So, you are one of the fortunate ones who received a payment from the government for the Paycheck Protection Program (PPP) – how do you get that loan amount forgiven? The quick answer is that you need to use at least 75% of the loan to pay employees, meeting the PPP’s goal to keep as many people employed as possible. But you should be aware of the devilish details to best position your company for that forgiveness.
Use the Funds for Your Payroll for Maximum Forgiveness
The PPP loan is plainly intended to keep as many people on your payroll as possible. Loans used to keep employees on payroll might be completely forgiven. What counts for payroll?
- Compensation, such as salary, wages, and commissions
- Costs of providing employee benefits, such as vacation pay, family, medical, or sick leave
- Costs for providing group healthcare benefits, including insurance premiums
- State and local payroll taxes assessed on compensation
You can use loan proceeds on rent or mortgage interest payments incurred before February 15, 2020, costs for group health insurance benefits, utilities, and other operational necessities. However, you must use at least 75% to pay your employees during the eight-week period after you received the loan. If you hit that 75% mark, your loan is eligible to be completely forgiven. PPP recipients should allocate the loan funds towards payroll as best they can.
Maximizing Loan Forgiveness and Why June 30 Is Significant
The loans can be 100% forgiven if properly used. BUT, even if you use the loan amounts as prescribed (75% to payroll), the loan forgiveness amount can be reduced if either of two things happen during that critical eight-week period following the origination date of your loan:
- You reduce the number of your full-time employees from what you had on February 15, 2020 (employee reduction)
- You reduce the amount of wages paid out by more than 25% from what you had on February 15th, 2020 (wage reduction)
This does not mean that you can’t manage your workforce in the eight-week period. If you laid off employees or reduced wages during the covered period through April 26, 2020, but you restore those full-time employees back onto your payroll and restore the previous reduction in wages by June 30, 2020, you would still be eligible for complete loan forgiveness.
To assess the employee reduction qualification, the formula to use is:
[Average number of full-time equivalent employees (FTEs) during the eight-week covered period] divided by either [average number of FTE per month for the period of February 15, 2019, through June 30, 2019] or [average number of FTE per month for the period of January 1, 2020, through February 29, 2020]
That result will be the amount by which your loan forgiveness would be reduced.
For the wage reduction analysis, look at each covered employee (who makes less than $100,000 annually) and determine if their wage or salary decreased by more than 25% for the covered period versus the first quarter of 2020. If they fall into that camp, determine the amount in wage difference between the covered period and the first quarter for all your FTEs to determine the amount by which your loan forgiveness would be reduced.
Even if you have the employee or wage reduction occurring during the covered period, if you restore your employee numbers and wages by June 30, 2020, you still can have the full loan amount forgiven. Put differently, if you furloughed FTEs between February 15, 2020, and April 26, 2020, but then you rehired all those FTEs by June 30, 2020, then those employees would count as part of the FTE formula to determine if the loan forgiveness amount would be reduced.
You should apply for loan forgiveness with the lender from whom you received the loan. When you apply, provide the supporting documentation, such as your payroll tax filings, to show the number of FTEs and pay rates, as well as the payments on eligible mortgage and utility obligations. Additionally, you must certify that the documents submitted are true and that you used the forgiveness amount to keep employees and other eligible uses. Pay attention to your lender’s specific guidelines if they ask for more. Once submitted, the lender is supposed to make a decision on how much of the loan is forgiven within 60 days of your application.
If not forgiven, the payments for principal and interest on the loans are deferred for six months, but interest will continue to accrue. The loan is due in two years and the amounts forgiven are non-taxable.
So Now What?
Do what you can to best position your company for forgiveness by taking these steps:
- Get a grasp on your data. Understand your FTE headcount so you are working with the right numbers when evaluating retention. Remember the critical dates are what you had on February 15, 2020, and where you are at on June 30, 2020 – always keep those dates in mind.
- Get organized. Retain and organize receipts and documentation for your expenses, particularly payroll tax filings and mortgage/rent expenses to support your forgiveness request. You may also want to set up a separate bank account for the PPP loan monies and then pay out payroll from that bank account to make it easier to track the PPP funds.
- Get a plan. Think strategically about how best to use the loan amounts, understanding the forgiveness potential. Remember that the loan forgiveness opportunity is not “all or nothing,” but can be reduced in degrees. If using 75% of the loan amount towards payroll is just not possible for any number of reasons (perhaps even not being able to hire back laid-off workers), play out the economics for the best possible application of the loan for your company to get through the pandemic. If you need to repay some portion of the loan, it comes with a favorable 1% interest rate.
During this unprecedented time receiving a PPP loan should be some welcome news, but putting a good plan in place to use the money so that the loan can eventually be completely forgiven should be a top priority.