Investing Retirement Funding Tax Planning

Your PPP Loan Was Forgiven. Awesome—Now What?

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Originally written for ForbesWomen

Katie was a teacher for 10 years, specializing in working with non-verbal children with autism and other neuro-diversities. In July 2019, she realized that she wanted to work with these same children in a more targeted way in order to make a bigger difference for them and their families, and she started a therapy and educational consulting business.

Her business was taking off and she was making big plans! And then in March 2020 COVID-19 shut everything down where she lived.

Even as a solo-preneur with a relatively new business at the time, she was one of the nearly 12,000,000 business owners able to apply for and receive a Paycheck Protection Program (PPP) loan from the Small Business Administration in 2020. She was also able to pivot to online services and lesson plans that kept her cash flow going through the worst of the lockdown. 

Katie met all the requirements necessary to have her PPP loan forgiven, and since her cashflow had held steady, she had $12,000 of extra cash sitting in her business account that she wasn’t sure what to do with.

Another business owner, Mark, has owned an accounting firm for 25 years and had 10 employees before the pandemic hit. He also qualified for a PPP loan in 2020, and received about $190,000 to cover payroll. His firm ended up having a better than usual year in 2020, and while he also qualified for full PPP loan forgiveness by meeting all the criteria for paying and retaining his employees, he still ended up with more than $200,000 of extra cash on his company balance sheet.

Why is this important to talk about right now? 

Because if you were one of the business owners that applied for and received a PPP loan to make sure you would be able to keep your business open amidst all the uncertainty of COVID-19, and then you ended up having a good or even great year in 2020, you might be sitting on more cash in your business than you’ve ever had before, whether that’s $12,000 extra or $200,000 extra or more. 

If you crossed all your t’s and dotted all your i’s and your loan was forgiven, that excess cash is now free and clear to use as you see fit. Meaning after all accounting was done, you spent the amount you received in PPP loan money on the expenses you were supposed to spend them on, and the cash that is now on the sidelines in your business is from sales and profits.

What that also means is that you have an opportunity to put your finances on more solid footing than you’ve ever been on before! So what steps do you need to take next?

Step 1: Talk to your CPA or accountant. Make sure that you have all the records you need to show your loan forgiveness in case you are audited in the next 6 years, and ask about the distribution rules for your specific company structure. Whether you’re a sole proprietor, partner in a partnership, an S-corporation or a C-corporation, you need to know what your distribution rules are for your particular business type. 

Step 2: Determine the amount you need for a cash reserve in your business. This can vary depending on your industry, but having 6 to 12 months’ worth of fixed expenses in easily accessible accounts is typically a good amount to start with. Once you’ve figured out the amount to keep as a cash reserve, set that much aside. 

Step 3: Determine how much cash you have in your business that is over and above your cash reserve amount. This is the amount that you can reallocate! 

Step 4: Check your upcoming cash needs. Is your tax savings account on track to cover your typical tax bill? Is your retirement savings account on track to fully maximize your retirement savings for 2021? Are there any other expenses that you might need to cover within the next 6 to 12 months? If any of these accounts are low, consider topping them off. 

Step 5: Consider investing the rest for the future. Talk to your financial advisor about the best way to invest any excess cash that remains, and/or how to invest your excess inflows now that your reserve accounts are all topped off!

We’ve all been through an uncertain year, but if your business has made it to this point and you still have much higher cash balances than you need for a cash reserve, you’re leaving huge growth potential on the table by leaving your cash on the sidelines. Making a plan for your cash and knowing what you need to sustain your business, without keeping too much on the sidelines, will allow your money to work just as hard for you as you work for it.