Strategies to Maximize Your PPP Loan Funds + Forgiveness
Smart Summary PPP forgiveness is valuable, but there are certain conditions that businesses should take care to avoid.Businesses should be documenting their payments meticulously and planning re-hires strategically to fully realize loan forgiveness.Employers may need to get creative with payroll in order to incentivize employees currently receiving unemployment while meeting their quotas for forgiveness.When
the CARES Act passed on March 27, 2020, the Paycheck Protection Program (“PPP”)
provided an opportunity for small business owners to receive an injection of
cash while their businesses are subject to government-ordered shut downs. Those
businesses fortunate enough to receive funds now face a myriad of issues as
they spend their PPP funds while also trying to plan for forgiveness to the
greatest extent possible. The
most pressing issue is one of time. The funds must be spent within 8 weeks of
the loan’s funding, yet many businesses are still closed to the public or
working with limited revenue potential. To that end, this article provides some
FAQs and examples to show how forgiveness works so small business owners can
plan accordingly.Forgiveness Like
anything else, forgiveness under the PPP comes with conditions.
What is the limit on
forgiveness?
The full principal amount of the loan, plus accrued interest.
What expenses can be
forgiven?
It depends on the total amount spent over the covered period. We’ve prepared a
worksheet that helps you understand and calculate all of this, which can be downloaded for free here.
Are there
restrictions on forgiveness? Yes. 75% of the amount forgiven must
be attributable to payroll costs.
How can my
forgiveness be reduced? There are two ways your total forgiveness amount can be
reduced: a reduction in number of employees or a reduction to employees’ salary
or wages. Refer to our worksheet for help on your specific situation.
If there is a reason
my forgiveness amount may be reduced, are there any second chances? Yes. The PPP
provides a grace period. If, from February 15 to April 26, 2020, you had: (i) a
reduction in the number of FTEs as compared to February 15, 2020; and/or (ii) a
reduction in the salary or wages of one or more employees as compared to
February 15, 2020, but you eliminated the reduction in FTEs and/or salary or
wages by June 30, 2020, then the amount of loan forgiveness will be determined
without regard to any reductions.Employment Concerns Once
you have your PPP money and a plan in place for forgiveness, it’s time to
spend. But many employers are finding it hard to allocate 75% of their spending
to payroll when employees have been laid off and are happy collecting
employment. With the CARES Act’s additional $600 benefit, employers may need to
get creative to compete with the expanded benefits. Options include a one-time
“recall” bonus, temporary raises, partial unemployment, or any combination of
the three. The best strategy will depend on your recall needs and PPP spend
plan. ExamplesTo
better understand your options, here are three common scenarios to consider.Company A – No LayoffsOn
February 15, 2020, Company A had 10 FTEs. From
February 15 – June 30, 2019, Company A had an average of 10 FTEs. Over
the 8-week period after receiving loan funds, Company A had an average of 10
FTEs.
Result: Company A will have its loan amount entirely
forgiven with respect to covered expenditures, provided that at least 75% of
the forgiveness amount is attributable to payroll costs.
Company B – 60% Layoff with
Full FTE Re-Hires Before June 30On
February 15, 2020, Company B had 10 FTEs.From
February 15 – June 30, 2019, Company B had an average of 10 FTEs. Company
B operated on a skeleton crew of 4 FTEs over the 8-week period after the
disbursement of the loan funds. Company
B hired 6 additional FTEs on June 15, 2020, as their business ramped back up.
Normally, Company B’s forgiveness amount would be reduced by 60%, but because
Company B eliminated the discrepancy in FTEs before June 30, 2020, the
reduction amount is calculated without regard to such reduction. Note in this
example that it is unlikely Company B will have spent all of their available
funds because they operated on a skeleton crew during the 8-week payment
period. Thus, there would likely be some funding remaining which can be repaid
or retained as a loan.
Result: Company B will have its loan amount
entirely forgiven with respect to covered expenditures, provided that at least
75% of the forgiveness amount is attributable to payroll costs.
Company C – 100% Layoff with
Re-Hires and Bonus IncentivesOn
February 15, 2020, Company C had 10 FTEsFrom
February 15 – June 30, 2019, Company C had an average of 10 FTEs. Company
C was forced to completely shut down operations. To make matters more
difficult, most of Company C’s employees make less than $50,000 per year, such
that its full-time employees were making more on unemployment than if they
returned to work. In
order to incentivize employees who would otherwise qualify for continued
unemployment, Company C decides to implement temporary raises. It did not bring
back any of them until week 6 of the 8-week period, at which point, Company C
re-hired all 10 FTEs and gave them temporary raises in an amount equal to the
entire loan amount, dispersed evenly among them.
Result: Although Company C’s average FTE over the 8-week period was equal to
2.5 FTE, Company C’s loan amount will be entirely forgiven with respect to
covered expenditures. This is because Company C eliminated the discrepancy in
FTEs before June 30, 2020. Further, all payroll costs, including the incentives,
were paid during the 8-week period. What You Should Do
Now
Document Everything. When you apply for
forgiveness, you will need to provide documentation of payroll records over the
covered period. Such documentation may include Form 941, state quarterly wage unemployment
insurance tax reporting forms, or equivalent payroll processor records that
best correspond to the covered period. You must also 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. Accordingly, you will want to document all
expenses with these important categories in mind.
Project and Plan. As with Companies
A, B, and C above, each borrower will be in a unique situation. You should
project your FTEs over the 8-week period against both your designated
historical comparison period and February 15, 2020. You will also want to plan
how and when funds will be expended with forgiveness in mind. Know the
categories of expenses for which forgiveness is permitted and that the
expenditures must occur over the 8-week period after you have received the
funds.
Watch for Reduction
Traps and Don’t Forget About Grace. If your projected average of FTEs over the
8-week period is less than your historical comparison period, then you should
look for creative ways to receive 100% forgiveness. As long as you can
eliminate any discrepancies prior to June 30, 2020, then you may be able to
take advantage of the grace period to receive full forgiveness.
Work with Your
Advisors.
Given how quickly everything has developed with the PPP, it is important to
take the time to plan for how you will comply with forgiveness requirements.
The earlier you bring in your financial and legal advisors, the greater chance
you have of making the most of your PPP funds.Danielle Crane is an
employment lawyer with Kegler Brown, advising clients on human capital
strategies to help navigate the COVID-19 pandemic and prepare for re-opening.
She can be reached directly at dcrane@keglerbrown.com or (614) 462-5444.Brendan Feheley is a
director and chair of Kegler Brown’s Labor + Employment practice where he is
working with business owners and their HR leaders to navigate the COVID-19
pandemic. He can be reached directly at bfeheley@keglerbrown.com or (614) 462-5482.
