Strategies to Maximize Your PPP Loan Funds + Forgiveness
April 21, 2020
- 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.
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.
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.
To better understand your options, here are three common scenarios to consider.
Company A – No Layoffs
- On 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 30
- On 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 Incentives
- On February 15, 2020, Company C had 10 FTEs
- From 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 [email protected] 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 [email protected] or (614) 462-5482.
Cody Myers is a business lawyer with Kegler Brown, working with clients on their funding strategies during the pandemic, including applying for and optimizing CARES Act Paycheck Protection Program and SBA EIDL funds. He can be reached directly at [email protected] or (614) 462-5495.