Maximize Forgiveness with PPP Loan Proceeds
Eric Fischer and Rod Kubat with Nyemaster Goode PC share their insights for using the Paycheck Protection Program (PPP) loan proceeds to maximize forgiveness.
Loans from the PPP, established under the Small Business Administration (SBA) as part of the Federal CARES Act (S.3548), can be used to cover expenses for eight weeks starting from the loan origination date. The loan can be forgiven if the use of funds meets criteria outlined by the SBA.
What is Forgivable?
Under the PPP, the following payroll expenses are eligible for loan forgiveness:
- Wages, salaries and other cash compensation up to $15,385
- Vacation and other leave
- Severance packages
- Employer-paid portion of group health benefits and retirement benefits
- State and local taxes paid by the employer
Additional forgivable expenses are:
- Utilities such as water, wastewater, electric, natural gas, telecommunications and trash
- Mortgage interest if the mortgage was in place prior to Saturday, February 15
- Lease payments if the lease agreement was in force prior to February 15
Interest on other debt is an allowable use of the PPP loan proceeds, but it is not a forgivable expense.
Reductions in Forgiveness
For a PPP loan to be forgiven, 75% of the funds must be used for payroll costs during the eight-week covered period. This is an all or nothing test. If the percentage of loan funds used for payroll costs drops below 75% of eligible expenses, no portion of the loan will be forgiven.
There is also a full-time equivalent employee (FTE) test which reduces the amount of loan forgiveness proportionately if a lower employment level is maintained during the covered period when compared to a previous employment time frame.
Under the wage reduction test, employers are only allowed to reduce salaries and wages by a maximum of 25% without penalty for employees who make less than $100,000 on an annual basis. Greater reductions in employee compensation will reduce loan forgiveness on a dollar-for-dollar basis.
For borrowers who had layoffs, furloughs or wage reductions between February 15 and April 26, loan forgiveness restoration may be granted if
- The business rehired those who were subject to the layoff or furlough before Tuesday, June 30.
- The business restored the wages subject to reductions by June 30.
SBA has provided some guidance regarding employees who refuse to return to work when recalled. If a good faith effort is made in writing to recall an employee at the same wages and hours but the individual declines to return to work, that individual employee can be excluded from the FTE test.
When managing a business’s use of the PPP loan, there are several best practices to put in place early in the process.
- Be aware of allowable expenses and monitor the use of funds to ensure 75% or more of the loan funds are used for payroll expenses.
- Segregate the PPP loan in a separate bank account and pay related expenses out of that account. If a separate bank account is not established, use a separate accounting account to manage the funds. This will allow the business to better track the use of the funds.
- Document all PPP loan expenditures and keep those records separated for easy access. This information will need to be submitted to the lender and SBA when requesting loan forgiveness.
- Conduct and maintain the FTE analysis.
- Gather records related to wage reductions and layoffs.
- Compile tax filings during this time frame.
- When the eight-week covered period is complete, apply for loan forgiveness promptly.
- Be prepared for an SBA audit by keeping copies of the loan application and all records. Document why the business needed the loan in the first place and how the funds were used to maintain the viability of the business.
Watch the full webinar to learn more about PPP loan forgiveness and frequently asked questions related to the program below:
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