What if one of your clients calls you and tells you he got over 100K in PPP Loan, and he spent about half of it remodeling his premises? Now your client became aware of the payroll 60% rule, and he is very nervous about having to repay the loan.
Well… this is not a far-fetched situation.
This is the case* of Stephan. He has a restaurant, and he got $135,000 in PPP Loan on April 13th, which he used to remodel his restaurants’ kitchen. He had furloughed his employees back in March 28th when non-essential businesses were asked to close.
Stephan had tried to contact his accountant, but the accountant was only focused on tax returns. Stephan was completely on his own. And the future of his PPP Loan forgiveness did not look bright.
A mutual friend referred Stephan to me. I met up with him and began explaining the rules of PPP forgiveness to him. The more I explained, the more pale he got. “I have been so stupid. Does this mean that I have to repay all of it?” he asked. I told him that if we start right now, we should be able to salvage at least a part of the forgiveness.
This required more than just compliance. If I just gathered the data and documentation, made the calculations, and filled out the form, Stephan would have to repay a lot of money. He needed help to maximize his PPP loan forgiveness.
I gathered the information I needed from Stephan. Then I ran a PPP Forgiveness Analysis in MoreReporting looking for ways to maximize the loan forgiveness.
The loan disbursement date was April 13, 2020. Since the Payroll schedule is biweekly, I could choose to use the alternative payroll covered period. That moved his covered period a week backwards. That way I could give him as much time as possible to use money on payroll. Every week counted. Also, because the loan was received before June 5th, I could choose to create an analysis for 8 weeks and another one for 24 weeks.
Choosing an 8-week period wouldn't give him enough time to spend the PPP loan according to requirements to get forgiveness. Stephan had not spent the money wisely. He had not used the money on any of the eligible expenses for PPP loan, such as payroll, rent, utilities, or mortgage interest. Also, he reopened his business later than his peers. So I decided to just go ahead and go for the 24 week period right away (April 13 - Sept. 27, 2020). This way, he would increase the chance to get 100% forgiveness.
Make sure to join the Insightful Accountant webinar with Johan Colvig of MoreReporting, "Maximize Your Clients PPP Forgiveness" today, July 30 at 4:00 p.m. Eastern Time. You can register here.
The first analysis I ran was for the FTE. I knew that since Stephan had furloughed employees for the first part of the covered period, he might face a low FTE reduction quotient. The tool I used automatically selected the most optimal FTE reference period and calculation method. It showed that it was best to use the advanced FTE calculation and that the optimal reference period was 02/15 - 06/30, 2019:
- 10 employees that started May 15th
- 4 employees could not be replaced
- Number of employees during the covered period: 10 (FTE: 7.1)
- Number of employees from 02/15 - 06/30, 2019: 11 (FTE: 10.0)
With this, the FTE reduction quotient was 0.71. I consulted with an attorney to see if we could use the “unable to return to previous business activity” clause. Since Stephan’s county never had a hard close-down, we couldn’t use that clause. In his county, non-essential businesses were only asked to close down. Had he lived in the neighboring county, he could have used the clause.
So the only option was to increase cost so much during the remainder of the covered period, that it evened out the low FTE reduction quotient.
I told Stephan to open up his business right away, even as the kitchen remodelling wasn’t completely done. At least he could open up for curbside pickup. That way, he immediately began to get eligible expenses.
After the soft opening, we estimated the cost for the remainder of the covered period. The payroll costs over 24 weeks would be $163,444. Non payroll expenses would be $25,000 for rent and $5,000 for utilities. The total expenses were estimated to be $193,444. With a FTE reduction quotient of 0.71, the forgivable amount would be $137,345. Since this was above his PPP loan amount, he would be 100% forgiven!
Stephan was really happy when he saw that he didn’t have to repay any part of the loan despite his unwise kitchen remodelling! I was surprised that it was possible to find a way for him to get 100% forgiveness. I don’t think that would have been possible, had I not had a tool like MoreReporting. I continued to monitor his progress on a weekly basis, to ensure that he was on track for 100% forgiveness.
Fortunately, Stephan had some reserves. And he had not spent all the PPP loan amount to remodel the kitchen. We just need to keep close tabs on his cash in case revenue is not at par with the payroll costs for the rest of the covered period.
A few weeks after Stephan signed a contract for my CFO services.
Like Stephan, many other business owners are navigating the PPP loan forgiveness by themselves. They are lost, and they need your help and guidance. They don’t just need
compliance. They need you to have their back, especially in these hard times. For your clients to stay in business and thrive, they need your added value. You need to be proactive and identify areas that need improvement and immediate action, PPP forgiveness maximization being one of them.
Make sure to join the Insightful Accountant webinar with Johan Colvig of MoreReporting, "Maximize Your Clients PPP Forgiveness" today, July 30 at 4:00 p.m. Eastern Time. You can register here.
*Some names and identifying details have been changed to protect the privacy of individuals.
Author Bio: Sofia Carreno is the VP of training and onboarding at MoreReporting. She has 10+ years university teaching experience. She got a masters in Business Administration and English Teaching. She is passionate about empowering MoreReporting's partners. She helps them learn how to efficiently use the software and supports them during their transformation to advisory.