Maximizing PPP Loan Forgiveness

By April 17, 2020 June 4th, 2020 CARES Act
Maximizing PPP Loan Forgiveness

Published: April 17th, 2020 at 1:49 PM PST | Updated: May 13th, 2020 at 12:02 PM PST

For more information on the Paycheck Protection Program, please refer to our PPP FAQ. We provide timely updates as the IRS and SBA release additional guidance.

As part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, the government introduced the Paycheck Protection Program (PPP) to provide federal loans for small businesses severely impacted by the coronavirus pandemic. The legislation allotted $349 billion in federal funds for the U.S. Small Business Administration to disperse to approved applicants. As of April 16, less than two weeks after launching the program, all of the $349 billion has been claimed.

If you were one of the more than 1.64 million applications approved for a PPP loan, chances are you still have questions on how to optimize the loan. One of the major characteristics of a PPP loan is the opportunity for loan forgiveness. But do you have the strategies and accounting protocols in place to maximize loan forgiveness?

PPP Loan Forgiveness

Your amount of PPP loan forgiveness may be up to the full principal amount of the loan and any accrued interest as long as you: 1) maintain salary and employee levels, and 2) use your loan proceeds exclusively for authorized purposes during the eight-week period beginning on the date you receive your first disbursement from your lender.

Authorized uses for the PPP loan proceeds include:

  • Payroll costs;
  • Continuation costs of group health care benefits (during periods of PTO for sick, medical and FMLA) and insurance premiums;
  • Interest on mortgage obligations incurred before February 15, 2020;
  • Rent, under lease agreements in force before February 15, 2020; and/or
  • Utilities, for which service began before February 15, 2020.
  • Interest payments on any other debt obligations incurred before February 15, 2020

SBA guidance currently indicates that up to 100% of the PPP loan principal and interest may be forgiven, but full loan forgiveness is not a foregone conclusion. Rather, the amount of the loan eligible for forgiveness depends in large part on the amount of loan proceeds used for Eligible Payroll Costs.

Eligible payroll costs include:

  • Compensation to employees, such as salaries, wages, commissions, cash, tips etc.
  • Employee benefits, including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums and retirement benefits;
  • State and local taxes assessed on compensation; and
  • For a sole proprietor or independent contractor: wages, commissions, income, or net earnings for self-employment, capped at $100,000 on an annualized basis for each employee.

Costs not eligible for loan forgiveness include:

  • Employer paid payroll taxes (e.g., FICA);
  • Employer paid leave amounts under the Families First Coronavirus Response Act (FFCRA);
  • Individual employee compensation above $100,000 per year, prorated for the covered period;
  • Compensation to employees whose principal place of residence is outside of the United States.

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Limitations on PPP loan forgiveness

On April 15, 2020, the SBA issued Interim Final Rules regarding administration, including certain limitations on PPP loan forgiveness. Some of the limitations of note are:

1. The borrower must use at least 75% of the PPP loan proceeds for payroll costs in order to be eligible for full forgiveness of the PPP loan principal and interest amounts.

  • No more than 25% of the forgiveness amount may be attributable to non-payroll costs, and any excess amounts will not be eligible for forgiveness.

2. Additional complex rules were issued regarding measurement of employee headcount and compensation reductions, applicable to both seasonal and non-seasonal businesses.

  • Number of staff: Decreasing your full-time employee headcount will reduce your loan forgiveness amount.
  • Payroll: Decreasing salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019 will reduce your loan forgiveness amount.
  • Re-Hiring: You have until June 30, 2020 to restore full-time employment and salary levels for any reductions made between February 15, 2020 and April 26, 2020.

3. PPP loan proceeds used to refinance an Economic Injury Disaster Loan (EIDL) borrowed prior to January 31, 2020 are not eligible for forgiveness.

Challenges in maintaining payroll/re-hiring

One factor to consider is the desire of employees to go back to work. While this may seem farfetched, consider this: employers are now competing against “boosted” Federal Unemployment Benefits. For example, under the Federal Pandemic Unemployment Compensation (FPUC) program, eligible individuals collecting certain unemployment insurance benefits, including regular unemployment compensation, will receive an additional $600 in federal benefits per week.

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Consequences of unauthorized use of loan proceeds

As part of the PPP loan application, you made a number of certifications. Among these was that “the funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments.”

Therefore, if you knowingly use your PPP loan funds for unauthorized purposes you may land yourself in some hot water. Some of the consequences include:

  • Loan rendered ineligible for forgiveness;
  • Conversion to a recourse liability, meaning the government may seek repayment of the loan from not only the borrower, but also its owners, shareholders, members and partners; and/or
  • Civil and/or criminal fraud charges and other federally prosecutable offenses.

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How to apply for PPP loan forgiveness

In order to obtain partial or full PPP loan forgiveness, you must submit a request to the lender servicing your loan. This must occur either after June 30, 2020, or at the end of the eight-week period beginning with the date of your first PPP loan funds disbursement (if you receive your first disbursement after June 30, 2020).

Your request should include a number of components, such as:

  • Confirmation of payroll costs
  • Documentation verifying the number of full-time equivalent employees and pay rates
  • Documentation of invoices and payments on eligible mortgage, lease, and utility obligations
  • Certification that all supporting documentation provided are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent and utility payments
  • Additional documentation that may reasonably be requested by the lender in support of the above

The lender must then do the following:

  • Collect paperwork from the borrower in connection with the forgiveness request and make an application to the SBA for that forgiveness; and
  • Make a decision on the forgiveness within 60 days.

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Proper documentation

In order to provide the requisite documentation to your lender (and ultimately the SBA) for your Loan Forgiveness Request, it is imperative to have meticulous accounting and documentation of how you spend your PPP loan funds.

We encourage you to implement and maintain proper controls, accounting, and documentation regarding disbursement of your loan funds at least through the eight-week covered period, especially if your PPP funds commingle with other operating funds.

Other considerations:

  • Document spending allocation and disbursement decisions
  • Hold PPP loan funds in an account separate from other operating funds in order to pay for authorized uses
  • Add detail to your accounting system to track these costs separately, including creating a cost center or class code with COVID

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How can Squar Milner help?

The Squar Milner team is hard at work keeping up to date on the provisions of the Paycheck Protection Program and developing key strategies around it. In turn, we can work with you to make sure you are aware of applicable provisions governing the administration of your obligations and opportunities regarding PPP loan forgiveness.

More specifically, we can also help you prepare estimated PPP loan forgiveness modeling calculations to assist with fund allocation and spending decisions, as well as develop sufficient cash flow planning to assist you with budgeting and spending. Our team is also capable of helping you prepare the necessary supporting documentation for the PPP loan forgiveness application.

To dive into the specifics of your situation and guide you and your business through the process, connect with one of our PPP Loan Forgiveness experts. We are here to answer any questions and help you optimize your loan forgiveness strategies.

You can also check out our latest webinar on PPP Loan Forgiveness, found here. Still have questions? Check out our PPP FAQ.

Have questions about how the Payment Protection Program applies to your specific business?

View Our PPP Services


Caroline Banzali
Partner, Tax Services

Pauline Dumas
Principal, Consulting Services

Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.

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