How can I maximize PPP Loan Forgiveness?

Question of the Week

How can I maximize PPP Loan Forgiveness?

Happy Five-Minute Friday, all! Hope you had a good week.

After a bumpy start in round one, the second round of PPP funding appears to be reaching the people who need them. According to a joint statement by Administrator Jovita Carranza and Secretary Steven Mnuchin, 2.2 million PPP loans have been made to small businesses in round two, with a total value over $175 Billion. . That’s already more than in round one, with some funds still remaining to be to be distributed. Additionally, the average loan is $79,000, which is $127,000 less than the $206,000 average loan amount for round one. That means more smaller businesses with less revenue obtaining much needed financing.

But getting a loan is just the first hurdle.  Once business owners get financing, they must then figure out how to use the funds in a way that maximizes loan forgiveness. As has been the case with this program from the beginning, we have some initial rules, additional guidance and a lot of unknowns. As always, we’ll do our best with the information that we have to give some guidance on how this forgiveness will work.


The current forgiveness rules

Under the Interim Final Rule on Additional Eligibility Criteria and Requirements for Certain Pledges of Loans (Interim Rule 4.14.20), the amount eligible for forgiveness depends in part on what you spend the money on for the eight weeks following receiving your funds. Forgiveness can be up to the full principal amount of the loan plus accrued interest if the loan funds are spent on the following:

  • 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),
  • 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)
  • owner compensation replacement, calculated based on 2019 limited to eight weeks’ worth (8/52) of 2019 net profit
  • payments of interest on mortgage obligations on real or personal property incurred before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business mortgage payments);
  • rent payments on lease agreements in force before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business rent payments); and
  • Utility payments under the service agreements dated before February 15, 2020

At first glance, these rules seem straight-forward. Five basic types of expenses count toward forgiving the loans. However, a few actions may reduce your benefit, including:

  • You spend less than 75% of the loan on payroll costs
  • You reduce full-time employees compared to 4.1.19 – 6.30.20
  • If you reduce your employee’s salary or wages to less than 75% of the base salary or wages of such employee during the prior quarter

The rules have huge gaps, and not all of these ambiguities have been clarified yet. My intention is to help you focus on what you can control and navigate the rules the best you can with the information you have.

What does this actually look like 

Because lenders are the final arbitrators for forgiveness, the process and therefore the results may differ based on your lender. But according to Interim Rule 4.14.20 the documentation you’ll need for loan forgiveness includes:

  • If you have employees, you should submit Form 941 and state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records that best correspond to the covered period (with evidence of any retirement and health insurance contributions).
  • The 2019 Form 1040 Schedule C that was provided at the time of the PPP loan application must be used to determine the amount of net profit allocated to the owner for the eight-week covered period.
  • Whether or not you have employees, you must submit evidence of business rent, business mortgage interest payments on real or personal property, or business utility payments during the covered period if you used loan proceeds for those purposes.

I break down what this looks like for different types of businesses, with and without employees, in my latest Forbes piece.


Quote of the Week

“All great achievements require time.” -Maya Angelou


Task of the Week

Take some time this weekend to calculate your potential loan forgiveness.  Are you able to meet the 75%/25% threshold? Can you trace the amounts you spent back to the loan funds? What are you still uncertain about?

Getting through these questions now will help get you ready for eight weeks down the road.