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Maximizing PPP Loan Forgiveness – So Many Questions

loan forgiveness

If you’re reading this, hopefully you were able to obtain a Paycheck Protection Program (“PPP”) loan and have either received the funds or will be receiving the funds soon.  If you couldn’t get funded, then there is hope that the program will be replenished soon so keep close to your banker and have your application ready to go.  Now that companies are getting funded the question on everyone’s mind is how to make sure most of this loan, if not all, gets forgiven under the forgiveness provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act and in the various guidance the Small Business Administration (“SBA”) has issued.  And that’s a great question that unfortunately currently has a lot of unknowns until final guidance is issued.

Let’s start with what we do know.  I’m not going to copy/paste verbatim since most of you have a good idea of what these terms mean at this point. 

Once you get the funds, you must retain supporting documentation that you used the PPP loan funds for “allowable uses” (i.e., “Specific Expenses” described below) incurred and paid (see question below as to what this might mean) within the eight (8) week period following your receipt of the PPP loan funds. Although you can use PPP loan funds for Specific Expenses after the eight (8) week period and before June 30, 2020, that portion of the loan will not be forgiven and you will need to repay that portion of the loan within two (2) years of the date you received the PPP loan, at one percent (1%) interest.

So far not too complicated.

Although the goal is to have the full amount of the PPP loan forgiven, the amount of loan forgiveness may be reduced pursuant to formulas found in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The loan can be forgiven in whole or in part. The amount to be forgiven is equal to the amount spent during the eight (8) week period following the first disbursement of the loan proceeds to the borrower (the "Covered Period") on:

    1. Payroll costs (wages, commissions, salary, health insurance, retirement benefits, paid time off (reduced by leave a tax credit was provided for) employer paid state and local taxes on payroll (ex. unemployment taxes) etc.),
    2. Interest payments on mortgages incurred before February 15, 2020,
    3. Rent payments on leases in effect before February 15, 2020, and
    4. Utility payments for which service began before February 15, 2020.

The maximum amount of loan forgiveness for non-payroll expenses is 25% of the amount of the loan. Eligible payroll costs include compensation up to $100,000 in prorated wages, per employee. 

The amount of loan forgiveness is reduced by:

    • Any reduction in the ratio of (1) the average number of monthly full-time equivalent  employees (“FTE”) during the Covered Period; versus (2) those employed during either of two reference periods: February 15 to June 30, 2019; or January 1 to February 29, 2020 (each a "Reference Period"); plus
    • The amount of any reduction in total salary or wages of any employee during the Covered Period in excess of 25% of the total wages and salary of the employee during the most recent full quarter during which the employee was employed—taking into account only employees whose annualized salary was less than $100,000.

To encourage employers to rehire workers laid off due to the COVID-19 crisis, borrowers who rehire laid off workers by June 30, 2020 (see question below on rehire timing), will not be penalized for having a reduced payroll at the start of the period.

A borrower seeking loan forgiveness must submit to the lender an application, which must include:

    • Documentation verifying the number of FTEs on payroll and pay rates for the Covered Period and the selected Reference Period described above, including:
      • Payroll tax filings reported to the IRS; and
      • State income, payroll, and unemployment insurance filings;
    • Documentation, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments;
    • A certification from a representative of the borrower authorized to make such certifications that:
      • The documentation presented is true and correct; and
      • The amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments; and
    • Any other documentation the SBA determines necessary;
    • The lender must make a decision on loan forgiveness within 60 days of the lender's receipt of the forgiveness application;
    • No borrower shall receive forgiveness without submitting to the lender the documentation described above;
    • For the borrower, the forgiven amount is not taxable income.

Simple right?  Yeah, not so much.  Before we get into some of the questions that we have received, we will say that the CARES Act states that the SBA needs to issue final guidance on forgiveness within 30 days of when the Act became law, which would be April 26, 2020 (which is this Sunday).  Does that mean they will meet that deadline?  We will see.  Hopefully some of these questions are answered in the final guidance, which will come out during your eight (8) week period, so you still have time to implement any strategies that may arise from the final guidance.  Also be aware that until that deadlines comes, hopefully anyone telling you how to “maximize forgiveness” leads with a healthy disclaimer that they don’t have all the answers, just their opinion based on what is currently available. 

Anyways, what are some of the common unknowns at this point?

  1. Can you use the funds to pay bonuses to increase your forgiveness?
    1. Good question, as these would be payroll costs during the eight (8) weeks.  However, is that what lawmakers intended when drafting the law, that some of the funds would be used not just to cover “regular” payroll, but also increase pay outs to employees during the 8 weeks?
      1. On one hand, since the SBA imposed the 75% minimum use on payroll, which is not explicitly in the law but is their interpretation, it is next to impossible to obtain full forgiveness if you don’t increase payroll costs during the 8 weeks.  Why?  Well, if you paid bonuses in 2019, or commissions were higher because 2019 was a good year, then those amounts are in your loan request calculation.  Also, since the loan amount was two and a half (2.5) times the average of payroll costs, you have more than you could possibly spend on just payroll in 8 weeks unless you increased payroll costs somehow, either by hiring more people and increasing wages, and the other allowable costs may not be high enough to use up the balance, especially since they’re limited to 25% of the total.
      2. On the other hand, was it really their intention to boost payroll for each employee for recipients of PPP loans or just cover their regular pay during that period?  With limited funds it would seem that covering “regular” payroll during the eight (8) weeks would be their goal, but then you would think the loan application calculation would have excluded one-time payouts like bonuses, which it did not.
    2. The third interim rule issued on April 14, 2020, that primarily focused on sole proprietors and independent contractors had an interesting addition to the discussion of what funds could be used for.
      1. “Payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual) , as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums);” – note the emphasis added is ours.
        1. That’s the first time the $15,385 per individual has explicitly been mentioned.  Previously it was $100,000, prorated as necessary.  Does that mean that you can include $15,385 of pay per employee during the 8 weeks, meaning if you provided a bonus to get them to that amount then it would be acceptable?  Sounds possible.  Hopefully guidance helps clear this up.Can you use the funds to pay bonuses to increase your forgiveness?
  1. Do costs incurred AND paid, or incurred OR paid, count?
    1. This is something else additional guidance will be issued on (hopefully).  If you incur the costs but don’t pay them, do they count?  Or if you pay the costs but they weren’t incurred, do they count?  Or do you have to incur AND pay them in the 8 weeks for them to count?  So many questions.
      1. For example, if your rent is due the first (1st) of each month, and you already paid April but half of April is in your eight (8) week period, do you include half of that rent amount?
      2. Or, if you pay June’s rent a couple weeks early during the end of your eight (8) week period, does it count?
      3. If your health insurance premiums were deferred for April and May and you don’t pay them until after the eight (8) weeks, do they still count?  Or if you pay them with June at the end of the eight (8) weeks, do all three (3) months count?
    2. Right now, it’s difficult to tell.  We would think the SBA doesn’t want you prepaying expenses too far out, but is a couple of weeks acceptable?  We would recommend planning out your expenses during the eight (8) week period to include payments in that period until guidance says otherwise.  This just makes sure that if you can include them if paid, that you’re ready to do so.  Again, guidance should be issued soon, so you will still have time to pay them and include them if you’re allowed.
  2. How do rehires and reversing wage reductions (of more than 25%) work when calculating the full-time equivalents (FTE) ratio and wage reduction impact on forgiveness?
    1. Another good question.  As currently written, the law appears to say that if you bring someone back or correct the wage reduction by June 30, 2020 then it doesn’t count against your forgiveness.  But if that’s outside of your eight (8) weeks does that make sense?  Or if you bring someone back or increase wages on the last day of the eight (8) weeks, does that count?  This is something more guidance should be issued on.
    2. For now, if you reduced wages, then bringing them back up would make sense as it will help you avoid the reduction penalty and help increase payroll spending which will help increase forgiveness.
    3. Increasing your FTE numbers could also be critical, because these reductions are calculated starting with the pool of costs eligible for forgiveness, so if you couldn’t spend it all on forgivable amounts then this will reduce that forgivable amount you were able to get to even further, and depending on the number of employees you have it could be substantial.
      1. One thing to keep in mind is that you can use your headcount from January 1, 2020 through February 29, 2020 as your benchmark, which may be more favorable instead of the average during 2019.
      2. If you are going to have a lower headcount, we would recommend looking at strategies to increase it soon so you can get the rehires or new hires into the forgiveness calculation.
  3. Are lease payments limited to real estate leases, or is it any type of lease with rent, such as an auto or equipment lease?
    1. It is difficult to tell if the lawmakers and SBA’s intention was any type of lease, or just real estate leases.  The third interim rule issued on April 14, 2020 mentions “business rent payments (e.g., the warehouse where you store business equipment or the vehicle you use to perform your business)” which implies it isn’t just real estate leases, but doesn’t explicitly say it applies to equipment or a fleet of rental vehicles for employees.  However, based on the current language, it is possible that any type of lease with rent payments may qualify unless excluded when further guidance issued.

There are a lot of other questions, but those are four that we’ve heard a lot recently and that will have a significant impact on the forgiveness calculations.  Again, there should be additional guidance from the SBA concerning forgiveness by April 26th because the CARES Act requires it.  Until that comes out, in summary, we recommend the following:

  1. Start tracking your eligible expenses so when it comes time to submit you don’t have to go back and try to figure it all out.  Consider contacting your payroll company to see if they can provide a report you can use which would cover your 8-week period.  For other expenses, track them in whatever manner is easiest for you (most likely a spreadsheet listing the expense, payment date, and which category of allowable costs it falls under), and keep supporting invoices, check copies, etc. so they are available.
  2. Delay expenses (rent, health insurance premium payments, etc.) that can be delayed to include them into the eight (8) weeks just in case you can include them.  If they can’t be included, then you had to pay them anyways so not an issue.  But if you can include them, then you have them set up to be paid during the eight (8) weeks.
  3. Think about what is due near the end of your eight (8) weeks and start thinking about paying it during the eight (8) weeks in case you can include it.  Or, could you fund HSA accounts in May instead of July, or could you increase what you contribute to the accounts with a one-time deposit during the eight (8) week period to assist with health care costs right now?  Note, wait to actually pay these costs until more guidance comes out in case you can’t prepay, but start thinking about it. 
  4. If you had to implement wage reductions and those reductions were greater than 25%, consider increasing wages so you don’t get penalized under the wage reduction rule.  This will also help increase payroll costs for forgiveness.
  5. If you anticipate a decrease in headcount based on the most favorable comparison headcount (2019 average or beginning of 2020 average), consider strategies to remedy the reduction by June 30, 2020 (or sooner if possible as it will increase your payroll costs and help avoid any issues if guidance clarifies when they have to be rehired and it is sooner than June 30, 2020) in order to avoid or limit the forgiveness reduction.

One other item that has come up is the deferral of employer Social Security taxes until forgiveness is determined.  The IRS issued guidance that said you were allowed to defer these costs until forgiveness is determined, clarifying that just because you have a PPP loan doesn’t mean you’re excluded from doing this.  But would this reduce your forgivable payroll costs?  The answer is no, because employer Social Security taxes are excluded based on guidance from the SBA (employee FICA is included as part of gross payroll, but you can’t defer that, just the employer portion) issued in their FAQ document (question 16).  Therefore, we would recommend deferring if possible since you can do it for a few months until forgiveness is obtained and it isn’t due until December 2021 and 2022.

If you have any questions or would like to discuss certain scenarios and situations, please contact us.  This can get complicated and while we may not have all the answers right now, we will provide guidance based on what we do know so you can plan and be ready to incorporate strategies that may be allowed. 

Read other posts related to PPP Loan Forgiveness: 

PPP Loan Forgiveness - Updated Guidance for Rehires
May 3, 2020

PPP Loan Forgiveness Application Form Released
May 16, 2020

What You Need to Consider as You Seek Loan Forgiveness – Q&A Highlights
May 20, 2020

Should You Apply for PPP Loan Forgiveness Now?
June 2, 2020

Senate Passes - Paycheck Protection Program Flexibility Act … the forgiveness rules are changing again
June 4, 2020

Trump Signs into Law Paycheck Protection Program Flexibility Act as We Look Towards Future Corrections
June 5, 2020

Should I use 8-weeks or 24-weeks for my PPP Loan Covered Period?
June 10, 2020

Updates and Revisions to PPP Loan Forgiveness – File Early, Reduced Business Safe Harbor
June 24, 2020

As additional guidance becomes available we will continue to post updates and update this article.

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