April 16, 2020

Using PPP Loan Proceeds to Maximize Loan Forgiveness

Updated 6/8/20

One of the biggest areas of CARES Act that benefits businesses is the Paycheck Protection Program (PPP). With big benefits, comes many questions around one detail specifically: loan forgiveness.

Which loan expenses are forgivable?

According to the CARES Act, if you spend the loan proceeds on four specific categories while maintaining the same level of employees your loan should be forgiven:  

  1. Payroll – The SBA declared that payroll costs include gross salaries and wages of employees up to a cap of $100,000 per year (on an annualized basis), employer-paid health insurance, employer-paid 401k matching contributions, and employer-paid state and local taxes on payroll (e.g., unemployment insurance), among other things. Payroll costs do not include the employers portion of payroll tax expenses such as Social Security and Medicare. Recent updates added a requirement that at least 60% of the loan forgiveness amount must be attributable to payroll costs.
  2. Rent – Eligible rent expenses include payments under a lease agreement in force before February 15, 2020.
  3. Utilities – The CARES Act defines utilities narrowly to include electricity, gas, water, transportation, telephone, or internet service for which service began before February 15, 2020. 
  4. Interest – Interest payments can be for debt obligations that are a liability of the borrower incurred in the ordinary course of business and before February 15, 2020. The underlying debt must be a “mortgage on real or personal property.” This would include debt on real property that is secured by a traditional mortgage lien as well as working capital lines of credit and other indebtedness where a UCC-1 is filed on the borrower’s personal property. This definition does not appear to include unsecured debt.

What are the stipulations for forgiveness?

Beyond the four categories, there are a few other stipulations businesses must follow for their loan to be forgiven:

  • Businesses must maintain the headcount and salaries of employees as the same pre-COVID-19 level.
  • The expenses need to be paid for during the covered period. Recent updates allow the covered period to be up to 24 weeks. Existing loans (as of June 5, 2020) may choose to keep their 8-week covered period.

If these requirements are not met, the loan must be repaid. New loans will have a loan term of 5 years, and existing loans may be modified from 2 years to 5 years at the discretion of your lender.

How can I maximize loan forgiveness?

If your payments follow the above criteria, there are two payroll calculations to use to determine the actual forgivable amount. The first calculation is a measurement of the number of Full Time Equivalents (“FTEs”) and the second is a measurement of actual salary expense. These calculations verify that the expenses are directly related to the purpose of the CARES Act: keeping employees working at wages comparable to pre-COVID-19. 

Headcount Calculation

If a business reduces its full-time employees during the covered period, the forgiveness amount is reduced by a ratio defined as: 

  • The average number of FTEs during the covered period divided by the average number of FTEs during the base period.
  • There are three different options to determine the base period, and borrowers can select the one most favorable:
    • Using 2019 Information –the average number of FTEs per month from February 15, 2019, through June 30, 2019
    • Using 2020 Information –the average number of FTEs per month from January 1, 2020, to February 29, 2020
    • Seasonal Businesses –the average number of FTEs per month from February 15, 2019, through June 30, 2019
  • There are provisions within the act that will help restore some or all of the forgiveness if displaced employees are rehired prior to December 31, 2020.  Please consult your advisor for further clarification. 

Wage Calculation

The CARES Act introduced a forgiveness penalty for companies who reduced wages per employee by more than 25% compared to the most recent quarter before the PPP loan was made. For purposes of this calculation, businesses only need to consider employees who makes $100,000 or less per year. The statute compares an eight-week period to a three-month period, so we expect further guidance will clarify the method of calculation.

How can I start planning?

The loan forgiveness process will be administered by your bank and we expect they will request supporting documentation to validate. Once a loan is received from the PPP program, businesses will need to be strategic about how to bring employees back, how to spend the funds, and how to ensure you receive the maximum amount of loan forgiveness. Here are a few planning points we suggest: 

  • Make sure proceeds are used on covered expenses only to maximize forgiveness
  • Use at least 60% on payroll expenses
  • Keep thorough documentation of how the proceeds are used so you can apply for forgiveness

Our advisors are closely following COVID-19 relief efforts and will continue to publish insights to keep you informed about potential business impacts and benefits. Learn more about the Paycheck Protection Program or visit our COVID-19 Resource Center for more news, tools and insights you need to know in these uncertain times.

It’s important to work closely with your banker and to expect changes as the program is still evolving.

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