Capitalizing on Low- and Interest- Free Loans

Shelter-in-place orders appear to be staying for a little while longer, and while some construction sites have been reopened, stretching cash continues to be critical for most contractors. With stimulus funds slowly starting to hit bank accounts, we rounded up some reminders and tips on how to make it last.

Maximizing your PPP

By now, many small businesses have received their PPP loans. In fact, construction was the biggest recipient of the loans in the first round with 13% of all funds going to small business contractors. But if you haven't already applied, the second round of PPP funding is still open. Contact your local bank or SBA loan provider to apply.

Although the loan is forgivable if used for certain expenses, many contractors we speak with are viewing it as a low-interest loan. They question the logic of using it for payroll expenses when most or all projects are on hold, and when employees can benefit more from boosted unemployment. Instead, they plan to use it as a bridge once projects reopen and they await receivables.

But, if you are planning to maximize your loan forgiveness, a few things to keep in mind:

  • The 75% rules - At least 75% of your loan expenses should be for payroll and employee pay should be at least 75% of the pre-pandemic level.
  • Maintain FTE - Forgiveness requires that you maintain pre-pandemic headcount, but critically, the IRS issued guidance that says the FTE count can be considered as of June 30, 2020. While the 75% rules still apply, this should provide more flexibility to meet the requirements. Additionally, the SBA issued guidance indicating that if a written offer to rehire a worker, and the worker declines - that employee will not be counted against the FTE requirement.
  • Documentation - Ideally open a separate bank account just for your loan, and document everything. Update May 15: The SBA just released the PPP Loan Forgiveness Calculation Form. You can access it here.

Social Security Tax Deferral

Would you like an interest free loan? As part of the CARES Act, you can defer the employer portion of social security taxes - even if you received a PPP loan with some restrictions.

The act allows employers to defer the employer portion of employees' 2020 social security tax for up to two years. So you'd pay half the taxes at the end of 2021 and the remaining half at the end of 2022. And for PPP recipients, you are eligible for deferral up until a decision is made on your loan forgiveness.

Your payroll provider should be able to assist you with this deferral, and definitely speak with your accountant for details, but you can find out more in an IRS FAQ.

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The information contained in this post is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.