Needless to say, the last few weeks have been a hectic, chaotic “roller coaster” for small businesses who are all trying to stay alive and understand and apply for the various relief programs that have been made available, including the SBA’s Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL). If you’ve successfully “navigated” the PPP loan application process, congratulations! (It wasn’t easy, and the large banks in particular distinguished themselves as “awful.”) This article focuses on how to maximize forgiveness of your PPP funding to the greatest degree possible.

Generally, the PPP was intended to fund payroll costs, rent, utilities, and certain other operating-related expenses (“Authorized Purposes”) for those businesses impacted by the quarantine guidelines.  

• First things first, the eight (8) week forgiveness period starts on the date the PPP loan is disbursed.  To the extent you are making adjustments to your payroll (adding employees back for example) or expenses, we’re recommending you do that ASAP. Any payments made after the 8 weeks will not be eligible for forgiveness.

In order to do that, we have assembled some guidance on how to maximize forgiveness of your PPP funding. We will also cover what’s not covered, what happens if you don’t spend it all and a variety of questions to take into consideration. Simply stated, if you are a PPP loan recipient, you have to focus your concerns on the ways to maximize the PPP loan forgiveness, document that process and do it properly to avoid legal issues.

• Next critical point, Lenders will only forgive your PPP loan to the extent it is spent on the Authorized Purposes in the eight weeks after receiving the loan; 75% of which must be spent on Payroll Costs and no more than 25% on the other Eligible Expenses. 

So there are two components for forgiveness, Payroll Costs (≥75%) and Eligible Expenses (≤25%)

Payroll Costs eligible for forgiveness include (at least 75% needs to be spent here):

• Salary, wages, commission, bonuses or similar compensation 
• Paid vacation, parental, family, medical, or sick leave
• Allowance for dismissal or separation
• Healthcare benefits (including insurance premiums)
• Retirement benefits
• State or local taxes assessed on the compensation of employees

Payroll Costs not eligible for forgiveness:

• Payments to an independent contractor (they are eligible to apply for their own PPP)
• Cash compensation in excess of $100,000
• The employer’s share of federal payroll taxes
• Qualified sick leave and qualified parental leave wages for which credit is allowed under the Families First Coronavirus Response Act (FFCRA)

Other Eligible Expenses (≤25% can be spent here) which are eligible for forgiveness:

• Interest on any mortgage obligation (excluding prepayment or payment of principal on a mortgage)
• Rent on leases in force before February 15, 2020
• Utilities – a “covered utility payment” means “… payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.”
• Interest on any other debt obligations that were incurred before February 15, 2020

• Next critical point, there are two components to Payroll Costs: Capped Payroll Costs and Uncapped Payroll Costs. 
  • Capped (Cash): The amount of compensation expenses eligible for forgiveness is limited to $100,000 per employee on an annualized basis. This equates to $15,385 of wages during the 8-week forgiveness window ($100,000/52 weeks X 8 weeks) – on a paystub there are the payments typically “above the line.” 
  • Uncapped (Non-Cash): The amount of non-cash employee “benefits”, for example health care coverage, retirement and taxes – on a paystub there are the payments typically “below the line.” (We will be updating this list as we learn more.)

Frequently Asked Questions

Do you have an overarching piece of guidance? 

We have two: 1. Tell the truth and only apply for what you believe you are entitled to. 2. DO NOT, UNDER ANY CIRCUMSTANCE, DOUBLE COUNT; I.E. THE SAME EXPENSE CAN ONLY BE COUNTED ONCE.

Do bonuses or increases in compensation count as payroll costs? 

Both the amount of a PPP loan and the loan forgiveness provisions are based in principal part upon the employer’s “payroll costs.”  As defined in the CARES Act, payroll costs include “the sum of payments of any compensation with respect to employees that is salary, wage, commission, or similar compensation.” It remains unclear regarding that exact situation for employee bonuses and raises that would increase payroll costs that are not in the ordinary course of the business. However, during these difficult times, for example a “hazard pay bonus” is appropriate, but don’t go overboard and don’t try to abuse the system.

You should also remain cognizant of the $100,000 annualized “Compensation Cap” per employee.

Am I able to include payments made to independent contractors in calculations of payroll costs?

No – payments to independent contractors are excluded from being an eligible payroll cost for forgiveness. However, one solution could be to change your payment method by converting 1099 contractors to W2 employees.

It is important to appreciate that your independent contractor (1099) and sole proprietors were eligible for a PPP loan and you should check to see if they’ve done that.  (We’re holding out hope that you might be able to make payments to for those independent contracts who did not obtain PPP funding as part of the forgiveness equation).

Can I hire new employees? 

Yes, increasing your payroll, either by amount per employee or the number of employees you have on payroll is a safe thing to do to achieve full loan forgiveness.  

What if I’ve laid people off or cut hours? 

For full loan forgiveness, you must maintain the same number of employees or restore employment to the same level it was prior to February 15th. If you’ve already laid off or furloughed employees, you have until June 30^th to bring them back. A business does not have to rehire the same employee, but you do have to have the same number of employees you had prior to February 15^th (the “Head Count Requirement”). If you have reduced hours, you have until June 30th to return to those original hourly levels.

What if I’ve cut salaries or wages?

You also have to pay salaries and or wages that are at least 75% of what employees were making before the pandemic hit (the “Salary Maintenance Requirement”) If you have reduced pay, you have until June 30th to return to those original pay levels.

What if I pay more than 75% to payroll? 

You can spend more than 75% on payroll costs, but the calculation to determine the forgivable payroll may make some payroll costs not forgivable. (Just because you spend the money on payroll costs doesn’t automatically make it a forgivable expense because of the Head Count Requirement, the Salary Maintenance Requirement and the Payroll Costs Cap on the amount available to pay out to each employee.)

What if I do not spend 100% of the loan proceeds on Payroll Cost or Eligible Costs?
Firstly, from everything we’ve read, the PPP loan will be forgiven for that portion that was properly used and the remainder will remain a 1% interest loan. While there is no clear guidance yet on what you are required to do with the excess, it was suggested by an SBA representative in a virtual “Townhall Meeting” that you have two options: (a) repay the excess immediately and reduce the loan amount or (b) keep the excess and repay it within the two-year loan period. 

Are there other limitations on loan forgiveness?

Yes, if you’ve received an EIDL proceeds from any forgivable advance up to $10,000 on an Economic Injury Disaster Loan (EIDL) will be deducted from the loan forgiveness amount as well. 

What if I don’t follow the exact rules and guidelines for using the funds?
While we expect a certain amount of flexibility given the lack of clarity in the beginning of the PPP Program, the SBA can charge you with fraud for willful false statement and make you repay the misused amounts.

What if I’ve also applied for EIDL and the Grant? 

If you also applied for the EIDL and related Emergency Economic Injury Grant (EEIG), you need to be extra careful. Any “double counting” as mentioned above, could result in you losing out on the chance for total loan forgiveness. If you received the grant, this offsets against your loan forgiveness to the extent if covers the same loss. 

What are the details of the loan if it’s not forgiven? 

If you don’t qualify for full or partial forgiveness, the terms of an unforgiven PPP loan are still generous – 1% interest, paid back over 2 years, with no other borrower or prepayment fees. 

What is the process for the loan forgiveness? 

After the 8 weeks you are required to apply for loan forgiveness.  That application, made to your SBA lender, must include documentation detailing the number of full-time equivalent employees and pay rates (Payroll Costs), as well as the payments on eligible mortgage, lease and utility obligations (Eligible Expenses). Your SBA lender will then make the decision on loan forgiveness within 60 days of receiving your forgiveness application.

Summary for Best Practices

• Clearly document all eligible payroll and non-payroll-related expenses during the 8-week covered period.
• As soon as possible, review and forecast expenses so that you are maximizing the amount that can be forgiven and to get an estimate of what amount (if any) won’t be forgiven.
• If you’re coming up short with the expenses, reexamine your utilities, 401k etc. for additional amounts that can be forgiven.  Wages can also be increased, within reason, to increase forgiveness amount (wage increase must not cause employee’s earnings to exceed 100k per year) and those increases should be for a reason – for example, we’re increasing wages to some degree to make up for the work during the “teeth” of the quarantine and pandemic. Other ways to use up funds: Fund your Retirement plans, 401k, profit sharing or IRA match, consider a signing bonus if new people were brought on.
• Employees who were let go should be brought back on. 
• If an employee can’t, or won’t come back on, get your spouse/kids to do the work and add them to the payroll. Just make sure to maintain the same number of employees, or more,  as you when applied.
• Payroll Costs must make up at least 75% of the forgiven amount; while your utilities, rent, insurance, etc. must not exceed 25% of the forgiveness amount.
• At the end of the 8 weeks the unforgiven amount will be considered a 24‐month loan at 1% interest rate.

Don’t put your business at risk. Protect your business and your employees by using the money as it was intended to be spent and track those expenses carefully so that you can facilitate a fast, no-surprises accounting after the 8-weeks to submit your forgiveness application. 

Please keep in mind this information is changing rapidly and is based on our current understanding of the programs. It can and likely will change. Although we will be monitoring and updating this as new information becomes available, please do not rely solely on this for your financial decisions. 

This blog is for informational purposes only.  It does not constitute legal advice and may not be relied upon as such.  If you face a legal issue, you should consult a qualified attorney for independent legal advice with regard to your particular set of facts.  This blog may constitute attorney advertising.  This blog is not intended to communicate with anyone in a state or other jurisdiction where such a blog may fail to comply with all laws and ethical rules of that state of jurisdiction.