Hindsight is 20/20, the saying goes. But in most cases, hindsight doesn’t matter much.
Knowing now that I should not have sold those Microsoft shares I bought in the mid-1980s? Not terribly actionable.
Similarly, knowing now that you should have, or some client should have handled the Paycheck Protection Program loan differently? That insight matters little to most PPP borrowers.
Yet some people only recently got their PPP loans. And the PPP loans are still available for at least a few more days. So, I thought it’d make sense to identify the comments we’re hearing from people about what they wish they’d done.
Here’s the list…
You Maybe Should Have Waited
A first comment we hear? Waiting made sense. Waiting until the rules were fleshed out and so a borrower was more likely to get the right and often a bigger amount, for example.
And then as importantly for the firms who needed the most help? Waiting to start the spending of the PPP funds. The idea here being that many firms should have paused their operations, maybe gotten through the first lock downs, and only then started spending when they really had customers or clients to serve.
You Possibly Should Have Relied on Unemployment
A related comment? As hard as it is to say, probably many firms should have furloughed employees. Employees would have enjoyed generous unemployment benefits in many cases.
And then, when a firm was able to begin operating, a firm could have turned on the spending and hopefully ramped up hiring as it ramped up revenues.
You Probably Should Have Stayed in the Safe Harbor
A couple of other comments related to the actual application for a PPP loan.
First, a firm borrowing or eligible to borrow an amount only slightly over $2 million? Firms in this situation probably should have borrowed less than $2 million and so qualified for the certification safe harbor.
I find it hard to believe that someone should have borrowed an extra $100,000 or $200,000 when that extra money meant tripping over the $2,000,000 threshold. Tripping over that threshold, as you probably know, means much closer inspection and review of the PPP loan applications.
You Maybe Should Have Stayed Under $150,000 Loan Amount
Another comment about dialing down the loan amount requested…
Lots of people know this now, but any borrower who received more than $150,000 in PPP loan proceeds was named and shamed, so to speak. This is unfair, surely nearly everybody was trying to follow the rules.
But if you were close to that $150,000? It maybe would have made sense to sneak in below $150,000. That would have kept your name, the rough size of your loan, and the number of employees your firm employs private.
Note: Click here to see the borrower names and PPP loan details.
You Could Have Strategically Delayed Paying Bills Especially Payroll
The crazy accounting method the loan forgiveness application uses? It counts payments on old bills and payroll amounts as potentially forgivable.
Last month’s rent check counts toward forgiveness if you pay the rent within the “covered period” that the forgiveness formula looks at.
So does payroll from last month that you pay within the covered period.
If you’d known the accounting worked this way—from the very start—you could have used PPP funds to get straight with employees and vendors. And that might have meant you retained other funds for whatever else you need to get your business back and fully operational.
You Usually Should Use the 24-week Covered Period
The PPP loan forgiveness formula lets you look at spending within an 8-week window, or covered period, or within a 24-week window.
Almost everyone should use or should have used the 24-week window. The basic reason? The PPP loan provided funding for roughly 10 weeks of payroll. Accumulating that much payroll spending happens easily if you get a 24-week window.
You Possibly Should Have Emphasized Mortgage Interest, Rent and Utilities Spending
So, the PPP forgiveness rules say spending on mortgage interest, rent and utilities must equal 40 percent or less of the forgivable spending. Another way to say this same thing? A borrower needs to spend at least 60 percent on payroll.
But here’s the thing: Borrowers logically should have tried to spend a full 40 percent on the non-payroll stuff.
Two reasons explain this optimization. The big reason? Furloughed employees in many cases had another way to stay financially healthy—generous unemployment benefits.
And then a small reason exists too. When an employer spends on payroll, each dollar of payroll typically requires additional costs that aren’t forgivable.
This is subtle but every dollar counts if your firm’s financial survival is at stake. So, consider a couple of examples. A firm that spends $10,000 on payroll gets $10,000 of forgivable costs but also triggers $800 or so of federal payroll taxes that it must pay but which it does not get forgiveness for.
In comparison, a firm that spends $10,000 on, say, rent or utilities, gets $10,000 of forgivable costs and the firm incurs no additional costs.
Some Sole Proprietors Should Pay It All as Payroll
One important exception to the previous “shoulda.” Sole proprietors without employees? These small business brothers and sisters should probably pay out all their PPP loan as payroll to owners. Or more accurately what the PPP rules describe as “owner compensation replacement.”
This simple approach produces two benefits. First, it means the documentation required for forgiveness is simpler and hopefully “do it yourself.” Second, this approach probably means the sole proprietor pays zero income taxes on the PPP loan.
Note: The forgiveness of the PPP loan doesn’t create income. But any tax deductions paid with PPP loan money get disallowed. The combination of these two accounting conventions mean in effect the PPP loan proceeds are usually taxed. However, a sole proprietor’s draws of “owner compensation replacement” aren’t tax deductions and so should not be disallowed. Which all means—and sorry for the minutiae—that most sole proprietors get a little extra tax bonus.
Many Folks Should Have Slowly Ramped Employment Levels
One last awkward comment. While the purpose of the PPP loans was to protect employee jobs, I think a business owner could have reasonably thought not about protecting jobs over the first few weeks of the COVID-19 pandemic. Instead, a business owner could have thought about protecting jobs over the long run. Including when this dark storm ends.
Accordingly, once the PPP statutes allowed a 24-week covered period, or spending window, most firms could have slowly ramped up their payroll over 24-weeks and then still spent enough to meet the requirements for getting full forgiveness.
Note: In our last blog post about PPP forgiveness, we describe how a firm that halves its payroll still gets nearly complete forgiveness. And that’s even before trying to use one of the safe harbor excuses.
Two Final Comments
Accountants—and you maybe know this—tend to suffer from compulsive personalities. Sorry.
Accordingly, I am compelled to close with these two comments: First, if you haven’t get applied for a PPP loan, get on it if you need the funds. Further, use what we all know now to make the smarter choices about using the PPP loan funds.
Note: Make sure any of your procrastinating small business friends have applied too. (Yeah, sorry more compulsive behavior.)
Second, if you’re still in the process of spending your PPP loan money, see if you can use one or more of the gambits listed above to get a little more mileage out of the program. Every little bit will help you rebuild the balance sheet you’ll need once we get through this storm.