, 2020, to December 31, 2020.

The loan’s intended purpose is to support payroll costs, interest on mortgages, rent, and utilities, with 60% of the loan going to payroll. Funding should be spent within the first twenty-four weeks of the loan’s term, beginning on the date the funds are received. Though interest will still accrue, payments on principal and interest are deferred for ten months.

If you reduced your full-time employee (FTE) count, between February 15, 2020, and April 26, 2020, you have until the last day of the year to bring your count back up to where it was originally. The aforementioned window also allows you to restore any reduced salary or wages, which could also jeopardize a portion of your loan forgiveness if not rectified.

A lower FTE count could reduce your chances of receiving full loan forgiveness, unless you can document that you were unable to rehire individuals employed by you on February 15, 2020, or that you could not hire similarly qualified individuals on or before December 31, 2020. You would also be exempt if you can prove that you are unable to return to your original working capacity (your capacity before February 15). The FTE count does not apply to employees who voluntarily resigned, were fired for cause, or voluntarily requested and received a reduction in hours.

Please note that this article has been updated to reflect the Paycheck Protection Program Flexibility Act, which was signed into law on June 5, 2020. For a comparison of the original PPP loan terms to the Flexibility Act’s new terms, please click here.

How the Loan Can Be Used

As we mentioned in the loan’s terms, recipients of the PPP loan must use it in specific ways. Here is a more in-depth list of how you can use your funding:

  • Payroll costs
  • Group healthcare during paid sick, family, or medical leave
  • Insurance premiums
  • Rent and utilities
  • Interest on your mortgage
  • Interest on other debt incurred prior to February 15th

Payroll Costs: What does that include?

Payroll costs is a fairly broad term, considering payroll expenses go far beyond your employees’ salaries. Under the PPP loan, recipients can use their funding in the following ways as they relate to payroll:

  • Salary, wage, or commission
  • Cash tip (or equivalent)
  • Vacation, paternal, family, medical, or sick leave
  • Allowance for dismissal or separation
  • Retirement benefits
  • State or local tax based on compensation
  • Compensation to a sole proprietor or independent contractor

Payroll Costs: What does that not include?

It’s important to note that funding should not be used to compensate individual employees for more than $100,000 per year. If an employee does make $100,000+, take into consideration that your allotted funding for that particular employee is prorated for the loan’s covered period.

Funding also cannot be used to pay for sick or family leave wages that are covered by a Families First Coronavirus Response Act (FFCRA) credit.

Loan Forgiveness

Many small businesses borrowed the PPP funding with the intention of having their loans forgiven in full. This goal is possible to achieve; however, you must pay close attention to how your small business is spending the money and that you are appropriately documenting your expenses.

As several businesses were hit with backlash after receiving the PPP loan (e.g., the LA Lakers), it is expected that businesses could be audited to ensure that they used their funding appropriately. Consider hiring a professional to oversee your spending, such as an accountant or financial advisor, who understands the ins and outs of the loan and can guide you through spending and documentation.

Primarily, if you are looking for your loan to be forgiven, it is crucial to focus on spending the funding only in the ways that are outlined by the Small Business Administration (SBA) without reducing your full-time employees or their wages.

Trusted Sources to Find More Information on PPP Loans

Contact us today to learn how LBMC Employment Partners can guide you through your business’ changing circumstances in the days ahead.