*UPDATE: This post was updated on June 9, 2020, to reflect changes introduced by the Paycheck Protection Program Flexibility Act*
When the Paycheck Protection Program (PPP) was initially launched, there were numerous elements that were unclear for businesses. For many people, the promise of a forgivable loan while their business was reduced or shut down by the pandemic was a desperately needed lifeline. However, concerns about how to get loan forgiveness quickly bubbled to the top.
The PPP was designed to keep people on business payrolls and out of the unemployment system. However, it’s not the only program available to support workers through the crisis. Many people are concerned about their health, as well as their vulnerable family members. Schools and childcare centers have been shuttered for months. For those who’ve been able to access unemployment, the federal government’s extra $600 per week has helped unemployment payments to go farther in covering basic expenses. Between all these factors, as well as other personal situations, many laid off or furloughed workers have opted not to return to work for the time being.
Unfortunately for PPP recipients, a lowered headcount on the payroll puts loan forgiveness into jeopardy—the first contingency for loan forgiveness is maintaining your full-time employee payroll. The money must be spent in the 24 weeks following receipt of funds, and the Small Business Administration will require proof that it covered qualifying costs (payroll, rent, utility payments, and mortgage interest). You also now have 24 weeks to bring your headcount back to the number of full-time employees listed on your loan application. If you’ve found yourself with PPP funds and a reduced headcount, here are a few moves to make now that will help you navigate your way to at least partial loan forgiveness.
- Document everything. If you furloughed your employees and they’ve declined to return to work, keep written records to prove that you tried to rehire them after receiving your PPP funds. The SBA has yet to clarify how this situation will impact your eligibility for loan forgiveness.
- Get creative. What’s keeping your furloughed employees from coming back to work? Are there ways you can address their concerns that allow you to keep them on the payroll through this period?
- Hire other workers. Where possible, increase your headcount by bringing on new team members who replace those who aren’t returning. Does your business use freelancers or 1099 contractors? Consider whether you can hire them as full-time employees and add them to your payroll. The money you pay to 1099 contractors should have been excluded from your PPP calculation as contractors are eligible to apply for the PPP on their own.
If you ultimately cannot meet the headcount requirement for PPP forgiveness, it doesn’t necessarily mean that you’ll have to pay back the entire loan. The PPPFA introduced the ability to justify the reasons that you haven’t been able to increase your headcount. The revised application hasn’t yet been released, but negative business impacts by COVID-19 will be a valid reason. You can also show evidence of good-faith employment offers that were declined by the employee. Ultimately, 60% of the loan amount must be spent on payroll (down from 75% under the original rules).
Remember that if the loan isn’t forgiven, it converts to a 5-year loan term at 1% interest—terms that have gotten even more favorable under recent legislation. Generally, double-dipping on coronavirus relief tax benefits for business has been prohibited. However, there’s also a change coming through the Paycheck Protection Program Flexibility Act that will allow PPP recipients to also qualify for a tax credit that defers payroll taxes.