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10 Ways to Maximize Your PPP Loan Forgiveness

By Dan Biewener

The prospect of loan forgiveness is one of the most attractive benefits touted by the Paycheck Protection Program (PPP). Its aim is to help relieve small businesses and their employees during the economic impact of coronavirus/COVID-19. Thanks to a second round of funding, there is still time to apply. To recap, the PPP is a 1% interest loan that can convert into a grant — as long as you spend the funds according to the program rules.  But PPP loan forgiveness is not automatic. In fact, borrowers will have to submit a forgiveness request to the lender.

Many businesses find the conditions so vague, contradictory, or unachievable, they have resisted applying. Even some whose loans were already funded have said they are so worried the PPP could land them in even worse debt, they are afraid to actually spend the money. If you’ve already received your PPP loan, congratulations — but you now have just eight weeks to use the funds appropriately, or you’ll have to repay them within the next two years.

Here are some clarifications, considerations, and suggested documents that can help achieve your maximum PPP loan forgiveness. Last updated on May 18, 2020, this information is based on what we’ve learned from the guidance available. Fortunately, the SBA finally released official guidance on Friday, May 23rd, releasing its PPP Loan Forgiveness Application Form (SBA Form 3508).  While forgiveness details are complex, two overarching principles stand out: follow the PPP’s intent, and carefully document.

1. Remember the Basic 75% / 25% Rule

The CARES Act established the PPP to help small businesses maintain their employees and their payroll (or your own expected income in the case of sole proprietors or independent contractors) over this next period of eight weeks. Qualified businesses can borrow up to $10 million at a 1% interest rate, calculated based on 2.5 times your average monthly payroll costs.

As the program’s name implies, its intended purpose is to keep employees (or yourself) paid and employed, with some allowance for operating expenses like the business’ rent, vehicle payments, and utilities. As a general guideline, your business is eligible for loan forgiveness if you allocate 75% of the loan money to keeping all the full-time equivalent staff on payroll, with no more than 25% allowed for other overhead.

2. Documentation Can Be Your Salvation

Don’t take for granted that the Small Business Administration (SBA) will forgive you simply on the assumption that you used the funds appropriately. Similarly, lenders cannot promise that the government will forgive all or any portion of the loan. The burden of proof will fall on you. Therefore, your best protection lies in the thoroughness of the documentation you maintain during the loan forgiveness period, as well the documents you provided when applying to your PPP lender. 

3. Upon Loan Approval, Check These Numbers 

If your loan was approved, you’ll get an email with an SBA loan number and the loan amount. When that happens, immediately do some math, because you’ll need to know three numbers:

  1. 75% of the total loan amount. That’s the minimum you’ll need to spend on payroll over the next 8 weeks to be eligible for forgiveness. For example: if your loan is for $48,000, you’ll need to pay at least $36,000 to your employees.
  2. Your number of FTE employees.
  3. Each employee’s average monthly salary or wage. 

Numbers 2 and 3 are important because your total loan forgiveness can be diminished if you reduced employee headcount or compensation during the eight-week forgiveness period.

4. Calculate Your Headcount

To determine full-time equivalent (FTE) employees, follow the instructions on page 7 of the SBA’s PPP Loan Forgiveness Application Form. For each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. A simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the Borrower.  Make sure to keep records that show your work on these calculations.

Any reduction in loan forgiveness will be based on the difference between two numbers: 

  1. Your number of FTEs at work during the eight-week loan window, and  
  2. Your number of FTEs at work during one of these baseline periods (whichever is lowest):
    • February 15, 2019 to June 30, 2019 (19 weeks)
    • January 1, 2020 to February 29, 2020 (8 weeks)
    • If you’re a seasonal business, you also have the option of using either date range above, or any consecutive twelve-week period between May 1, 2019 and September 15, 2019, whichever yields the lowest FTEs.

For example, if you had 20% fewer FTE employees during the eight-week loan window, then your loan forgiveness will be reduced correspondingly by 20%. 

5. Keep Layoffs from Affecting Forgiveness

Did you have to lay off or furlough employees between February 15, 2020 and April 26, 2020? If you see you’re going to  come up short in your FTE headcount, you may still be able to avoid that reduction penalty. As long as you rehire all those employees (or an equivalent number) by June 30, 2020, then they will be included in your FTE count for the eight-week forgiveness period.

If those employees don’t want to return, you may be able to fix that too. 

  • It’s the headcount that counts — so you could even hire new employees to replace them. 
  • Whether you rehire or replace, be sure to pay them at least 75% of the previous compensation, to avoid the forgiveness penalty for reduction in pay. 
  • In determining FTE headcount, there are three exceptions that let you claim an individual as a FTE even though they are no longer employed with the company on the date of your forgiveness application. These are: 1) an employee that was “fired for cause”, 2) an employee who voluntarily resigned, or 3) an employee who voluntarily requested and received a reduction of his or her hours. In all of these cases, you’re only allowed to claim this individual if the position was not filled by a new employee. Any FTE reductions in these cases do not reduce the Borrower’s loan forgiveness.
  • If a former employee refuses to come back to work (at the same hours and pay as before the layoff), document that communication. As long as you keep a written record of your offer to the employee and a record of their refusal, you can submit these later with your loan forgiveness application. Their FTE hours won’t be counted in your comparative averages, and you may still qualify for loan forgiveness. 

6. Consider rehiring even if you can’t reopen yet

One common question over the headcount issue is: how can you rehire employees if your business is still closed, even as mandated by stay-at-home orders? If your goal is to maximize forgiveness of the loan, current guidance from the SBA suggests you pay your employees anyway, whether your doors are open or they can work from home or not.

“It’s counterintuitive, but Congress designed this program as a way for small businesses to keep their employees rather than laying them off and putting them on unemployment,”advises Neil Bradley, executive vice president and chief policy officer at the U.S. Chamber of Commerce. “[Congress] anticipated that you might be paying employees who actually physically can’t come to work who aren’t providing services — but they would rather pay you (through the paycheck protection program) to pay those employees rather than you laying them off.”

7. Keep Wage Cuts from Reducing Forgiveness

Because a pillar of the PPP is to keep workers paid, your loan forgiveness may be reduced if you cut the average wage of any employee by more than 25%. While the SBA has yet to issue guidance on how  the amount of loan forgiveness would be penalized, it’s assumed to be on a dollar-for-dollar basis. The SBA form 3508 (PPP Loan Forgiveness Application) includes instructions on calculating the forgiveness amount.

So, for the eight-week covered period, you need to pay your employees at least 75% of their average wage based on what you paid them in 2019 (or if 2019 data isn’t applicable, based on their gross wages in the first quarter of 2020). This rule does not apply to employees who earned an annual salary of $100,000 or more ($8,333 per month) in 2019.

Note that there is a limit to the cash compensation any individual employee can be paid during this eight week period: $15,385 (i.e., $100,000 prorated over eight weeks). Keep this in mind if you’re considering adding bonuses such as “hazard pay” to help maximize forgiveness.

As part of your PPP loan application process, you should have already calculated your monthly payroll costs according to the guidelines provided for employers. It’s in your best interest to double-check and have those figures and supporting documents at your fingertips.

In the event reductions were made, you have one recourse. If, by June 30, 2020, you restore the employees’ pay to the same wage that they earned as of February 15, 2020, you can avoid this wage-reduction penalty.

8. Setup a Separate Bank Account (Optional)

Once you’re approved by the SBA, the lender has just 10 days to put the money into your account, but usually this happens very quickly. To make it easier to manage, track, and later document your loan’s appropriate usage, some accounting firms recommend that you open a separate bank account to hold the PPP funds. If you do this, remember to switch your payroll withdrawal account to your dedicated PPP account for the eight-week period. While a separate account is not required by the SBA, your alternative is to keep very meticulous records of all your finances and expenses, and that can be a headache.

9. Check Your Progress in 30 Days

Halfway through your forgiveness period (or no later than June 30th), take a look at how you’ve spent your PPP funds so far. If you notice that 75% of your expenses aren’t going towards payroll, or that your average FTE headcount or employee wages are below your thresholds, you may have time to make necessary adjustments in how you spend the funds you have left, including considering “hazard pay” bonuses, giving people promotions and raises, or hiring new employees. Just remember that total cash cap of $15,385 per employee if you’re trying to use bonuses or raises to get your payroll spending up to the 75% required for forgiveness. 

10. Prepare and Apply for Forgiveness

Once your eight-week window has closed, you can submit a request to your lender.  As the borrower, you’re responsible for documenting how you used the PPP proceeds and to demonstrate that you did the following: 

  1. Used at least 75% of the loan to cover for payroll costs (or if you’re an independent contractor, replaced your compensation based on your 2019 net income)
  2. Did not reduce headcount during the eight-forgiveness window
  3. Paid each of your employees at least 75% of their average wage
  4. Used the remaining 25% of the loan (or less) for allowable overhead expenses:
    1. Rent or mortgage payments for your business
    2. Interest payments on a mortgage or other loan (such as an auto loan) you use to perform your business (but interest payments on any other debt incurred before February 15, 2020 are not eligible for loan forgiveness)
    3. Utility payments for your business

Even before your forgiveness period is up, it’s a good idea to prepare by organizing what you’ll need. First, ask your lender if they will require any specific documentation. As a general guideline, such documents may include:

  • Payroll reports verifying your number of  full-time equivalent employees and pay rates (during both your baseline period and the forgiveness window)
  • IRS and state tax and insurance filings
  • Records of benefits payments
  • Receipts, canceled checks. or other records of PPP-approved expenses like rent and utilities
  • Statements for interest paid for debt obligations

You must also certify that the documents are true. Once you submit your request, your lender has 60 days to make a decision on the forgiveness.

What If You Don’t Qualify for 100% Forgiveness?

It may be difficult to flawlessly comply with (let alone document) the forgiveness requirements. However, amounts not forgiven simply convert into a 1% interest loan, payable over the next 2 years. There’s even a grace period. You will not have to make any payments for six months following the date of disbursement of the loan. (However, if not paid before the six month deferment ends, interest will still accrue from the date loan was disbursed.)

If there is evidence that you tried to manipulate the program, such as by providing false information, the SBA’s Interim Final Rule warns that you could be subject to additional charges for knowing violations or misappropriations. Furthermore, the rule states, “If a shareholder, member or partner uses PPP funds for unauthorized purposes, the SBA may have direct recourse against such shareholder, member or partner for the unauthorized use.”

Summing Things Up

To maximize your forgiveness, the first and most important step is to consult with your lender on the process and ask what documents you’ll need

It’s also helpful to remember that the payroll protection program was passed for the purpose of preserving people’s pay during the primary period of this pandemic. That’s the basic theme behind the forgiveness rules. There is also legislation proposed to extend the duration of the forgiveness window and add even more clarity to the PPP program. (We’ll update this post to reflect any final rules.)

To maximize your potential loan forgiveness, first make sure you’re not reducing headcount or wages. Then make adjustments (through rehiring or increasing pay) to avoid reduction penalties and demonstrate that you’ve dedicated at least 75% of your loan to paying your employees. Finally, ensure that what’s left over is spent only on approved business expenses.

Three keys to remember are: 1) follow the PPP’s intent, 2) carefully document, and 3) don’t do anything that makes it look like you’re trying to game the system. Just operate your business like you normally would, and play by the rules.

Disclaimer: Fundbox and its affiliates do not provide financial, legal or accounting advice. This content has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for financial, legal or accounting advice. You should consult your own PPP lender or your own financial, legal or accounting advisors before engaging in any transaction.

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