PPP Forgiveness

How to Best Time When to Apply for your PPP Loan

Hindsight is 2020. That being said, you don’t have the luxury of hindsight when it comes to figuring out when is the best time to apply for a PPP 7(a) loan for your practice.

Let’s assume you meet these three conditions:

  1. You have temporarily closed your practice and laid off most or all of your staff.
  2. You do not plan to rehire or replace your staff until you are ready to reopen the practice.
  3. Your practice revenue for the 2nd quarter of 2020 will be less than half of Q2 2019 revenue.

As a general rule, the more you will depend on the PPP loan to provide your practice with crucial working capital during the first month or two back in practice, the sooner you should consider applying since the available funding for this program is limited.

 (The information below assumes you can’t defer when you will receive the PPP funds until you reopen your practice but instead will receive the funds a few days after your loan is approved.)

 If upon reopening your practice you WILL RELY on the PPP loan for working capital:

Most practices that are currently closed that receive a PPP loan in the next few weeks will probably not qualify for much of the loan to be forgiven. To qualify for the full loan forgiveness through the PPP program:

  1. During the 8 weeks following the loan’s origination (covered period), you fully spend the amount of the loan with at least 75% going for payroll costs and the remaining funds used for certain facility expenses.
  2. Your staff count remains consistent between the covered period and the count from either 2/15/19 through 6/20/19 or 2/15/20 through 6/20/20
  3. Salaries paid during the covered period for employees earning less than $100k per year won’t decrease by more than 25% from the gross wages reported during the prior calendar quarter.
  4. You fully staff your office to pre-2/15/20 levels by 6/30/20.

If you receive the PPP loan while your office is still closed, there is a very good chance that most of the loan won’t be forgiven. With your staff collecting state unemployment benefits plus $600 per week from the federal government, why rehire them just to qualify to have the PPP loan forgiven?  Plus, PPP money used to pay salaries for non-working staff won’t be available to you when you finally re-open your practice.

Should you still pursue a PPP loan if it won’t be forgiven?  If the amount of the PPP loan will exceed $5k for each employee that will be rehired when you reopen your practice, you might opt for the PPP loan even if you won’t hire back your staff soon enough to qualify for this loan to be completely forgiven.  The funds received will be available for working capital when your practice reopens and you start building up your patient A/R again, and you can repay the portion of the loan that isn’t forgiven as soon as you can without any prepayment penalties.

While the interest rate for the PPP loan is only at 1%, one big pitfall of the PPP is that the loan needs to be paid back within two years.  For that reason, while the PPP loan is very tempting due to the promise of it being forgiven, maybe take this time to apply for a traditional line of credit with one of the dental lenders or a local bank if the timing of when you receive the PPP loan and when you will be able to reopen your practice won’t result in your loan being forgiven.  A traditional line of credit gives you much more flexibility than the short 2-year term that the PPP will provide.

Please note that there is an option available to practices not taking the PPP loan. These practices are allowed a $5k per retained employee tax credit based on half of the first $10k paid to each employee between the date they are rehired through 12/31/20.  More info on this credit is available at: https://www.irs.gov/newsroom/irs-employee-retention-credit-available-for-many-businesses-financially-impacted-by-covid-19. You are only eligible for the retained employee tax credit if your practice revenue for Q2 2020 is less than half of the revenue from Q2 2019, which sadly most likely applies to your practice.

If upon reopening your practice you WON’T DEPEND on the PPP loan for working capital:

The less you will depend on money from the PPP loan to cover your practice overhead the first month or two back in operations, the longer you might want to wait to apply.

To max out the non-loan money the government is willing to provide to you for hiring back your staff, consider waiting to closer to when you will reopen your office to apply for the PPP, even though there appears to be a decent chance no PPP funds may be available at that time. If you do get the PPP loan, the first 8 weeks of your staff’s pay (and up to $8,333 per month for you) and some of your facility costs could be completely subsidized by the government.

If the PPP funds have already run out by the time you are ready to apply, you’ll instead take advantage of the $5k per retained employee as a tax credit against the federal payroll taxes your practice routinely remits each pay period.  This will give you almost immediate access to these tax credits being generated.

Neither of these two options ends with you having a loan to repay down the road.

And if your practice does need more working capital, any practice not taking a PPP loan can defer paying their matching Social Security taxes for the remainder of the year and repay those taxes over 2021 and 2022.

 

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