The process of applying for a PPP loan can feel overwhelming. From finding an SBA-approved lender to understanding the eligibility requirements, it can take work to keep up. You should carefully document payroll expenses to get the most out of your PPP loan. This will help you qualify for forgiveness when your covered period ends.
Increased Cash Flow
The early days of the COVID-19 pandemic were tumultuous and uncertain for small business owners, who didn’t know what the rules would be later on regarding how to qualify for PPP loan forgiveness. Some experts advised that businesses should accept the funding, then put it aside for later use once things settled down.
In late 2020, Congress passed the $900 billion Coronavirus Response and Relief Supplemental Appropriations Act, which fixed issues with PPP and made it possible to get a second draw on the loan (if eligible). The program has also loosened criteria around headcount and payroll costs so businesses can qualify for forgiveness even if they don’t get back to their previous total employee count.
Despite the changes, many businesses still need clarification about a PPP loan application and which lenders are suited for your needs. Fortunately, there are some simple guidelines. For example, keeping accurate bookkeeping to prove your expenses and ensure that 60% of the loan funds are spent on payroll is important.
Reduced Stress
Amid Covid-19’s economic havoc, many small business owners were stressed about staying afloat. The CARES Act’s PPP loan program was designed to relieve that stress by providing loans to eligible individuals and businesses.
The PPP fund also offered loan forgiveness for those who met two requirements: their staff did not decline in size, and they spent at least 60% of the funds on payroll costs.
To qualify, borrowers should work with an accountant or financial advisor to document their expenses and ensure they meet these thresholds. The program could have been better, however.
First, it took a lot of work for banks to target firms most likely to need the funding. Second, the limited targeting led to many inframarginal firms receiving financing.
Third, the PPP fund is a substitute for conventional bank credit rather than complementing it in some cases. Nevertheless, our research shows that an additional dollar of PPP credit can multiplier traditional loan dollars to the smallest firms.
Tax Benefits
While the PPP program has officially ended, a small business can still use loan forgiveness to offset tax obligations. The key is to document the appropriate expenses and follow IRS guidance.
For example, it is important to focus on payroll costs. You can get your loan forgiven if you document that 60% of the funds went towards maintaining or rehiring employees and that these expenses are essential for operating your business.
It’s also a good idea to use a bookkeeping service to stay on top of your spending to ensure you meet these requirements. In addition, the latest round of coronavirus relief gives you more flexibility regarding what expenses are eligible for forgiveness.
The list has been expanded to include protective equipment and property damage. However, it’s important to note that any amount paid in business taxes will be taxable. This is a longstanding rule, even when a loan is later forgiven.
Forgiveness
When you receive your loan, your lender will have requirements for documentation and recordkeeping. You must maintain payroll and non-payroll expenses documentation to qualify for PPP loan forgiveness.
Payroll costs include tips, commissions, bonuses, hazard pay, and gross wages paid to employees. The amount of forgivable cash compensation per employee is limited to $100,000 on an annualized basis.
Non-payroll expenses are operational expenditures, such as equipment, software and cloud computing to enable remote work. Costs to adapt operations in response to the pandemic, such as acquiring new personal protective equipment and installing barriers to keep workers safe, are also eligible.
It would help if you also documented that you have maintained employee and compensation levels in the face of a significant downturn.