Maximizing Loan Forgiveness under the Paycheck Protection Program

Authored by
Hayley Ryan

Some companies that were approved for loans under the Paycheck Protection Program (“PPP”) have already received loan disbursements, and we expect that those companies still waiting may receive funds over the next few weeks.

This Memorandum is subject to further review and update as circumstances develop and should not be relied on for any legal advice without consultation with an attorney.

In order to take advantage of the most attractive feature of the Paycheck Protection Program, loan forgiveness, companies should prepare to use these funds in a way that maximizes the available loan forgiveness amount.

Companies can do so by taking the following actions:

1. Open a separate bank account for your PPP funds.

While not required, we recommend you maintain a separate bank account for your PPP funds. Forgivable expenses should either be paid directly out of this account or wired to your operating account in the specific amount of each forgivable expense. This will allow you to show that the funds were used only for approved purposes, and generally create a cleaner audit trail when applying for loan forgiveness.

2. Understand the time period during which expenses are forgivable.

Only forgivable costs incurred and payments made during the eight-week period following the date on which funds are disbursed are eligible for forgiveness (the “Covered Period”). Therefore, to maximize forgiveness, plan to spend 100% of the PPP funds before the end of the Covered Period.

3. Only apply the funds to approved expenses.      

Only the following expenses may be paid out of PPP funds:

Expenses that result in forgiveness:

  • (i) Payroll Costs (see full definition below);
  • (ii) interest payments on any indebtedness secured by a mortgage on real or personal property incurred before February 15, 2020;
  • (iii) rent payments on real or personal property secured by a leasing agreement in force before February 15, 2020; and
  • (iv) payments on utilities (electricity, gas, water, transportation, telephone or internet) for which service began before February 15, 2020.

Expenses which are permitted, but will not result in forgiveness:

  • (i) interest payments on any indebtedness secured by a mortgage on real or personal property incurred on or after February 15, 2020;
  • (ii) rent payments on real or personal property secured by a leasing agreement in force on or after February 15, 2020;
  • (iii) payments on utilities (electricity, gas, water, transportation, telephone or internet) for which service began on or after February 15, 2020;
  • (iv) interest payments on any other indebtedness incurred before February 15, 2020; and
  • (v) continuation of group health care benefits during paid leave, and insurance premiums.

4. Prioritize payroll.

Under the Small Business Administration rules, if you do not spend at least 75% of the loan proceeds on Payroll Costs, the dollar amount of the shortfall from 75% reduces the amount of forgiveness. Therefore, plan to spend as much as you can on Payroll Costs during the Covered Period. All remaining proceeds should be spent on other approved expenses.

5. Be prepared for reductions in headcount to reduce the forgiveness amount.

The forgiveness amount may be further reduced if you have reductions in headcount. To determine the reduction, first calculate the average number of full-time equivalent employees (“FTEs”) per month during the Covered Period, and divide that by the average number of FTEs from February 15, 2019 to June 30, 2019, or January 1, 2020 to February 29,2020 (your choice). The resulting fraction will be your maximum forgiveness amount.  For example, if you have nine FTEs during the Covered Period, but had ten during the applicable prior period, a maximum amount of 90% of your PPP funds that were applied to forgivable expenses will be forgiven.

6. Be prepared for reductions in salary or wages to reduce forgiveness amount.

To calculate the dollar amount by which the forgiveness amount will be reduced due to reductions in salary or wages:

  1. identify all employees who earned less than $100,000 annually during 2019 (“Applicable Employees”) who are still employed during the Covered Period;
  2. for each Applicable Employee, take that employee’s wage/salary rate during the Covered Period and compare it to that employee’s wage/salary rate for Q1 2020;
  3. for any Applicable Employee whose current wage/salary rate dropped by more than 25% from his or her Q1 wage/salary rate, any reduction greater than this 25% amount will reduce loan forgiveness, dollar for dollar.


7. Consider rehiring employees or restoring salaries prior to June 30, 2020 to avoid the forgiveness amount reductions described in 5 and 6 above.

If, by June 30, 2020, you restore your FTE count to where it was as of February 15, 2020, then headcount-related reductions in forgiveness will be excused.

If, by June 30, 2020, you restore the salary/wage levels of Applicable Employees to the level existing on February 15, 2020, then wage/salary-related reductions in forgiveness will be excused.

 

8. Keep meticulous records.

Loan forgiveness will be only be provided for documented forgivable expenses.

Please do not hesitate to reach out to a member of our firm with specific questions about maximizing your loan forgiveness. These are complicated, technical issues that should receive careful attention, and we are here to help.

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“Payroll Costs” consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; and payment of state and local taxes assessed on compensation of employees. The compensation of an individual employee in excess of an annual salary of $100,000 is specifically excluded from the definition of Payroll Costs.

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