Maximizing Paycheck Protection
Program Loan Forgiveness
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
Although 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
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
Reductions 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.
Document, Document, Document
We 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 through the form below or call 480.829.8463.