Best Practice for Maximizing the PPP Loan Forgiveness

The Paycheck Protection Program (PPP) was created with the intention of providing funding needed to keep small businesses running during the COVID-19 pandemic. One of the most attractive features of the PPP loan is that all or a portion of the loan will be forgiven, if a borrower meets certain criteria. This is where things get complicated. 

Following is Burkland's comprehensive guidance and recommendation on setting your company up for full loan forgiveness. This guidance is based on our understanding of the CARES Act as of today and is subject to change as additional guidance is issued.  

This blog post will be updated if our recommendations change based on new information and guidance. We also have a resource master doc that is updated regularly with all CARES/PPP information here.

Understanding the PPP Loan Forgiveness Condition

1.Expense purpose and categories to be qualified for forgiveness (allowable expenses)

  • Payroll Cost
    • Eligible payroll costs include:
      • Gross salary, wage and commission
      • Employee Benefits vacation, parental, family, medical, sick leave or health benefits
      • State and Local taxes assessed on compensation
    • Excluded payroll costs for loan forgiveness include:
      • Employer paid payroll tax (Social Security and Medicare taxes)
      • Employer paid leave amounts under the Families First Coronavirus Response Act (FFCRA)
      • Individual employee compensation above $100,000 per year, prorated for the covered period
      • Compensation to employees whose principal place of residence is outside of the United States
      • Compensation to independent contractors
  • Rent - as long as the business lease agreement was in effect before February 15, 2020
  • Utilities - as long as the service began before February 15, 2020
  • Mortgage interest - as long as the mortgage was signed before February 15, 2020

2. Eight-week period (covered period)

The eight week period for allowable uses starts as soon as the business receives the loan. Know your start date and calculate your end date. 

3. The 75% rule 

At least 75% of the loan must be used for payroll cost in the covered period. 25% can be used for other allowable expenses. Independent contractors are not included in the allowable expenses.

4. Full-time equivalents headcounts (FTE)

You must maintain the number of employees on your payroll during the 8 weeks subsequent to receiving the loan (the covered period). The SBA will reduce the loan forgiveness by the proportion in which the FTE headcount during the covered period is less than the pre-Covid 19 period. 

Here is the calculation to determine if you have met your staffing requirements:

Calculate the average number of full-time employees you had for the following periods: 

             A. 8-week covered period 

             B. February 15, 2019 to June 30, 2019

             C. January 1, 2020 to February 29, 2020 

Take A and divide by B. Do the same with C. Take the largest number. 

  • If you get 1 or larger than 1, you maintained your staffing requirement
  • If you get smaller than 1, your forgiveness will be reduced proportionately

5. Salary and Wage requirement

You must maintain at least 75% of total salary in the covered period compared to the pre-COVID quarter. The pre-COVID quarter is the most recent full quarter before the pandemic (Q1 2020 or Q4 2019...we are still awaiting for more guidance) 

This requirement will be individually assessed for every employee that did not receive more than $100K salary. For those over $100K, salaries can be reduced to $100K. 

6. Rehiring requirement 

You have until June 30, 2020 to rehire any employees that were laid off or put on furlough, and reinstate any pay reduction that was made between February 15, 2020 and April 26, 2020. 

Managing Documentation and Record Keeping

Good record keeping will be critical for loan forgiveness. Your lender will require strict documentation to prove your expenses and how you used the PPP loan. Maintain the following documents from day one of your covered period. You lender may require additional documentation: 

  • Payroll summary reports from your payroll providers (reflecting salary and wages, number of full time employees)
  • Payroll tax filing (941) 
  • State income, payroll and unemployment insurance filings 
  • Health insurance invoice and payments 
  • Invoice and payment receipts, canceled check, bank statements or other documents verifying payment on rent, utilities and mortgage interest. 

Since the key to maximizing the PPP loan forgiveness includes sound record keeping,  this is the time to improve your record keeping by obtaining receipts and maintaining an organized system for bookkeeping and document storage. 

Please reach out to us with additional questions on the PPP loan program/CARES act, to learn more about how we can help your startup, or if you have questions about federal, state, and local resources available in response to the COVID-19 outbreak. Burkland offers expert CFO servicesaccounting services, and tax services to startups across the USA.