Alerts and Updates

How to Maximize Paycheck Protection Loan Forgiveness

May 15, 2020

You may not apply for forgiveness until at least eight weeks after receiving your PPP loan.

Receiving Paycheck Protection Program (PPP) loan proceeds? If so, we hope it provides much needed cash during these uncertain times. Now what?

Below we summarize the loan forgiveness rules and provide steps you should consider taking over the eight-week period from the point you received the PPP proceeds in order to ensure maximum forgiveness of your loan.

Use the Funds for Forgivable Purposes

Forgiveness of your PPP loan depends largely on whether you use the money to pay forgivable expenses. These include:

  • Payroll costs (if you're self-employed, these costs include the net profit amount from your business, as reported on your 2019 tax return),
  • Interest payments on mortgages incurred before February 15, 2020,
  • Rent payments on leases dated before February 15, 2020, and
  • Utility payments under service agreements dated before February 15, 2020.

However, not more than 25 percent of the forgivable loan amount (the amount of the loan used to pay forgivable expenses) may be attributable to nonpayroll costs. At least 75 percent of the loan must be used for payroll costs. Consider implementing the following best practices to ensure proper compliance:

  • Set up a separate bank account for PPP funds. If not practical, deposit funds into your business savings account and transfer the money to checking and payroll accounts when needed.
  • If it is likely, due to your unique circumstances, that 75 percent of the loan will not be used for payroll, consider modifying your payroll periods (from semimonthly to weekly, for example) or paying out legitimate bonuses toward the end of the eight-week period.
  • Gather and analyze mortgage documents, leases and utility bills to make sure obligations arose prior to February 15, 2020.

If expenses are paid with a business credit card, make sure that portion of the credit card bill is paid with PPP funds before the end of the eight-week period.

Keep Track of Employee Headcount and Salary Levels

Extra care should be taken to make sure these numbers are complete and accurate. For the eight-week period, if your average number of full-time equivalent employees per month is less than the average during the base period, your forgivable loan amount will be reduced.

The base period is either (1) February 15, 2019, through June 30, 2019, or (2) January 1, 2020, through February 29, 2020. An analysis may determine which period produces the best result. Also, your forgivable loan amount will be reduced if salary levels are cut by more than 25 percent. For each employee who earns less than $100,000, compare total salary paid during the next eight weeks with that employee's salary during the most recent full quarter. If the reduction is greater than 25 percent, a corresponding reduction must be made to the loan forgiveness amount. Note that this test requires the business to look at every employee individually. If you have already laid off or furloughed workers, try to restore employee headcount and salary levels by June 30, 2020. If you do so, any headcount and salary reductions that occurred between February 15 and April 26, 2020 will be ignored. Keep in mind you do not have to rehire the same employees. Also, rehired workers do not actually have to perform customary work duties. Before taking action, you should consult with a qualified labor and employment attorney to work out the terms for rehiring workers.

Focus on Recordkeeping

This is crucial to obtaining maximum loan forgiveness. In the final analysis, you have to show the bank you used the loan for eligible expenses. With this in mind, another best practice is to create a spreadsheet of all eligible expenses as they are incurred and paid. We also recommend you maintain a special folder (electronic or otherwise) that contains the following documentation:

  • Employee headcount calculations
  • Payroll tax filings (both federal and state)
  • Mortgage documents, leases and utility bills
  • Cancelled checks and payment receipts
  • Bank statements for the separate account used to pay forgivable expenses

If you did not set up a separate bank account, include copies of other bank statements with forgivable expenses highlighted to support any electronic funds transfer payments.

Apply for Forgiveness

You may not apply for forgiveness until at least eight weeks after receiving your PPP loan.

When you are ready, you will need an authorized representative to certify that (1) the documentation presented is true and correct and (2) 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. Once the bank receives your loan forgiveness application, the bank has 60 days to review and either approve or deny it.

If, for some reason, only a portion of the loan is forgiven, you will need to fulfill all remaining payment obligations. The unforgiven portion of the loan will be subject to a two-year note with 1 percent interest. Fortunately, no payments will be due for the first six months (although interest will continue to accrue). In addition, no collateral or personal guarantee is required, and there are no prepayment penalties. Banks will be very particular when processing PPP loan forgiveness applications, so professional assistance may be required.

TAG’s Perspective

The clock started ticking as soon as the PPP loan proceeds landed in your bank account. After working hard to obtain your Paycheck Protection Program loan proceeds, the last thing you need is to err in the production of the loan forgiveness application. Meeting the requirements to have your loan forgiveness application approved is a complicated process, fraught with traps for those unaware of the intricacies of the rules. Don’t jeopardize your eligibility. Aside from identifying and tracking eligible expenses qualifying for loan forgiveness and maintaining supporting documents, we recommend that you prepare a budget and track your progress during the eight-week period.

For More Information

If you would like more information about this topic or wish to discuss your own unique situation, please contact Michael A. Gillen, Joann I. Camm, Luke J. Bartlinski, any of the practitioners in the Duane Morris Tax Accounting Group or the person in the firm with whom you are regularly in contact. For information about other pertinent tax topics, please visit the Tax Accounting Group publications page.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.