PPP Norms and Regulations for Fund Eligibility and Forgiveness

The ongoing Coronavirus pandemic has threatened the livelihood of many small and medium enterprises. The lockdown has led to small offices, factories, retailers, hoteliers and restaurant owners facing an uncertain future and liquidity issues.

According to a study conducted by Thryv Inc and America’s Small Business Development Centres in late March, almost three-quarters of US small businesses experienced a substantial drop in business. The same number were planning to let go of employees or reduce hours.

The US government, to stem the economic downslide, came up with a $2 trillion economic stimulation package under the CARES Act that provided every American with a $1,200 stimulus check and an extra $600 a week in unemployment benefits. Money was also set aside for the Small Business Administration (SBA) to cover the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan Program (EIDL). The Federal government has come up with a $350 billion plan to provide forgivable loans to small businesses, now boosted by the second tranche of $320 billion.

Under the Paycheck Protection Program, small firms can apply to retail banks and credit unions for loans of up to $10 million, intended for expenses such as rent, insurance, utilities, and wages. The PPP loans become grants, provided the employers retain their employees and spend 75 percent of the money on payroll.

 This program provides forgivable, low-interest loans to small businesses that qualify and has already been a lifesaver for many businesses that have been forced to shut their doors during the quarantine.

But declaring help and seeing its implementations is a different matter. Nobody is clear, neither the banks nor the applicants, on who qualifies for how much and how to disperse the loans.

A survey by the National Federation of Independent Business showed that four in five applicants for the emergency funds did not know whom to apply to and whether they qualified for the loans,

In such a scenario, how do small enterprises survive and see through the pandemic? Here are a few pointers and suggestions.

Proper documentation to avoid fines and criminal charges

To avoid the situation where established businesses took advantage of the loans at the cost of genuine needy establishments, the SBA which is overseeing the loans, came up with the “economic uncertainty” clause. The PPP wants business owners to certify that the “economic uncertainty” caused by the pandemic means a PPP loan is necessary to their survival. Now they have to take additional steps to assess this.

The SBA redefined the “economic uncertainty” provision to require businesses to assess their current activity, and their ability to access other funds. And businesses that have availed the offer can return the loan in a safe harbor period if they have found other sources of funds.

The US Treasury has said it will conduct automatic reviews of PPP loans that exceed $2 million. That means businesses with higher loans need to be more vigilant, but all businesses need to be prepared with the certification of their eligibility for the loans.

Businesses should keep clear documentation of the assessment for filing for loans. Undertake regular reassessment to see that you qualify for the loans.

It is prudent to keep track of all the expenditure done after the loan. The bookkeeping documentation should include profit and loss statements, balance sheets, assessments of access to other capital, a pipeline of business, receivables and collections, and all invoices done.

Loan forgiveness guidelines

To qualify for loan forgiveness, businesses must retain employees at pre-pandemic staffing levels and wages.

The law says 75% of PPP loans need to be used for payroll, with 25% toward other eligible expenses such as rent and utilities.

If employee numbers are reduced, and wages factor goes down, then businesses can apply for partial forgiveness.

If you have used only $1 million of the $2 million loans sanctioned for wages, then you can apply for partial forgiveness. You have 24 months from the date of disbursement to pay back the loan, with deferral for the first six months and a 1% interest rate, says the government notification.

Similarly, if you use up the $2 million loan for wages and other eligible expenses but have hired back only half of your pre-covid staff, then you qualify for only $1 million forgiveness.

However, experts point out that it’s not completely clear how percentages for eligible expenses will be calculated. Experts on the matter say that government guidelines on this partial pardon of funds are still not clear and further clarification is awaited.

You do not need to rehire old staff, you can hire new ones instead. Also, businesses have until June 30 to rehire all full-time employees and to restore wages. The business can present documentation for any ex-employee refusing to join back.

The law does allow business owners to wait to rehire employees until the end of the program, but it may be risky if the money is used for other expenses than wages. One option is to continue paying wages to staff till the businesses reopen or are fully functional.

Remember only employees who file W-2 forms each year with your company are eligible for the payroll funds. Independent contractors have their own guidelines to qualify.

Remember to pay yourself too from the funds. Any form of fraud or mistakes in filing and documentation will attract felony and criminal charges, so experts advise due diligence and proper follow-ups.

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