Client Alert: Six Steps to PPP Loan Forgiveness

Date: May 19, 2020

Click here for a one page guide to PPP Loan Forgiveness.

Congratulations, you received a loan under the Paycheck Protection Program (“PPP”)! Now you want to maximize your ability to take advantage of the opportunity to have up to 100% of the loan forgiven. The following guide provides overall concepts to consider in using your PPP loan proceeds. Please reach out to the authors or your other professional advisors if you have questions about your specific situation.

As of the date of this article, the process and timing to apply for loan forgiveness remains unclear, other than applications will be submitted after June 30 and the process will largely be driven by future guidance from the SBA and the practices of your lender.  You should review your PPP loan documentation to see if your lender has set out any specific requirements. After you apply for forgiveness, by law your lender must provide you with a response within 60 days.

Recordkeeping and Required Documents for Forgiveness

The documentation you will need to support PPP loan forgiveness will mirror the documentation you provided to your lender to support your qualifying Payroll Costs for purposes of determining your maximum PPP loan amount. Your lender may have additional requirements, and the SBA will likely continue to provide further guidance. You should keep an eye out for further notices and instructions from your lender regarding the PPP loan forgiveness process.
  • Documents verifying the number of full-time equivalent employees (“FTEs”) on payroll and their pay rates, for the periods used to verify you met the staffing and pay requirements:
    • Payroll reports from your payroll provider
    • Payroll tax filings (Form 941)
    • Income, payroll, and unemployment insurance tax filings with your state
    • Documents verifying any retirement and health insurance contributions
  • Documents verifying your eligible interest, rent, and utility payments (canceled checks, payment receipts, account statements)

Calculating Eligible Forgiveness

STEP 1: Track eligible costs incurred and paid[1] during the 8-week period following the loan funding.

Eligible costs are:
  • Payroll Costs
    • Gross compensation, from salary, wages, commissions, tips, etc. limited to an amount annualized to $100,000 per employee. Mathematically, this works out to a maximum of $15,384.62 per employee.
    • Payment for leave
    • Separation or dismissal allowances
    • Employee benefits
    • Group health care coverage
    • Vacation Pay
    • State and local tax payments that you make – e.g., state unemployment taxes.
    • Planning Tip: Depending on your payroll schedule, you may want to adjust the timing of your payroll date to accommodate as many payroll cycles as possible.
  • Mortgage interest for mortgages in effect prior to February 15, 2020.
  • Rent under a lease in effect prior to February 15, 2020.
  • Utilities
    • Electricity, gas, water, transportation, telephone, internet
    • Service must have been established prior to February 15, 2020

STEP 2: Use Payroll Costs to establish forgiveness floor:

  • 75% of your expenditures eligible for forgiveness must have been on Payroll Costs.
  • Planning Tip: Plan to spend at least 75% of PPP loan proceeds on Payroll Costs to maximize loan forgiveness.

STEP 3: Calculate maximum potential loan forgiveness:

  • Taking into account the forgiveness floor, the maximum potential forgiveness is equal to the amount spent on all eligible costs.

STEP 4: Calculate any decrease in FTEs for the 8-week covered period:

  • First, determine the average number of full-time equivalent employees you had per month for:
    • The 8-week period following your initial loan disbursement, (A)
    • February 15, 2019 to June 30, 2019, (B1)
    • and January 1, 2020 to February 29, 2020. (B2)
  • In calculating "A" you may add back as retained employees two different categories of workers, which are:
    • For people who you laid off or put on furlough, if you have made a written offer to rehire the person for the same salary/wage and number of hours as before they were laid off, and that person rejects your re-employment offer, you will be allowed to exclude this employee when calculating forgiveness.  You must have documentation of your offer and the former employee’s rejection of the offer.
    • Any worker who voluntarily resigned, voluntarily requested and received a reduction in hours, or who you fired for cause.
  • Then, take A and divide that by B1. Do the same with B2. Take the largest number you obtain. If you are a seasonal employer, you must divide by B1.
  • If you get a number equal to or larger than 1, you successfully maintained your headcount and meet this requirement.
  • If you get a number smaller than 1, you did not maintain your headcount and your forgivable expenses will be reduced proportionately.
  • For example, a 10% drop in FTEs results in a 10% decrease in the amount of the loan forgiveness.

STEP 5: Calculate any reduction in payroll for the 8-week covered period:

  • You must maintain at least 75% of total salary per employee.
  • This requirement will be individually assessed for every employee that did not receive more than $100,000 in annualized pay in 2019.
  • If the employee’s pay over the 8 week covered period is less than 75% of the pay they received during the most recent quarter in which they were employed, the eligible amount for forgiveness will be reduced by the difference between their current pay and 75% of the original pay.

STEP 6: Consider any rehiring or wage restoration:

  • You can rehire any staff that were laid off or put on furlough and reinstate any pay that was decreased by more than 25% to meet the requirements for forgiveness. You have until June 30th to do so.  

[1] As of the date of this article, the SBA and Treasury have not provided any interpretation of what it means for expenses to be “incurred and paid.”