Review this list of qualified expenses for maximum forgiveness on your loan
Though the initial round of Payroll Protection Plan (PPP) loans are exhausted, small business owners that applied and were approved in time are now receiving their loan proceeds. For these borrowers, the 8-week forgiveness period has begun, and they are beginning to plan how to use the funds while still maximizing their potential forgiveness.
The SBA is expected to release more clarification on the forgiveness piece of this loan in the coming days and weeks. However, for those needing guidance today, we are sharing a list of qualified expenses and clarification on what this could mean to practice owners.
Additionally, after the 8-week forgiveness period, there will be an audit period where actual forgiveness is calculated and expenses are reviewed by the lending bank. Also included in this communication will be a list of documents we recommend borrowers gather and have ready to submit.
Please be advised these recommendations may alter once the SBA final guidance is issued.
Before we go any further, we want to reiterate guidance provided in previous communications. It is strongly advised borrowers open a separate bank account for the PPP loan and only pay qualified expenses from this account.
SALARY & WAGES
Compensation paid to employees of your business is the driver of this loan and the intended expenses for the forgiveness you may obtain. For your PPP loan, a minimum of 75% of the forgivable amount must be compensation. Any wages paid to employees, up to a $100,000 annualized salary, during this time will be included. The guidance is still unclear on wages paid to owners and family salaries.
CWA Interpretation: For doctors or associates making over $100,000, we believe that the correct amount to pay through wages during this 8-week period is $15,384.62 ($100,000/52 weeks X 8 weeks). For family members, we believe that the wages received should reflect the same amount of wages the family member received during the period before February 15, 2020. For example, if the family member had a 2019 salary of $20,000, then we believe the same calculation used above for the owner doctor should be applied ($20,000/52 weeks X 8 weeks) resulting in wages paid of $3,076.92. We recommend you issue compensation, at a minimum, two times to reflect monthly compensation.
If your practice has a group healthcare insurance plan, the premiums incurred and paid during your 8-week period are considered qualified expenses.
CWA Interpretation: Qualified and forgivable health care costs appear to be exclusively for group plan costs and do include owners. We do not believe, however, that this includes individual health plans for owners and their family. Further, this likely also does not include Health Savings Account (HSA) contributions for the benefit of owners or their families.
Documentation Needed: Documentation reflecting the health insurance premiums paid by the company under a group healthcare plan, including owners of the company during the 8-week period. Copies of the monthly invoices should suffice.
RETIREMENT PLAN FUNDING
Retirement plan contributions made during the 8-week qualified period are eligible PPP expenses. This includes employer contributions funded to Defined Benefit Plans, Defined Contribution Plans and SEP IRAs.
CWA Interpretation: Because of the lack of current guidance on the PPP forgiveness, it is unclear how much, if any, benefits will be forgiven that are paid to the owner or the owner’s family. In previous guidance, the administration states they desire to “prevent windfalls that Congress did not intend.” It is for this reason we believe the amount of forgivable retirement contributions may be limited. We recommend that you make payments for the employer funding, at a minimum, two times to reflect monthly contributions.
Documentation Needed: Documentation of retirement plan funding by the employer during the 8-week period following the origination of the loan should be sufficient. Copies of statements, funding schedules and remittances to the retirement plan administrator should be available.
Rent expense is a qualified expense for PPP funds. It is important to note that the expense must be both incurred and paid during the 8-week period, so any prior rent due would not be a qualified expense. It is also important to note that the rent allowed is based off a signed lease agreement in effect prior to February 15, 2020.
CWA Interpretation: While rent is a straightforward expense in the PPP program, it is important for practitioners that own their building to comply with a lease signed prior to February 15, 2020. Any changes to the rent after this date will not be qualified unless expressed in the previously signed lease.
Documentation Needed: Signed lease agreement. Proof of rental payments (checks, ACHs, bank statements or wires) along with the invoice if applicable.
BUSINESS LOAN INTEREST
Interest on mortgage obligations and loans secured by any business personal property are qualified expenses as long as these loans were incurred before February 15, 2020.
CWA Interpretation: Please note, only the interest on qualified debt obligations can be used for forgiveness, not principal. Further, most practitioners own their buildings in a separate legal entity and for that reason, a building mortgage would likely not qualify here, but would rather be satisfied under the rent provision. If the building is owned in the operating entity (i.e. dental practice), then the mortgage interest is qualified.
In addition to mortgage interest, practice acquisition loans, equipment loans and build-out loans would also qualify as long as they are secured by the business personal property and were incurred prior to February 15, 2020.
For tracking purposes, it is advised to pay interest and principal separately during this 8-week period to make sure this can be easily identified.
Documentation Needed: Copies of all statements of interest paid on mortgages and loans. This could be a statement from the bank showing principal and interest or a loan invoice, along with evidence of payment.
Utilities are the last qualified expense under the PPP program. These are described by the SBA as phone, internet, gas, water, electricity, etc. Similar to previous qualified expenses, it is important that these service contract agreements predate February 15, 2020.
CWA Interpretation: For our clients, we feel that both office telephone lines and cell phones are qualified expenses. As to what “etc.” includes, we will await further guidance to see if any other utilities qualify.
Documentation Needed: Copies of proof of payment (canceled checks, ACHs, bank statements or wires) or other evidence of utilities paid. Service contracts must predate February 15, 2020, for each utility that you are claiming.
Non-payroll related expenses, such as rent and utilities as described above, can only equate to 25% of the forgivable amount. For many business owners, this will be limited. This doesn’t mean that a business owner shouldn’t use the PPP money for these expenses, it just may be that a portion of these expenses may be limited for forgiveness.
As mentioned, we expect more guidance on both qualified expenses and forgiveness to be issued by SBA soon. In the meantime, this outline allows business owners who have already received their PPP disbursements to begin to spend on qualified expenses and properly track.
To maximize your forgiveness, we cannot stress enough the need to gather expense information as you spend the money and have it available at the end of your 8-week period.