July 8, 2020
Everyone has been talking about how to maximize loan forgiveness under the Payroll Protection Program (PPP). I get it. People want their PPP loan to be forgiven so they don’t have to repay the proceeds and the loan effectively becomes a grant.
I read an interesting article in Accounting Today entitled
Is Maximizing Loan Forgiveness the Real End Game?
by Steven Pinsky. The author suggests that there other reasons to take a PPP loan than to meet payroll and covered eligible expenses. Pinsky believes that some borrowers are doing themselves a disservice by focusing on maximum forgiveness instead of maximum long-term viability.
Under the Payroll Protection Program Flexibility Act (PPPFA) funds that are not used in the covered period (increased from 8 to 24 weeks) will be treated as a five-year loan at one percent interest. The remaining funds can be used for any SBA approved business expenses.
Pinsky argues that the borrower should consider:
- If they have the working capital needed to weather the covered period and the months that follow?
- Is there enough cash to support the on-going operations until the borrower can become cash flow positive?
- Does it make sense to pay employees that are underutilized, or worse, to sit at home when many of them can make similar or, in some cases, better wages on unemployment?
These and other questions boil down to Pinsky’s key question: “Am I better off using the PPP funds to maximize payroll and forgiveness, or should I apply them to other approved uses in the covered period and then to additional SBA-approved uses after the covered period?”
Pinsky suggests that borrowers look at the bigger picture of long-term viability. Many businesses have not been able to operate during the recent months. Most, or all, of their revenues have dried up and they still have significant fixed costs. Business owners must make hard choices as to how to survive in the long run. The decisions they make should not solely be based on getting through the 24-week covered period. Companies must look to future months after that. Many borrowers may conclude that maximum forgiveness is not the best avenue forward.
As Pinsky explains in the article, the CARES Act, and the PPP in specific, are not just designed to get companies through the end of the covered period. It is part of a larger effort to keep companies viable through the end of the current economic hardships. Therefore, the effective use of funds to accomplish this goal for long-term viability supports that objective. He gives numerous examples in the article to emphasize his point. I recommend that you
read the article
and consider some of the arguments that Pinsky makes.
Feel free to contact any member of our team at (610) 828-1900 (PA) or (732) 341-3893 (NJ) with questions. Rich Higgins, CPA, managing principal – New Jersey office can be contacted at
Richard.Higgins@MCC-CPAs.com
.
I can be reached at
Marty.McCarthy@MCC-CPAs.com
.
As always, we are happy to help.
Stay safe,
Marty McCarthy, CPA, CCIFP
Managing Partner
McCarthy & Company
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).
