Brian Basinger is the Founder and Principal of Basinger CPA. Brian is a Certified Public Accountant and a Certified Tax Coach and helps small business owners navigate accounting, bookkeeping, and tax preparation. Basinger CPA is a strategic advisory firm that tries to go in-depth and be proactive in helping their clients on tax planning, accounting, and cash flow forecasting.
What is the PPP Loan vs Other Options
The PPP Loan (Paycheck Protection Program) came about earlier this year amid the COVID-19 Pandemic to give relief to businesses, specifically small businesses and is designed to cover at least 2 months worth of payroll, as well as rent, utility, and other expenses you may need assistance in covering. The PPP Loan is still in the 2nd round, although most people who have applied for it have received it at this point.
There are 3 other options you may want to consider instead of, or in addition to, a PPP Loan. The first of these options is a Payroll Tax Deferral. This allows employers to take the tax from 2020 and defer the employer portion of taxes, which is about 6.2%. In this situation, businesses would be required to pay half in 2021 and the remaining half in 2022 with a 0% interest rate. The next option was an Economic Injury Disaster Loan (EIDL) and provides financial assistance to small businesses that may have suffered economic injury as a result of a disaster. These applications have now closed, but applications that were previously submitted are now being processed and approvals will span over the next few weeks. Although this option is not free money, it is money on really good terms. The final option is for a payroll tax credit which applies to people, or family members, that may have been affected by COVID-19 and needed to miss time from their jobs.
Recent Changes and Updates Made to the PPP Loan
When the PPP Loan first came about in early 2020, it was intended to be used over 8 weeks to cover those 2 months of expenses. Most people who have already applied for the loan have received it at this point, but if you have not, then you may not be going through the right bank. The loan has since been extended from the previous 8 weeks and can now be used over 24 weeks. Now that it is 24 weeks, there is more than enough cost to cover the loans – the loan is calculated based on a 2 and a half multiplier of the previous year’s payroll.
Brian also presented two different scenarios in the case of having to lay-off an employee or employees. Previously, employers had until June 30th to hire everyone back or to make an equivalent job offer to somebody else. This date has since been changed to December 31st that you can hire back employees who may have been furloughed or laid-off. Businesses also have until December 31st to restore wage rates that may have been reduced due to COVID-19. If you are needing to lay an employee off and concerned about the forgiveness of the loan, an option is to apply for the 8 weeks of forgiveness (which is still available) and wrap of the forgiveness of that loan and then you can proceed with the lay-off. If you are letting an employee go with cause, you can do that if they have been deemed an appropriate exclusion to the head-count rule.
An additional factor to consider in the PPP Loan is that this loan is intended for employees who receive a W2, it is not for contractors or 1099 employees. Contractors are eligible to apply to receive their own PPP Loan, so they are not allowing businesses to stack them. It is one of those scenarios now where people who are hiring traditional employees (W2) and paying payroll taxes are being rewarded by being able to take advantage of the PPP Loan.
Guidelines to Forgiveness of PPP Loan
Although definitive guidelines for the PPP Loan have not been released, the ESBA, or Employer-Sponsored Brokerage Account, has continuously released a series of FAQ documents and this is currently the most authoritative interpretation of the bill and the legalities. There are still many unanswered questions, but it is expected that they will release an additional FAQ document to answer some of those. Banks have also received an additional forgiveness application so if businesses are looking to apply for loan forgiveness already, they will apply through the bank that issued their PPP Loan and the bank should have a modified forgiveness template based on the SBA or Small Business Administration. The template requires businesses to put together the application with all supporting documentation.
The main cause of lack of forgiveness has been not enough payroll, and some businesses do not have enough payroll to justify forgiveness. The new 24-week period is crucial because it allows extra time and also has moved from previously being 75% made up of payroll cost to now only requiring 60% of payroll costs. This has opened up more of a possibility to get forgiveness for other expenses such as rent, utilities, or mortgage interest if that is making up a substantial part of expenditures.
Most payroll providers have paycheck protection reports that employers can run and get their numbers back – employers must enter appropriate dates and it should give you payroll costs, state and local taxes, retirement contribution costs, and group health insurance costs. Once employers run and receive that report, they can plug those numbers into the application form and turn into their bank. It is encouraged to have your application ready to return to the bank along with any supporting documents you may have included so that everything is ready to go when you are ready to apply for PPP Loan forgiveness.