I now have two clients who received the PPP Loan. It's a lifeline...but the rope tossed to these businesses may be a bit short.
The calculation for the loan amount was based upon previous average payroll X 2.5. So a business with $200,000 in 2019 payroll would have an average monthly payroll of $16,666.67. This a gross compensation and does include the employer's share of Social Security, Medicare Futa/Suta or administrative expenses. This example's loan amount would be $41,666.68. The forgiveness of the PPP loan was contingent upon using the funds for calling back previous employees, paying them their average compensation over an 8 week window beginning when the loan was received and achieving an aggregate payroll percentage of 75% of the PPP loan amount. So in the $200,000 example this business would have to pay out compensation of $31,250.01 (75%) over 8 weeks to receive the forgiveness. Up to 25% of the loan proceeds could be used for rent and utilities also receiving forgiveness, What isn't noted is that the addition of employer taxation expenses will in many instances become a debt that is not forgiven. In some states the UI rate is 6% or higher so the potential is Fed at 7.65% and State at 6% for a total payroll related expense add on of about 14%. No small amount for business who may have zero capital and unable to produce revenue.
Allowing that the intention was good there is another major difficulty here. This 8 week period wherein the 75% payroll level must be paid out is during a time when the business is mandated to be closed and cannot produce revenue. Employees getting paid for non-production does not provide increased survival for the business and by the time reopening might be available the capital is gone and the potential rises that the business will close again and stay closed.
Employees who were initially let go due to the covid19 closings went on Unemployment. Due to brilliant Fed action many were paid more than their wages so it was a pretty good deal. If, and that's a big if, employees returned to employment they would likely receive less than they were getting on UI. So, would they return to get less pay, be unproductive and watch the business close again and then return to unemployment perhaps for an extended time? YES. I am seeing that now. In Illinois where clients have been forced to remain shuttered while other States reopen, permanent closures are increasingly likely. This is shameful abuse of the "power" the Governor(s) apparently has under health protection. But in exercising this power, businesses will die and long term effects will be around for years in form of lowered economic activity, employment prospects and of course taxes generated by business for firefighters, police, healthcare workers and unemployment insurance too. An easy fix would have been to permit use of the funds be timed by the business owner to coordinate with reopening and a return to productivity. Accountants knew these flaws and have spoken up. So what to do?
In my practice, I am committed to helping the business survive and that extends to the ownership. After all, these are my clients. That others may get their survival from the business as well is manifest but my main concern especially in this emergency is to help the business survive. With little capital for rainy day funds, many businesses are broke in a few weeks. The PPP seems like a poorly designed lifeline that falls short and just takes employees off one unemployment roll added to another (the business using PPP) and then back again. It's just a dumb plan. However, the PPP loan does convert to a regular 1% interest loan for 2 years if NOT spent as 75% payroll and 25% rent. So, I am now recommending not calling employees back and holding onto the cash letting it become a loan. This will buy time to presumably reopen. Meanwhile the furloughed/fired employees remain on the better paying unemployment and offering employment later after production is possible. A business following this approach will increase debt but under favorable terms AND they will have a greatly increased chance to actually survive. Maybe the previous employees will come back maybe they won't. But the false hope of the spent PPP when closed is just a delayed death.
Of course, some businesses may have circumstances where the PPP used as payroll is fine because the work can be done from employee homes etc., or some limited opening has been allowed. But bars, salons, barbershop, massage services all are facing a discriminatory mandate so I say put survival first. Use the PPP as survival capital. So it's a loan. So what. Just survive and pay it back. Believe me, those who use the PPP just to become another unemployment check source may never get back to truly reopening. There won't be another PPP loan funding from what I see. Those who survive will also get a bonus of less competition. That sounds mean, but it is merely a fact. The neighborhood may have fewer restaurants, salons, bars, etc. for some time so survivors eat. Survival is hard even for tigers. If you survive, you deserve it.
If you want my analysis of your situation, call. Good luck.