Hindsight is 20/20, the saying goes. But in most cases, hindsight doesn’t matter much.
Knowing now that I should not have sold those Microsoft shares I bought in the mid-1980s? Not terribly actionable.
Similarly, knowing now that you should have, or some client should have handled the Paycheck Protection Program loan differently? That insight matters little to most PPP borrowers.
Yet some people only recently got their PPP loans. And the PPP loans are still available for at least a few more days. So, I thought it’d make sense to identify the comments we’re hearing from people about what they wish they’d done.
Here’s the list…
You Maybe Should Have Waited
A first comment we hear? Waiting made sense. Waiting until the rules were fleshed out and so a borrower was more likely to get the right and often a bigger amount, for example.
And then as importantly for the firms who needed the most help? Waiting to start the spending of the PPP funds. The idea here being that many firms should have paused their operations, maybe gotten through the first lock downs, and only then started spending when they really had customers or clients to serve.
You Possibly Should Have Relied on Unemployment
A related comment? As hard as it is to say, probably many firms should have furloughed employees. Employees would have enjoyed generous unemployment benefits in many cases.
And then, when a firm was able to begin operating, a firm could have turned on the spending and hopefully ramped up hiring as it ramped up revenues.
You Probably Should Have Stayed in the Safe Harbor
A couple of other comments related to the actual application for a PPP loan.
First, a firm borrowing or eligible to borrow an amount only slightly over $2 million? Firms in this situation probably should have borrowed less than $2 million and so qualified for the certification safe harbor.
I find it hard to believe that someone should have borrowed an extra $100,000 or $200,000 when that extra money meant tripping over the $2,000,000 threshold. Tripping over that threshold, as you probably know, means much closer inspection and review of the PPP loan applications.
You Maybe Should Have Stayed Under $150,000 Loan Amount
Another comment about dialing down the loan amount requested…
Lots of people know this now, but any borrower who received more than $150,000 in PPP loan proceeds was named and shamed, so to speak. This is unfair, surely nearly everybody was trying to follow the rules.
But if you were close to that $150,000? It maybe would have made sense to sneak in below $150,000. That would have kept your name, the rough size of your loan, and the number of employees your firm employs private.
Note: Click here to see the borrower names and PPP loan details.
You Could Have Strategically Delayed Paying Bills Especially Payroll
The crazy accounting method the loan forgiveness application uses? It counts payments on old bills and payroll amounts as potentially forgivable.
Last month’s rent check counts toward forgiveness if you pay the rent within the “covered period” that the forgiveness formula looks at.
So does payroll from last month that you pay within the covered period.
If you’d known the accounting worked this way—from the very start—you could have used PPP funds to get straight with employees and vendors. And that might have meant you retained other funds for whatever else you need to get your business back and fully operational.
You Usually Should Use the 24-week Covered Period
The PPP loan forgiveness formula lets you look at spending within an 8-week window, or covered period, or within a 24-week window.
Almost everyone should use or should have used the 24-week window. The basic reason? The PPP loan provided funding for roughly 10 weeks of payroll. Accumulating that much payroll spending happens easily if you get a 24-week window.
You Possibly Should Have Emphasized Mortgage Interest, Rent and Utilities Spending
So, the PPP forgiveness rules say spending on mortgage interest, rent and utilities must equal 40 percent or less of the forgivable spending. Another way to say this same thing? A borrower needs to spend at least 60 percent on payroll.
But here’s the thing: Borrowers logically should have tried to spend a full 40 percent on the non-payroll stuff.
Two reasons explain this optimization. The big reason? Furloughed employees in many cases had another way to stay financially healthy—generous unemployment benefits.
And then a small reason exists too. When an employer spends on payroll, each dollar of payroll typically requires additional costs that aren’t forgivable.
This is subtle but every dollar counts if your firm’s financial survival is at stake. So, consider a couple of examples. A firm that spends $10,000 on payroll gets $10,000 of forgivable costs but also triggers $800 or so of federal payroll taxes that it must pay but which it does not get forgiveness for.
In comparison, a firm that spends $10,000 on, say, rent or utilities, gets $10,000 of forgivable costs and the firm incurs no additional costs.
Some Sole Proprietors Should Pay It All as Payroll
One important exception to the previous “shoulda.” Sole proprietors without employees? These small business brothers and sisters should probably pay out all their PPP loan as payroll to owners. Or more accurately what the PPP rules describe as “owner compensation replacement.”
This simple approach produces two benefits. First, it means the documentation required for forgiveness is simpler and hopefully “do it yourself.” Second, this approach probably means the sole proprietor pays zero income taxes on the PPP loan.
Note: The forgiveness of the PPP loan doesn’t create income. But any tax deductions paid with PPP loan money get disallowed. The combination of these two accounting conventions mean in effect the PPP loan proceeds are usually taxed. However, a sole proprietor’s draws of “owner compensation replacement” aren’t tax deductions and so should not be disallowed. Which all means—and sorry for the minutiae—that most sole proprietors get a little extra tax bonus.
Many Folks Should Have Slowly Ramped Employment Levels
One last awkward comment. While the purpose of the PPP loans was to protect employee jobs, I think a business owner could have reasonably thought not about protecting jobs over the first few weeks of the COVID-19 pandemic. Instead, a business owner could have thought about protecting jobs over the long run. Including when this dark storm ends.
Accordingly, once the PPP statutes allowed a 24-week covered period, or spending window, most firms could have slowly ramped up their payroll over 24-weeks and then still spent enough to meet the requirements for getting full forgiveness.
Note: In our last blog post about PPP forgiveness, we describe how a firm that halves its payroll still gets nearly complete forgiveness. And that’s even before trying to use one of the safe harbor excuses.
Two Final Comments
Accountants—and you maybe know this—tend to suffer from compulsive personalities. Sorry.
Accordingly, I am compelled to close with these two comments: First, if you haven’t get applied for a PPP loan, get on it if you need the funds. Further, use what we all know now to make the smarter choices about using the PPP loan funds.
Note: Make sure any of your procrastinating small business friends have applied too. (Yeah, sorry more compulsive behavior.)
Second, if you’re still in the process of spending your PPP loan money, see if you can use one or more of the gambits listed above to get a little more mileage out of the program. Every little bit will help you rebuild the balance sheet you’ll need once we get through this storm.
ANGEL UNZALU says
Under The Cares Act, the exclusion of compensation in excess of $100,000 annually applies only to cash compensation but not to non-cash benefits, including employer contributions to retirement plans and employee benefits consisting of group health care coverage.
The Cares Act refers to non-cash benefits as employer paid. Are cafeteria plan insurance benefits as well as 401K employee deferral also considered cash compensation?
Shannon D Chapman says
I was starting My business and this happened can they help me?
Stephen Nelson CPA says
Maybe. See this blog post: https://evergreensmallbusiness.com/ppp-second-draw-loans/
Also, see if you can get a “first draw loan” if (when) the program restarts: https://evergreensmallbusiness.com/paycheck-protection-program-loan-small-business-life-saver/
H B says
For a single-employee-owner S-Corp, is it wise to continue process payroll from PPP funds using the current system – self-run payroll from inside the Quickbooks desktop/standalone product (with just the quickbooks generated reports, bank statement, 941 form and cancelled paychecks to rely on), OR is it better to sign up with a 3rd party payroll provider and use their services for just one owner-employee? Any pros, cons, risks vis-a-vis forgiveness when using the EZ form?
Stephen Nelson CPA says
I think it’s too late to make the change to another vendor… also with the continuing small business recovery and paycheck protection program act that’s apparently on the way, you may not need GREAT documentation already packaged up by Gusto, Paychex, ADP, etc quite as much.
H B says
If EIDL advance was given along with PPP, is that to be included? The application asks for that amount but does not specifically mention what to do with it.
Stephen Nelson CPA says
EIDL grant will be included as part of your PPP loan.
Nic says
I got the ppp and the grant. They paid the grant for the eidl and never got that money. Is that forgiveable
Stephen Nelson CPA says
If I understand your question–that you’re wondering if an EIDL grant that got rolled into a PPP loan is forgivable–answer is yes.
TVT says
One employee S-Corp here. I have not used my PPP yet. Should I run my regular payroll via Quickbooks and pay all the payroll fees and taxes OR should I process the PPP as an Owner Draw?
Thanks
Stephen Nelson CPA says
An owner draw doesn’t create payroll cost for an S corporation. So you want to use it for shareholder-employee payroll…
Karin blakes says
Hello I have already gotten a ppp loan for 7133 in May which wasn’t enough to cover don’t know,if I did it right
Wil I be eligible for a second one
Stephen Nelson CPA says
OK, so we need Congress to pass the bill and for President to sign… but then if you’re in an eligible category (and I bet you are) and if your revenues have dropped by 50 percent, you should be able to get a second draw loan if you move fast enough.
William Bauman says
I applied for a PPP loan over 5 weeks ago and it doesn’t look like my bank is processing it. I’ve reached out to them with no reply. Should I I reapply?
Stephen Nelson CPA says
I would. That sounds like a PPP application that’s gotten lost. BTW, it may be too late to apply right now. The deadline is August 8 and they sometimes shut down the processing close to the deadline. But if they reopen the program, you would want to apply for a PPP loan… be sure to do it right so you get as much money as possible… and then possibly, you would even apply for a second draw loan if you’re eligible.
Fletcher Stevens says
I’m a uber driver and I received a ppp loan in june. Can I use the loan for owner compensation replacement (OCR) and use the funds as I want to or do I need to document how I use the funds. There’s a question of loan forgiveness. Do I just fill out the ez form and list the ppp loan as ocr for ppp loan forgiveness?
Stephen Nelson CPA says
So great question. And what I think is you want to pay Fletcher the proprietor draws that use up the PPP Loan. I’m just using example number here, but say you got a $5,000 PPP loan. What I think you do is pay Fletcher a $500 a week draw (like, write an actual check) over ten weeks and so thereby “use up” the PPP loan. BTW, Fletcher the proprietor will probably use that money for rent, groceries, etc., etc., That’s okay.
If you do your owner compensation replacement in this way, however, you’ll get full forgiveness. And, a bonus, the way the rules currently work, you should NOT be taxed on the $5,000.
Last tip or point: If your revenues are down enough, apply for a “second draw loan” if Rubio’s bill becomes law.
Derrick says
I am an independent contractor (web design, marketing ,etc). I just got approved for my PPP yesterday. Waiting on my payment now.
Questions:
1. I owe back rent. I need to use more than 40% for rent. After I pay myself for payroll compensation, can i just pay the remainder of the rent over the 40% in the form of a cashiers check, etc. so its basically “off the books”?
2. What is the best way to pay yourself as an independent contractor? Ive read there really is no definitive rules regarding this.
3. Ive read where one stipulation of the second stimulus package will probably be being able to show your income was affected by 50% or more. Since I was just approved for my first PPP, do you think my chances of getting approved for a second one in a week or so would be feasible?
P.S. I did not receive EIDL.
Thanks
Stephen Nelson CPA says
You must spend at least 60% on payroll. That’s what optimizes forgiveness. You can spend all the rest on rent. E.g., you got $10,000. You pay $6,000 to Derrick the sole proprietor. The other $4,000 you use for rent. BTW, if Derrick uses some of his $6,000 to pay rent? That’s fine
You pay yourself by writing a check if you’re a sole proprietor.
To get a second draw loan, we need Congress to pay Rubio’s bill. And then, of course, you’ll need to meet the requirements, which are described here:
https://evergreensmallbusiness.com/ppp-second-draw-loans/
Donn says
Will my eidl loan be forgiven since my bank was slow on processing my ppp loan? If so, what can I spend my funds on?
Stephen Nelson CPA says
Regarding spending, you want to follow the suggestions provided above to maximize forgiveness and minimize taxes.
How the EIDL and PPP connect depends. Here are the actual rules:
Source: https://home.treasury.gov/system/files/136/Guidance-on-Refinance-of-EIDL-Loans-with-PPP-Loan-Proceeds-and-Lender-Remittance-of-EIDL-Refinance-Proceeds-to-SBA.pdf
SMITH says
Hello I got a mail from PPP loan that I applied for and I was told to creat an account which I did and got my identity verified and is still under process I have not signed the closing document.what is really going on am still going to get paid or not ?
Stephen Nelson CPA says
Hopefully your loan will be processed. Right now, btw, the deadline is August 8th, so unfortunately your PPP application may still be “waiting in line” when the deadline passes. But probably your PPP application will “restart” once they pass a bill that moves the deadline out again. BTW it’s also possible the bank or online lender may process your loan today or tomorrow. Accordingly, if you see an email from the bank, you’ll want to respond immediately. They can move very fast once you’re approved.
Martha Lee says
What is the recommendation for a landlord with four units and living in one of the units to apply for any assistance for the rental loss from nonpaylent tentants?
Stephen Nelson CPA says
PPP loans work for “active trades or businesses” with payroll and who file a business tax return (so a Schedule C or Schedule F etc). Not for investors filing a Schedule E.
Sorry… 🙁
Archie Giles says
I received a PPP LOAN in late April and have spent roughly 89% of the loan on approved expenses using the 8 week timing. If I go another 2 weeks I will be at about 105% of PPP fund usage. Can i apply for forgiveness or do I have to wait the entire 24 weeks?
Stephen Nelson CPA says
You can either use 8 weeks… or 24 weeks. Your choice. Sounds like either works.
Tamara says
I did a first round of PPP in May. I am self employed with a couple of seasonal employees and family members. I applied as a self employed sole proprietor. B of A asked for 940’s and I was given only the amount that would cover payroll, They eliminated my pay and rent. I’m being encouraged to go for round 2 but I don’t know if I should go back to B of A or file directly from the SBA website application form. Thanks for your help!
Stephen Nelson CPA says
I think you go back to BofA and ask for a PPP loan increase based on later regulations saying you can include your owner compensation replacement.
H B says
Stephen, for the loan forgiveness EZ application for owner only entity. By example say 10k was the loan itself. 10k payroll paid (as 2.5 months salary) to business owner. Then on Line 5, the amount is 10k, and Line 6 the amount is 10k, and line 7 (60% threshold) is 6k. The forgiveness line is Line 8 – least of line 5/6/7 which comes out to only 6k. Even though the full example loan of 10k was used in full compliance (i.e. 100% for eligible payroll costs), only 6k will be forgiven?
JW says
How will loan forgiveness be approved? I’ve heard rumors that small for small loans the government is considering self-certification. Am I correct that since I received my funds in early May I only have 8 weeks to properly use for loan forgiveness but later loans are given 24 weeks?
Stephen Nelson CPA says
You can use either 8 weeks or 24 weeks. And Rubio’s bill lets small borrowers self-attest. A small borrower is someone who borrows less than $150K.
Barcell U Morgan says
If I only applied for and received the EIBL of 1000 .Can I still apply for the PPP Loan, minus the the 1000 EIBL.
Stephen Nelson CPA says
You should be able to. And you should try. Definitely.
Barbara says
My tech will not come off of unemployment so I am using another company to do the jobs for me. Do I need to put them on payroll or just write a check to them? Thanking you in advance.
Stephen Nelson CPA says
You need to be careful about two things. First, if you have reduced your headcount, you need to make sure you don’t get an FTE adjustment that causes you to lose forgiveness just because you employ fewer people. Roughly, if you cut your workforce by 10 percent, you lose 10 percent forgiveness. But a bunch of “mulligans” exist that let you wriggle out of this adjustment. So you want to know those and make sure you can use one if possible.
The second thing to be alert to: You get forgiveness based on payroll. So you may risk losing forgiveness if you don’t have enough payroll. E.g., with one less employee, you have less payroll to plug into the formula. Note that amounts you pay a 1099 contractor don’t count. Neither would amounts you pay some other business.