The Paycheck Protection Program (PPP) was created to help business owners weather the economic impacts of the COVID-19 pandemic by providing much-needed funds to take care of operations. The goal was to help keep businesses from closing due to shutdowns and other challenges, but the loans came with stipulations — and misuse of the funds comes with penalties that could be costly for those who received them.
Many business owners thus want to make sure they are using their PPP funds correctly, which can prevent them from having to repay the loans and help keep their business finances in order. Under the CARES Act, there is also the Employee Retention Credit, also known as the ERC, which you can learn more about here. Here are answers to some of the most common questions business owners have about PPP loans and how to use them — including whether they can tap into that amount to rehire employees they were forced to let go earlier in the pandemic.
1. Why Were PPP Loans Important?
COVID-19 turned many businesses upside down. Some had to shutter temporarily due to local mandates and requirements. Others needed to create dramatic changes in their operations in order to protect customers and employees alike.
PPP loans provided the funds necessary to cover immediate business expenses. Small business owners embraced PPP loans through the Small Business Administration (SBA) as a way to stay afloat during the financial challenges associated with the spread of the virus. According to the terms of the SBA loan, acceptable use included:
- Payroll expenses
- Rent/mortgage payments
- Utility payments
- Healthcare payments
Payroll costs represent a significant expense to many businesses, especially those that may have suffered decreased income as a result of COVID-19. Through PPP loans, however, many businesses could keep their employees working even when company income grew unstable.
2. Can I Rehire Employees I Laid off at the Beginning of the Pandemic With PPP Funds?
Yes. Some employers chose to let employees go before they knew whether they could acquire a PPP loan. Others may have struggled to keep employees at work due to shutdowns. Still others may have chosen to let their employees go so they could collect unemployment while not working. Your PPP funds can help you rehire those employees.
3. Do I Have to Hire the Same Employees I Laid off at the Beginning of the Pandemic to Receive Forgiveness for My PPP Loans?
No. If you have the same number of workers that you had before the pandemic, you can use your PPP loan to hire different individuals than those who were laid off at the beginning of it. Many of your employees might choose not to come back in light of their changing circumstances. You can choose to hire new full-time employees to replace them, and you can use PPP funds to continue to fund payroll.
4. What Happens If My Employees Choose Not to Come Back?
Employees may have a variety of reasons for choosing not to return to your business during this period. Some may need to remain at home for health reasons or to care for children who cannot yet return to school in person. Others may have obtained other employment during layoffs. You do not have to choose to replace those employees to receive forgiveness for your PPP loan. However, you do need to show that you offered reasonable rehiring options for employees who chose not to come back, including:
- The same salary they made when they were laid off or underwent furlough
- The same number of hours they had when they were laid off
A note on reduced hours due to employee needs:
In order to receive PPP loan forgiveness, you will need to show that you provided your employees a written offer with the same reasonable payment and hours you provided at the time of their layoffs. Not every employee will want to accept that offer. Some may need to change their hours to provide care for their children or elderly loved ones during the pandemic, or to decrease potential exposure to others. If you have documentation of these changes and that the employee asked for them, you can still receive PPP loan forgiveness.
5. Can I Still Terminate Employees for Cause While Using PPP Loan Funds to Cover Payroll?
You can terminate employees for cause while using PPP funds to cover payroll just as you could at any other point. Make sure you clearly document what led to the employee’s dismissal. This documentation can also help prove that you did not dismiss an employee due to discrimination.
6. How Will PPP Loan Forgiveness Be Handled If I Cannot Bring Back My Full Workforce?
PPP loan forgiveness amounts will be calculated based on the percentage of your workforce you bring back. If you choose not to bring your entire workforce back due to inadequate work for them to perform or restrictions related to the number of people who can be in your business at one time, you may still receive partial forgiveness for your loan. You may not receive forgiveness for the share intended to cover payroll if you do not rehire enough employees to restore your former employee headcount, however.
7. Is There a Deadline for Qualifying for PPP Loan Forgiveness?
To qualify for PPP loan forgiveness, you will need to rehire employees (or hire new employees to replace those who choose not to return) by December 31. The goal of PPP loans is to help reestablish the same headcount and salary levels you had pre-COVID-19, so you should try to rehire those employees as soon as possible.
Get Help from the Tax Professionals
PPP loans can help keep your business afloat as you deal with the disruption caused by the pandemic. Ensure that you do not face full repayment of that loan by making sure you fully understand the requirements of PPP loans and how they impact your business. Contact Silver Tax Group today to discuss your questions about rehiring employees using PPP funds, or to speak with an expert about other tax-related questions you might have.