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Loan Forgiveness Under the Paycheck Protection Plan

As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law March 27, many small business owners were able to apply for – and receive – a loan of up to $10 million under the Paycheck Protection Program (PPP). Businesses – including nonprofits, veterans’ organizations, Tribal entities, self-employed individuals, sole proprietorships, and independent contractors – that were in operation on February 15 and that have 500 or fewer employees are eligible for the PPP loans. If the loan proceeds are used as specified, business owners may apply to have the loan forgiven.

Here’s what you need to know about loan forgiveness under the PPP:

Covered Period

The loan covers eight weeks (56 days) of payroll, rent, mortgage interest and utility expenses. Employers must keep employees on their payroll through June 30. Generally, the first day of the covered period is the same day as the loan disbursement. For example, if the loan proceeds were received on Wednesday, April 22, that is the first day of the covered period. The last day of the covered period would then be Tuesday, June 16.

Alternate Payroll Covered Period. If you pay your employees weekly or bi-weekly, you may elect to have the eight-week (56-day) period begin on the first day of the first pay period following the PPP loan disbursement date. In this case, if the loan proceeds were received on Wednesday, April 22, and the first day of the first pay period following the loan disbursement is Monday, April 27, the first day of the Alternative Payroll Covered Period is April 27 and the last day of the Alternative Payroll Covered Period is Sunday, June 21.

Eligible Expenses

PPP loans cover both payroll costs and nonpayroll costs; however, to be eligible for loan forgiveness, 75 percent of the PPP loan proceeds must go toward payroll costs, with the remaining 25 percent toward nonpayroll costs. For example, a business owner that received loan proceeds of $250,000 must use $187,500 of that amount on payroll costs to be eligible for loan forgiveness. The remaining $62,500 can be used to pay nonpayroll costs as specified below.

If your business does not meet the 75 percent requirement, there will be a proportionate reduction in loan forgiveness – not a complete loss.

Eligible payroll costs. Payroll costs include costs for employee vacation, parental, family, medical, and sick leave. The total amount of cash compensation – payroll costs paid and payroll costs incurred – for each individual employee may not exceed $15,385 for the covered period of eight weeks (56 days) based on an annualized salary of $100,000.

Bonuses can be included as long as this threshold amount is not exceeded. Self-employed individuals and owner employees can use PPP loan funds to cover owner compensation costs for a period of eight weeks only (8/52 of 2019 net profit from Form 1040 Schedule C).

To count toward eligible payroll expenses, employer contributions for retirement plans as well as health insurance must be paid during the covered period.

Loan forgiveness is based on full-time equivalent (FTE) workers and a standard 40-hour work week. A simplified method allows 1.0 FTE for 40 hour work weeks and 0.5 FTE for less than 40 hour work weeks. Calculations can be done using either method to determine which one is most advantageous to the employer. Special rules apply for workers whose salary has been reduced by 25 percent or more. Please call if you have any questions about this.

Businesses that received PPP loans can exclude laid-off employees from loan forgiveness reduction calculations if the employees turn down a written offer to be rehired.

Eligible nonpayroll costs. Specific nonpayroll costs are also eligible for forgiveness; however, they cannot exceed 25 percent of the total forgiveness amount. They must be paid or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period and can include costs that were paid and incurred one time.

  • Payments of interest on any business mortgage obligation on real or personal property incurred before February 15, 2020. These amounts do not include any prepayment or payment of principal
  • Business rent or lease payments (including leases for vehicles and office machinery) entered into force before February 15, 2020; and
  • Business utility payments for services begun before February 15, 2020 such as electricity, gas, water, transportation, telephone, or internet access.
  • Interest payments on debt obligations incurred before February 15, 2020
  • Refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020

Self-employed individuals can use PPP loan funds to cover interest, rent and utility payments are also eligible as long as these amounts are deductible on Form 1040 Schedule C.

Loan Amounts not Forgiven

Any amounts that aren’t forgiven must be repaid in two years at an interest rate of 1 percent, which begins to accrue upon loan disbursement. Payments, however, are deferred for six months following the disbursement of the loan.

Tracking Expenses

Business owners need to keep accurate records of how PPP loans are used. Failing to document or falsely claiming eligible expenses could lead to criminal penalties.

Don’t Delay. Start Planning Now to Maximize PPP Loan Forgiveness

If you’ve received a PPP loan and want to make sure your loan is forgiven, help is just a phone call away.

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Preparing an Effective Business Plan

A business plan is a valuable tool whether you’re seeking additional financing for an existing business, starting a new company, or analyzing a new market. Think of it as your blueprint for success. Not only will it clarify your business vision and goals, but it will also force you to gain a thorough understanding of how resources (financial and human) will be used to carry out that vision and goals.

Before you begin preparing your business plan, take the time to carefully evaluate your business and personal goals as this may give you valuable insight into your specific goals and what you want to accomplish. Think about the reasons why you need additional financing or want to start a new business. Whatever the reason it is important to determine the “why.”

Next, you need to figure out what type of business or new business direction you are interested in pursuing. Chances are you already have a specific business in mind but if not you might want to think about your business in terms of what technical skills and experience you have, whether you have any marketable hobbies or interests, what competition you might have, how you might market your products or services, and how much time you have to run a successful business (it may take more time than you think).

Finally, if you are starting new business, you’ll need to figure out how you want to get started. Most people choose one of three options: starting a business from scratch, purchasing an existing business, or operating a franchise. Each has pros and cons, and only you can decide which business fits.

Pre-Business Checklist

The final step before developing your plan is developing a pre-business checklist which might include:

  • Business legal structure
  • Accounting or bookkeeping system
  • Insurance coverage
  • Equipment or supplies
  • Compensation
  • Financing (if any)
  • Business location
  • Business name

Based on your initial answers to the items listed above, your next step is to formulate a focused, well-researched business plan that outlines your business mission and goals, how you intend to achieve your mission and goals, products or services to be provided, and a detailed analysis of your market. Last, but not least, it should include a formal financial plan.

Preparing an Effective Business Plan

Now, let’s take a look at the components of an effective business plan. Keep in mind that this is a general guideline, and any plan you prepare should be adapted to your specific business with the help of a financial professional.

Introduction and Mission Statement

In the introductory section of your business plan, you should make sure you write a detailed description of your business and its goals, as well as ownership. You can also list skills and experience that you or your business partners bring to the business. And finally, include a discussion of what advantages you and your business have over your competition.

Products, Services, and Markets

In this section, you will need to describe the location and size of your business, as well as your products and/or services. You should identify your target market and customer demand for your product or service and develop a marketing plan is. You should also discuss why your product or service is unique and what type of pricing strategy you will be using.

Financial Management

This section is where you should discuss the financial aspects of your business–and where the advice of a financial professional is vital. The following financial aspects of your business should be discussed in detail:

  • Source and amount of initial equity capital.
  • Monthly operating budget for the first year.
  • Expected return on investment (ROI) and a monthly cash flow for the first year.
  • Projected income statements and balance sheets for a two-year period.
  • A discussion of your break-even point.
  • Explanation of your personal balance sheet and method of compensation.
  • Who will maintain your accounting records and how they will be kept.
  • Provide “what if” statements that address alternative approaches to any problem that may develop.

Business Operations

The Business Operations section generally includes an explanation of how the business will be managed on a day-to-day basis and discusses hiring and personnel procedures (HR), insurance and lease or rent agreements, and any other pertinent issues that could affect your business operations. In this section, you should also specify any equipment necessary to produce your product or services as well as how the product or service will be produced and delivered.

Concluding Statement

The concluding statement should summarize your business goals and objectives and express your commitment to the success of your business.

Help is Just a Phone Call Away

Please contact the office if you have any questions about business plans or need assistance creating one.