There is no doubt that 2020 has been a challenging year for small businesses. A global pandemic has upended our way of life. As of May 19, 4.9 million people have been infected worldwide resulting in more than 300,000 deaths. Not to overlook the health ramifications of this pandemic, but the economic devastation in the United States and around the world has been massive. We are starting to see long-standing businesses and retailers, such as J.C. Penny, file for bankruptcy.
Many states, including Ohio and Kentucky, issued shelter in place orders and many people found themselves working from home throughout March, April, and even into May. However, the end may appear to be in sight as the economy in Ohio and Kentucky begin to reopen.
Many small business owners obtained the Paycheck Protection Program Loan (PPP) through federal legislation known as the CARES Act. This program, implemented through the Small Business Administration, allowed small businesses to obtain a forgivable loan up to 250% of its average monthly payroll in order to fund the next eight weeks of payroll expenses. The loan could also be used for rent, mortgage interest, and utilities. Even more importantly, this loan is eligible for loan forgiveness.
Recently the U.S. Department of Treasury released the PPP Loan Forgiveness Application. As a small business owner, you successfully obtained a PPP loan to assist your business through this crisis. However, having your PPP loan forgiven may be another story if you are not careful!
Three Potential Issues with PPP Loan Forgiveness
First, in order to be eligible for loan forgiveness, you have to spend 75% of the loan proceeds on payroll and payroll related costs. The remaining 25% can be forgiven even if spent on non-payroll related costs such as rent, mortgage, mortgage interest, utilities, and other specific expenses. One of the main issues with loan forgiveness is that your loan application was based upon your 2019 payroll costs resulting in a loan of up to 250% of your average monthly payroll costs. As for many businesses on reduced employment numbers, certain businesses may have a difficulty spending 75% of the loan proceeds on payroll costs within the allotted time of 8 weeks.
The second issue is proving your eligibility for loan forgiveness. Although the application for loan forgiveness was released from the U.S. Department of Treasury and this program is in conjunction with the Small Business Administration, it will ultimately be the responsibility of your specific lender to determine if you are eligible for loan forgiveness.
Each lender is likely to have different documentation requirements. However, you will generally need to provide documentation which shows the amount of money from your PPP loan spent on payroll expenses and on non-payroll expenses. The key to obtaining loan forgiveness will almost certainly depend upon maintaining the correct documentation.
Finally, the official language of the CARES Act and corresponding guidance regarding the PPP loan program provided that PPP loans in excess of $2 million — or other loan amounts as appropriate — would be subject to a mandatory audit. Therefore, small businesses in possession of PPP loans and applying for loan forgiveness should plan for the potential of an audit of their loan application and their loan forgiveness application.
For more information
For these reasons, we recommend that our clients contact us at the beginning of the loan forgiveness process. By doing so, we can ensure that their loan forgiveness amount is maximized to the full amount under the law and to guide them through the PPP loan audit process.
As you begin the process of obtaining loan forgiveness of your PPP loan, please call our office at (513) 241-0400 or use our contact form to schedule a telephone or video conference.