PPP loans for coronavirus: forgiveness may not be as simple as business owners think

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As more and more small American businesses prepare for their chance to get a federal loan, with plans to replenish funding for the ongoing paycheck protection program, experts warn that loan forgiveness can be a little more complicated than what business owners expect.

“What is becoming obvious is that forgiveness is going to be a little more difficult than they think,” Robert Spence, a certified financial planner at Raymond James, told FOX Business. “The devil is in the details … When you look at some of the details, the forgivable part will be less than people thought. “

The Paycheck Protection Program (PPP) is designed to encourage companies with fewer than 500 employees to keep their employees despite the difficult economic conditions resulting from the coronavirus pandemic. Applicants can receive up to $ 10 million, which can be forgiven in some cases. At least 75% of the money must be spent on salary costs – the rest can be used for mortgage interest, utilities and rent.

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One of the first problems is that, although the loan amounts are based on average monthly payroll costs of 2.5 times for 2019 or the past 12 months (up to $ 10 million), the window for l use is only eight weeks.

“In essence, there is some kind of inherent problem with mathematics,” L.J. Suzuki, the founder of CFOShares.org, told FOX Business.

The loan amount is also based on previous staffing levels – before many small businesses lay off or cut their wages. As a result, Spence noted, it can be even more difficult for business owners to use at least 75% of their loan on their payroll.

Suzuki said it has heard of business owners planning to hire their spouse or pay bonuses only to meet these forgiveness specifications.

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Forgiveness will be prorated if the payroll is not maintained at the levels observed before February 15. It will therefore be reduced in proportion to the number of jobs cut or the amount of wages. It will also be reduced if you do not meet the allocation specifications.

It is possible to re-hire employees, but there are also challenges.

Business owners, especially bars and restaurants, are competing against rising unemployment benefits. The extra $ 600 a week for four months is higher than the base salary for many tip workers, who are currently short of tips.

Ultimately, your lender is responsible for evaluating the loan forgiveness. What you will need to show your bank as proof will likely vary, but at least you will need payroll records showing the amount paid in wages per employee throughout the 8 week period. You will also need to show what was paid in non-payroll expenses – which will require keeping good documentation. Suzuki noted that you may need an invoice from your owner or an invoice from your utility company.

With regard to the companies most likely to receive a full loan forgiveness, these may not have been the intended target of the program.

“The irony is that the companies most likely to get 100% forgiveness are the companies that were relatively financially stable at the outset,” said Suzuki, adding that the companies that probably needed the most financial aid are those who have probably made a more careful decision. staffing approach.

However, full forgiveness does not have to be the end goal of every business. The loan has a low interest rate of 1% over two years – and no payments are required during the first six months.

Suzuki said it would tell customers who could benefit from taking the “high quality” loan – even if it was not forgivable. He also warned people not to turn their business upside down so that the loan could be canceled at the expense of the long-term viability of their business.

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Suzuki and Spence warned that final PPP directions remain unclear and are likely to change in the weeks and months to come – as has been the case with the program so far since it was developed and deployed so quickly.

Spence said that some of the forgiveness provisions are “strangely too complicated.”

Suzuki said the “unprecedented program” became operational before most people – including lenders – really understood it.

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Meanwhile, lawmakers were about to finalize a deal to replenish program funds starting Thursday – the deal includes an additional $ 310 billion for the PPP.

Initial funding of $ 350 billion for the program ran out last week and lenders were forced to stop accepting applications.

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