What Is the Payroll Protection Program?
As we’re going into the second year of the Covid-19 outbreak, more and more businesses are struggling to stay afloat. While everybody checks under couch cushions and between car seats for spare change to keep going, congress continues to dally on the matter. To keep on top of things, we need to look for options. One of those options is the Payroll Protection Program passed through the CARES Act. Does the Payroll Protection Program help? Is it a worthwhile way to help keep alive during the pandemic? Well, let’s take a look at what you need to know.
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1. It Is A Loan
The first thing you have to understand is that the Payroll Protection Program isn’t free money. It’s a government loan with an extremely low interest rate. The current interest rate on these loans is fixed at 0.5%-1%. Once you take out a loan on this program, you can defer repayment for up to a year. The loan will be repaid over a period of two years after that. This means that it can help your business stay afloat without needing to lay off workers; however, it is still taking on debt. If your business is in a position where taking on more debt would leave you insolvent, it might not be in your best interest to take out a loan on it.
2. There Is The Possibility of Loan Forgiveness
It is possible to get loan forgiveness with this program. Potentially, up to the entire amount of your loan might be forgiven, making it more of a grant, but this depends on several factors. The biggest one is that if you apply for the Payroll Protection Program, you must keep your employees on staff at the same pay rate as when you took the loan. If you let employees go, or lower their pay raise, a certain amount of forgiveness will be taken away.
This can be reversed if employees are rehired or wages restored, but it’s better to follow the terms of the loan and keep people employed. After all, that is what the program is for. We’ve come across plenty of stories of companies that applied for the program, then proceeded to slash wages and lay off employees only to find out they suddenly had to start paying back the loan because they’d run out their forgiveness.
The forgiveness also requires careful documentation of your expenses paid to employees. This includes payroll, health care costs, and any other benefits offered. You must also fully document your business expenses on other loans, utility bills, and building rent. On top of that, there is a form you need to fill out. Failing to properly document everything could get your loan forgiveness denied.
3. The Loan Can Be Counted As Taxed Income
Well, yes and no. This one is complicated. As of 2020, the loan can’t officially be taxed by the federal government; however, there are a few tricky clauses here. It can’t be taxed, but it can be subtracted from the amount of tax deductions you can claim for the rest of your business expenses. If you take up a PPP loan, you won’t be able to claim payroll or utilities on your business expenses for 2020 or 2021 taxes. This exemption only counts if you qualify for loan forgiveness, however.
Additionally, there is no stipulation in the bill that prevents local governments from taxing you. While you may not have to pay federal taxes on the money you receive, your state might be able to count it towards your taxes if they wish. Keep these in mind as you decide whether or not to apply.
4. The Money Is Limited
The stimulus package that started this was initially counted in the trillions. That was split between large corporations, small businesses, and self-employed individuals. Even with the most generous calculations, there’s nowhere near enough money to give to every business in the country. Fortunately, not every business has needed to ask for it, but that still means funds are limited. Congress can add more to the budget, but all things considered, it’s pretty apparent that we shouldn’t count on them to keep increasing it. Budget increases to this program happen in bursts and are never enough to cover everyone.
What this means is that if you do need a loan, it isn’t a good idea to delay. We’re already way late into the game at this point, so if you’re struggling and need a little extra to see you through, you should apply soon.
5. This Program is For Payroll and Operations ONLY
This is essential. The program is meant to help cover payroll and regular business expenses – as in expenses you incur on a regular basis, such as utilities. As stated above, forgiveness is determined by how well you keep your employees working and keep their wages stable. To be eligible for any forgiveness, at least 75% of the loan money – which can total up to two months worth of average payroll costs plus an additional 25% – must be spent covering payroll. If that is covered, the rest can be spent covering utilities and other regular business expenses. If your documentation of expenses shows you don’t meet that standard, there is no forgiveness at all.
6. The Loan Comes At No Risk To Board Members
Normal business loans come with some personal liability to board members if the loan is not repaid. An important note of this program is that board members incur no personal liability. As long as no board member of your business receives money and uses it for a purpose other than the loan is allowed for, they will not be required to personally cover losses if the business is unable to repay the loan.
7. All This Is Subject To Change
What makes this so difficult is that congress can – and has – changed the rules of this bill at its own discretion. To get any more money into the program (which is necessary to keep it going), congress has to authorize more money into it, and each time they do, they make both small and large changes. It’s impossible to predict when congress will choose to revisit the bill, so within a few months of this article being published, the information may become out of date. You need to keep checking with your financial advisors, book-keepers, and legal counsel to keep on top of it.
We Can Help
The documentation required to qualify for the loan forgiveness is very precise. If you take out a Payroll Protection Program loan, it’s going to add to the amount of work you need to do. If you want to avoid losing your forgiveness, you need to keep everything straight. That can be tough. The high stakes of the situation makes it more stressful. That’s where we can help you. Here at Dragon Financial, we have expert accountants ready to help you out. We keep up to date on all the latest codes and can provide extra temporary staffing to help keep your documentation in order. We also do payroll services, so if you need the extra help to make sure everyone gets paid on time and the records are kept straight, we can help you there, too.
If you’ve recently taken out a PPP loan, or plan on taking one out and want to be absolutely sure the money is all properly spent and documented, get in touch with us today. We’re happy to help!