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Bea Wolper and Kelly Jasin
EWJJ Law Firm
Columbus, Ohio
May 2020

One important requirement of the PPP loan program is that the recipient small businesses who receive a PPP loan use at least 75% of borrowed funds toward paying their employees ((no more than $100,000 annual salary per employee) as well as benefits (including paid sick leave and insurance premiums) and taxes on compensation) in order for the loan to be forgiven. The other 25% can go toward other costs — such as rent, utilities or paying contractors. The small business is required to sign an affidavit stating it will adhere to this condition in order to receive the PPP loan. Further, in order to be eligible for full loan forgiveness, the business must maintain number of full time staff as well as level of payroll as compared to 2019 rates.

UPDATE: The IRS released a notice early in May to clarify that NO PAYMENTS made with PPP loan funds for expenses that usually would be deductible (such as payroll and rent) will be allowed to be a deductible expense. Businesses must be vigilant…for example, a payroll payment that the business payroll service makes automatically, if funded with the PPP funds, should not be included at the end of the year in that business’s total wage deduction.

The forgivable loan is only that part of the loan which meets these conditions. Otherwise, the PPP loan (or a portion thereof) must be repaid. In other words, if a small business uses more than 25% for other costs, or lays off employees or cuts wages which are not restored by June 30, 2020, that portion may not be eligible for forgiveness.

If a small business follows this rule, then the business does not have to repay the loan…only the interest on the amount borrowed.
We suggest the business owner sets up a “sub’ bank account with its bank —a separate account within the existing larger bank account –called the “PPP Loan Account”. The PPP loan account can then be used to clearly track the use of the funds and how it’s disbursed. This will establish a “paper trail” and help the owner be “over-prepared” in order to account for how every dollar is spent.

A proper paper trail will show… “this is the money I received, and this to whom and in what amount it was specifically disbursed.” The sub-PPP loan account will help the businesses prove that no more than 25% of] the funds from that bank account were directly on costs other than payroll.