According to a recent poll conducted by the ADA Health Policy Institute, more than 74% of dentists have applied for the Small Business Administration’s Paycheck Protection Program (PPP) loan, which can be forgiven in full and converted to a grant if the program’s requirements are met by the borrower.
Of those who submitted applications, half have been approved and 34% are awaiting a decision. For the practices that do have money coming to them, the next question will be what, when, and how to most effectively spend this financial relief from COVID-19.
“PPP guidance from the Small Business Administration is evolving on a daily basis,” explains Kate Willeford, CPA and President of The Willeford Group. “Things are continuing to change, but we are following it very closely to keep dentists fully informed about using these funds.”
With SBA guidance on spending limitations and loan forgiveness still being finalized, below is the most updated information regarding the PPP loan.
How should you spend the money?
The short answer… it will depend on your reason for requesting the loan.
The longer answer…
If you are using the funds for working capital and long-term survival, you may not be as concerned with following the guidelines for full loan forgiveness. If that is the case, you can hold the money until your office reopens, even if that extends beyond the eight-week period that begins when you receive your loan disbursement. Then, you’ll just need to repay any amount that doesn’t qualify for forgiveness over a two-year term (deferred six months) at 1% interest.
If, however, you are hoping to have the entire loan amount converted to a grant, then all of your allowable expenses (see section below) must be documented during the eight-week period. You must also meet two important criteria.
First, your number of full-time equivalent employees cannot be reduced by more than 25% of the number of employees you had on payroll February 15, 2020.
Second, you cannot reduce a team member’s salary or wages by more than 25%. If you do, the forgiven amount will be reduced. If you already let workers go (between February 15 and April 26, 2020), you will have until the sooner of the end of your eight-week period or June 30 to rehire 75% of the full time equivalents.
What can the money be spent on?
In order for the PPP loan amount to be forgiven and converted to a grant, you must use the money for designated expenses.
Payroll costs must account for at least 75% of your expenses and the remainder can be allocated for mortgage interest, rent, phone and utility charges. Note that, for rent payments to be forgiven, you must have a lease that was in place prior to February 15, 2020.
Payroll costs include:
- Gross wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee)
- Employee benefits including payments required for the provisions of group health care benefits, insurance premiums, and payment of the matching contribution for the retirement plan deferrals made during the eight weeks
- State unemployment and local taxes assessed on compensation
- For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee
When should you spend the money?
How soon you put your PPP loan to use primarily depends on how desperately you need it, but there may be good reasons to wait as long as possible to maximize loan forgiveness.
The PPP loan is intended to cover eight weeks of payroll expenses and any additional amounts for making payments towards debt obligations. As it stands, those eight weeks start as soon as the money is disbursed to the borrower. However, the AICPA has suggested to the SBA that the eight-week period should only begin once stay-at-home restrictions are lifted, not when loan proceeds are received. There is also a grassroots effort to push the start date back to when the business actually reopens.
But with the clock already ticking, dental practices who already have the money in hand are wondering if they should begin using the money.
“If you need to spend the PPP loan money over the first two weeks, go ahead,” says Kate. “However, I would recommend spending it very cautiously and spend less than 20% on rent, mortgage interest, and utilities so you don’t overspend. If you have the flexibility to be able to wait to spend the loan money, I would continue to wait.”
Also keep in mind that, as of right now, you are not required to rehire your dental team as soon as you receive the money. Unless you are in a state that will reopen within the next two weeks, it may be more profitable to continue to have your employees collect unemployment until you know exactly when you will reopen. In states with partial unemployment, your team will lose their unemployment pay once you pay them more than the allowable amount in your state, which has been increased to $275-300 per week in some states.
There is very little downside to waiting, unless you are at risk to default on your rent or mortgage, you are paying your team for partial work and need cash to meet payroll, or you have team members you want to make whole who are receiving less pay on unemployment than they would from you.
“You will definitely have plenty of time to spend the loan money, even if the guidance states you must spend it in the remaining 3-5 weeks,” adds Kate.