You’ve applied for a Paycheck Protection Program (PPP) loan and have received the funds from the Small Business Association (SBA). What’s next? How do you use that money in a way that not only helps keep your dealership afloat but also puts you in the best financial position when it comes time to pay it back?
Well, the obvious answer is, carefully. While we don’t have solid guidance from the SBA on every point yet, we’ll base the following on what we know currently.
What expenses can PPP loan funds be used for?
The CARES Act states that these are allowable uses:
- Payroll costs, including salaries, wages and commissions below $100,000; leave benefits; healthcare benefits; retirement benefits; and state and local payroll taxes.
- Salaries and commissions that are excluded from payroll costs
- Rent, including rent under a lease agreement.
- Utilities on services that began prior to February 15, 2020.
- Interest on covered mortgages incurred prior to February 15, 2020.
- Interest on “other debt” obligations, as long as that was incurred before February 15, 2020.
- Floor plan interest is likely included in “other debt” for floor plan inventory acquired before February 15, 2020; we’re still waiting for guidance on whether floor plan inventory acquired after February 15 is eligible.
What are the PPP loan time parameters?
The PPP loan proceeds must be used for allowable expenses incurred between February 15, 2020, and June 30, 2020. However, the CARES Act also suggests that loans may be originated up to June 30, 2020. This makes things muddy as to whether expenses must occur prior to June 30 and needs further clarification.
PPP loan forgiveness
The items listed above provide a general framework for the types of expenses that are considered for loan forgiveness.
However, of those expenses mentioned above, there is one exception and a couple gray areas that we await clarification and guidance about:
- Interest on other debt: This is not a forgivable expense.
- Rent: We are awaiting guidance on whether personal property leases are an eligible expense.
- Interest: We are awaiting guidance on whether floor plan interest will be considered mortgage interest eligible for forgiveness.
Time restrictions for loan forgiveness indicate that the expenses must be incurred and the funds must be spent within the eight weeks immediately following disbursement.
Situations that can cause a reduction in loan forgiveness
There are some situations that might trigger a reduction in loan forgiveness. One of the main intentions of the PPP was to put people back on the payroll — even if there’s not work for those employees. There’s some gray area here as payroll calculations come into play.
How will forgiveness reductions be calculated?
This is something that we’re waiting for more guidance on. What we know now is that there are three criteria, but we don’t know in what order they must be applied, because that would have an impact on the outcome.
Three things that will trigger a reduction calculation:
- A reduction in employee headcount
- A reduction in employee pay level
- The use of more than 25% of the proceeds for non-payroll expenses
A few practical tips to minimize the impact of loan forgiveness reduction
Until we have further clarification, consider these tips as you move forward:
- With a decrease in showroom and service traffic, it may be necessary to make modifications to pay plans during this time.
- The intent of the PPP is to maintain employment levels during this interruption. Any reduction in headcount or compensation over the eight-week period should be scrutinized and carefully modeled to know the effect on potential loan forgiveness.
- Follow the 75% payroll and 25% non-payroll guidance for the use of loan proceeds.
- Carefully track and document all use of loan proceeds.
- Be sure you have documented in your permanent corporate records or board of director minutes the economic uncertainty facing your dealership and reasons that make this loan necessary to support the continued operations of the dealership.
We know that the National Auto Dealers Association is working to get clarification from the SBA on these gray areas, and we’ll be watching closely.
With questions swirling in this rapidly changing environment, it can be challenging to stay on top of developments. We encourage you to visit our COVID-19 resource center often as new content is added daily. As always, we’re here to help you, if you have questions, please reach out to your Wipfli relationship executive or a member of our dealership practice team.
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