5 SMB Questions an Accountant Can Answer About the Paycheck Protection Program

As of May 28, 2021, the Paycheck Protection Program has run out of funding. You can learn more about the PPP with our COVID-19 resource hub.

Economic hurdles presented by COVID-19 have brought a new visibility to the issue of whether or not small and midsize businesses (SMBs) should work with Certified Public Accountants (CPAs). Once considered a nice-to-have, these professional services have grown in necessity as businesses face a quagmire of Paycheck Protection Program (PPP) related decisions.

PPP seems like a straightforward way for SMB’s to stay afloat during the COVID-19 pandemic. Business owners can apply for funds to be used largely for payroll costs, and then apply for loan forgiveness if they are unable to pay it back.

In practice, however, it is a bit more complicated and questions abound:

What should you do with the money? Could the United States Small Business Administration (SBA) decide to scrutinize your application? How should you approach the loan forgiveness process? All this and more will be addressed in this article.

It is tempting to try to wrestle with these questions on your own, but it is often best to consult with a CPA – they can help you weigh your options and make the best decisions in the face of uncertainty.

So, without further ado, here are five questions an accountant can help you with on PPP:

1. How Should You Allocate Your PPP Loan?

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the United States government stipulated that borrowers were required to use 75% of PPP funds for payroll costs in order to qualify for loan forgiveness. The Paycheck Protection Program Flexibility Act (PPPFA) changed that, reducing the threshold to 60%.

The flexibility is a welcome development for business owners, but it puts a spotlight on the question: how should SMB owners allocate PPP funds?

In addition to payroll costs, PPP funds can be used for mortgage, rent, utilities, and other debt. It can be overwhelming to decide how to best put the money to use, and that’s where a CPA comes in. An accountant can consider both the future possibility of loan forgiveness and the present needs of the businesses in helping you craft a plan that gives you the best of both worlds.

2. Is an Audit a Possibility for Small Business Owners?

Audits are the worst nightmare of many business owners. Under normal circumstances, it can be difficult to determine what triggers an audit by the IRS. With PPP loans, however, it’s a little more cut and dried.

The SBA has said that it will audit all PPP loans that are greater than $2 million. Does that mean you’re in the clear if your PPP loan doesn’t meet that threshold? Not exactly.

The SBA reserves the right to review loans that are smaller than $2 million. If the SBA decides to audit a loan, it will notify the lender, who will then notify the borrower in writing within five business days. The chances of a smaller loan being audited is unknown, but with more than 5 million loans being approved, the SBA certainly doesn’t have the resources to audit the vast majority of them.

A CPA can ensure that you file all of your forms the right way to minimize the chances of an audit, just like with a regular return for your income taxes. But that still doesn’t completely eliminate the possibility of an audit.

If an SBA administrator decides to look into your situation – for whatever reason – you want to make sure you have all of your ducks in a row. An administrator could look into:

• Loan amount: did the borrower calculate it correctly?
• Loan proceeds: did the borrower use the proceeds for reasons that Congress spelled out in the CARES Act?
• Loan forgiveness: if the borrower applied for loan forgiveness, did they file the application form properly?

A CPA can help you handle a potential audit in two ways:

1. Record keeping

An accountant can maintain all PPP-related documentation and forms including the loan application, payroll records, and financials. On top of that, a CPA can keep spreadsheets that detail how the proceeds of PPP were used.

2. Stand ready to communicate on your behalf.

If an inquiry is made into your PPP-related activities, it could just be a matter of crossing some T’s and dotting some I’s. A CPA will be well-equipped to communicate with an administrator based on their experience. By telling them what they need to know, the audit can potentially be resolved quickly.

3. Should the 24-Week Period Always be Used for a Paycheck Protection Program Loan Forgiveness Application?

One of the best parts about PPP is that it allows qualified borrowers to apply for loan forgiveness. The PPPFA extended the covered period from eight weeks to 24 weeks, meaning that buyers now have 24 weeks to spend their loans on forgivable expenses.

At first glance, it seems obvious that SMB owners should use the 24-week period, but the eight-week period is actually preferable in certain scenarios. Let’s look at a few of the advantages of each period.

The eight-week covered period may be best if:

• It’s harder to satisfy staffing requirements for a longer period because of the coronavirus. Loan forgiveness depends on your ability to maintain the number of employees on your payroll. In a tough economy, many SMB owners are struggling with employee retention; it’s easier to hold out for eight weeks than 24 weeks.
• Getting full loan forgiveness quickly is important. The PPP loan forgiveness rules are not guaranteed to stay the same; waiting to file the application form introduces the possibility that the goalposts will be moved by the time you apply. Moreover, leaving your PPP loan status up in the air can impact your business in other ways. If you want to apply for other loans, for example, a pending PPP loan forgiveness application could adversely affect that process.

The 24-week covered period may be best if:

• An SMB owner needs the 24-week period to spend the bulk of the loan. Many businesses were in such dire straights that as soon as they received the PPP funds, they were able to put all of the money to work quickly. But for SMB owners that were struggling, but not bleeding cash, they may have spent the PPP funds very gradually. If that’s the case, using the 24-week period could lead to greater loan forgiveness.
• More time would be preferable. As stated in the eight-week period section, sometimes it’s preferable to complete the loan forgiveness process quickly. In other instances, however, a business owner may want to take more time to talk to their advisors and chart a course forward.

This decision won’t be too hard for some business owners. For example, if a business owner spends all of their PPP funds in the first eight weeks and then proceeds to reduce headcount by 50%, the eight-week period would likely be the way to go.

For many business owners, however, this decision will not be straightforward. If you’re in that category, a CPA can help you evaluate your options and weigh the pros and cons.

4. Should the Borrower Maximize the Loan Forgiveness Amount at Any Cost?

There has been a lot of fear amongst SMB owners about what portion of their PPP loan will qualify for loan forgiveness. Or if they will qualify at all.

It’s tempting to alter business decisions to qualify. Not having to pay back a sizeable amount of money, after all, could increase cash flows for years to come. But maximizing the loan forgiveness amount isn’t always advisable.

If a business owner, for example, doesn’t believe that their business will return to pre-pandemic heights for years to come – if ever – it might make sense to downsize. The headcount reduction would adversely affect loan forgiveness eligibility, but could still be the right move.

Worst case scenario, the business owner would have to repay part, or all, of the loan at 1%. Interest rates like that don’t come around often. SMB owners shouldn’t let PPP conditions take their focus away from what’s most important: keeping their business afloat until the economy recovers to pre-pandemic heights.

A CPA can help a business owner sift through all of the possibilities. Both the business owner and accountant should zoom out and consider the future of the business – where it will be in 2021 and beyond. Contingencies must be considered.

5. Are You Taking Advantage of All Paycheck Protection Program Benefits for Your Small Business?

PPP is best known as a program that handles the disbursement of funds to cover payroll costs including vacation, parental, family, medical, and sick leave. But that’s not all it does. The latest updates state that businesses that received PPP loans can delay the payment of payroll taxes, which was not possible under the original CARES act.

As it pertains to the tax delay, SMB owners should consult with their CPA and see if it makes sense to take advantage of this benefit. It’s important to note that this is a delay; payroll taxes will not be forgiven.

Broadly speaking, this is an example of an easy-to-overlook benefit of PPP. A CPA can comb through the CARES Act, the PPPFA, and any other updates to see if there is a little-known benefit that can potentially be of great assistance to you.

Here are FAQs that can help you answer some of the more basic questions on your PPP eligibility including self-employed and full-time job status.

Don’t Be Afraid to Ask for Help

The Paycheck Protection Program can be a game-changer for your business, but you want to extract as much of a benefit as possible from the program. That way, your business has a high chance of weathering the COVID-19 storm. In many situations, you should talk to an accountant to ensure you properly weigh all of your options and make the right moves.