Maximizing Loan Forgiveness Under the Paycheck Protection Program

Many companies that were approved for the Paycheck Protection Program (“PPP”) have already received the loan disbursements and we expect many more awaiting funds to receive them over the next few weeks. The most attractive feature of the Paycheck Protection Program is the loan forgiveness. In order to take advantage of this feature, we recommend that companies should prepare to use these funds in a way that will maximize the loan forgiveness amount. The following is a list of actions to help do this:

Open a Separate Bank Account for your Paycheck Protection Program Funds

paycheck protection program written on mask with money in the backgroundAlthough it is not recommended, we advise maintaining a separate bank account for your PPP funds. Qualifying expenses should be paid out of this account. Another option is to wire exact forgivable expense amounts to your operating account. This will make it easier to show that the funds were used for approved purposes and create a very clean audit trail when you apply for forgiveness.

Understand the Time Period Which Expenses are Forgivable

First, we recommend that you document the date that you receive the funds in your bank account. Only forgivable costs incurred during the eight week period (“the Covered Period”) following receipt of funds are eligible for forgiveness. In order to maximize forgiveness, plan to spend 100% of the PPP funds during the Covered Period.

Only Apply Funds to Approved Expenses

Only the following expenses may result in forgiveness of the PPP funds:

  • Payroll Costs (full definition below)
  • Interest payments on any indebtedness secured by a mortgage on real personal incurred before February 15, 2020
  • Rental payments on real or personal property secured by a leasing agreement in force before February 15, 2020
  • Utility payments such as gas, water, electricity, telephone, internet, transportation for which service began prior to February 15, 2020

 

Permitted Expenses that will NOT Result in Forgiveness of the PPP Funds:

  • Interest payments on any indebtedness secured by a mortgage on real personal incurred on or after February 15, 2020
  • Rental payments on real or personal property secured by a leasing agreement in force on or after February 15, 2020
  • Utility payments such as gas, water, electricity, telephone, internet, transportation for which service began on or after to February 15, 2020
  • Interest payments on any other indebtedness incurred before February 15, 2020
  • Continuation of group health insurance benefits during paid leave and insurance premiums

 

Prioritize Payroll

You should plan to spend as you can on payroll costs during the Covered Period. The Small Business Administration rules state that if you don’t spend at least 75% of the loan proceeds on payroll costs then the shortfall from the 75% will reduce the amount of forgiveness. The remaining expenses should be used on the other approved expenses.

Reductions in Headcount to Reduce the Forgiveness Amount

woman restructuring staff boxes for headcount reduction for paycheck protection programReductions in headcount may further reduce the forgiveness amount. To determine the reduction, 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 ten FTEs during the Covered Period, but had eleven during the applicable prior period, a maximum amount of 90.91% of your PPP funds that were applied to forgivable expenses will be forgiven.

Prepare for Reductions in Wages to Reduce Forgiveness Amount

In order to calculate the amount which forgiveness will be reduced due to reductions in wages you must do the following:

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.

Should reconsider hiring employees or restoring salaries prior to June 30, 2020, in order to avoid forgiveness amount reductions described 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.

Document, Document, Document

Proper documentation for paycheck protection program is key - stack of files and foldersWe can’t stress enough the importance of keeping meticulous records. Forgiveness of these loans will only be provided for documented forgivable expenses.

Please don’t hesitate to contact us regarding specific questions you have related to maximizing your loan forgiveness. These are very technical and complicated issues that you need to take seriously. We are here to help in any way that we can, please contact us online or call 480.493.2300.

Mark Barone
Mark Barone
Mark Barone has been a tax and accounting specialist for over 20 years. After graduating from the University of Iowa, he joined KPMG as an associate in Chicago before moving to Phoenix in 1998 to work with Deloitte. Barone then transitioned into private practice, and in 2016, he helped to launch Stableford Tax.

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