by Scott Lewis, CPA, MSA
As part of the interim guidance provided by the SBA, the amount of loan forgiveness on the Paycheck Protection Program (PPP) loans can be up to the full principal amounts of these loans and any accrued interest, as long as the borrowers use all of the loan proceeds for purposes as they were defined and intended. At least 75% of the loan proceeds must be used for payroll costs, using the same payroll parameters that were documented on the loan applications; salaries and wages, employer share of health and pension benefits, and employer portion of state and local unemployment taxes. No more than 25% of the loan proceeds can be used for payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020, over the eight-week period following the date of loan origination.
The key is to document all the above expenditures. Consider the documentation somewhat of an “audit trail” to provide to the banks and other lenders should it be requested. We suggest depositing the loan proceeds into separate bank account(s) outside of the normal business checking and other fiduciary accounts. Doing this ensures that the monies are segregated. When payroll is calculated and processed, in the typical payroll cycle, determine the amounts needed, and transfer these monies into the bank account where payroll is normally disbursed. It is basically a funding mechanism to track the use of the loan proceeds. Some expenditures, such as the employer portion of FICA and Medicare do not factor into the forgiveness portions of the loans, so these need to be addressed separately.
On non-payroll expenditures such as rent and utilities, the monies can come from these newly opened bank accounts as well and should maintain proper documentation. There are already rules in place that can reduce the amount of forgiveness due to reductions in workforce, or excessive reductions in salaries, and the SBA has noted that more guidance will be forthcoming.
In the interim, we strongly recommend taking proactive steps such as the suggested separate bank accounts and precise documentation of all payroll and other forgivable uses of the PPP loans.