Planning for PPP Loan Forgiveness

Many small businesses are finally seeing their applications approved and funding granted for the Payroll Protection Plan Loans (“PPP”) after weeks of confusion and uncertainty. As the SBA and big banks continue to fumble through the second round of PPP funding, many borrowers are now focusing on how best to use their funds to optimize the best part: potential 100% loan forgiveness.

Although much of the guidance on loan forgiveness remains shrouded in governmental ambiguity and overall confusion from lenders and the public, we anticipate additional clarity from the SBA over the coming weeks as regulations continue to evolve. Below is a summary of steps, based on currently known information, that give you the best chance for maximum PPP loan forgiveness. Borrowers will apply for forgiveness directly through their lender at the end of the 8-week period, and as with the initial loan application, each bank’s process may differ.

Covered Costs Eligible for Forgiveness:

The following have been designated as covered/qualified costs by the SBA when calculating loan forgiveness:

1. Payroll Costs: Compensation paid to employees of your business is the driver for the loan amount and is consequently the main expense these funds should be used for. A minimum of 75% of the forgivable amount must be payroll costs. Any wages paid to employees, up to a $100,000 annualized salary plus payments for group health-care benefits (including insurance premiums during periods of paid sick, medical, or family leave) and retirement contributions, during the 8 week period will be eligible for forgiveness.
   
   

   A few things to note:

   • Use all the funds you receive for payroll, if possible, to maximize forgiveness. Increase your payroll, either the amount per employee or the number of employees you have on payroll, or by paying bonuses (up to the $100,000 annualized cap) or a 401(k) profit share.
   • Start these payments from the date you receive the money, or as close to that as possible to ensure that these compensation expenses fall within the 8-week window.
   • Guidance is still vague on wages paid to owners and family members.


2. Mortgage Interest: from loans (on real or personal property) that existed before February 15, 2020.
3. Rent: on lease costs that were in force before February 15, 2020 (we are waiting for additional guidance on whether this applies to leased equipment).
4. Utilities: (electricity, gas, water, transportation, telephone, or internet access) for services that began before February 15, 2020.

Remember, a minimum of 75% of the loan must be used on eligible payroll costs to be forgiven which means no more than 25% of the loan can be used on non-payroll expenses.

The current guidelines form the CARES Act state that covered costs must be incurred and paid in the 8-week window. We are hoping that this gets modified so that it does not create additional administrative headaches.

Recordkeeping and Required Documentation for Forgiveness:

A crucial piece of loan forgiveness will be keeping accurate records and being able to provide the required documentation necessary for forgiveness. While different lenders may request additional items, we expect the following to be required:

• Documents verifying the number of full-time equivalent employees 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 filings from your state
• Documents verifying your eligible interest, rent, utility payments (canceled checks, payment receipts, account statements)

The loan can be forgiven either in whole or in part. To maximize forgiveness, accounting for the PPP proceeds and related expenditures properly on your books is of vital importance. This will also help you streamline the process of applying for forgiveness at the end of the 8-week period. Lenders will have 60 days of the receipt of the forgiveness application to determine those amounts eligible for forgiveness.

Forgiveness Reduction Factors:

There are various factors that could reduce PPP forgiveness to keep in mind while utilizing these funds:

1. Spend the entire amount of the loan on LEVEL OF
   • Any amount of PPP spent on ineligible costs will not be forgiven.
   • Any amount not forgiven will accrue interest at 1% and need to be repaid over the remaining 2-year loan period. There is no prepayment penalty.
2. Maintain the same number of full-time equivalent (FTE) employees to maximize forgiveness eligibility:
   • Choose most beneficial base period for comparison:
     • February 15, 2019 – June 30, 2019 OR
     • January 1, 2020 – February 29, 2020
   • FTE Definition:
     • Not currently defined; additional guidance should be issued by the SBA in the coming weeks.
   • To encourage employers to rehire workers laid off due to the COVID-19 crisis, borrowers who rehire laid off workers by June 30, 2020 will not be penalized for having a reduced payroll at the start of the period.
3. Level of Payroll:
   • Amounts eligible for forgiveness will be reduced if there is a decrease in salaries/wages by more than 25% for any employees that made less than $100,000, annualized, during the most recent full quarter during which the employee was employed.

Rehiring Employees & Utilizing Funds:

Many employers are facing a strange new difficulty as PPP loans continue to fund: how to utilize PPP funds within the 8-week period to pay former and prospective employees if their businesses are closed and there is no work for employees to perform. Further still, how to incentivize employees to return to the workforce if they are currently making more via unemployment income than they were via regular salary and wages from their jobs, as is the new reality for many in California.

Although many business owners are turning to creative solutions to utilize their PPP funds (i.e. paying contractors via W2 rather than 1099, paying bonuses to essential employees, etc.), guidance from the SBA on this issue has unfortunately not yet been provided. However, we are hopeful clarification continues in the coming weeks and we will provide any new updates as soon as they are released.

Good Faith Certification:

The SBA recently issued additional guidance that has caused some concern with business owners regarding the Good Faith Certification where borrowers are required to “assess their economic need for a PPP loan” and “take into account their current business activity and their ability to access other sources of liquidity”.

We feel it is a best practice to document your economic need for the loan. At a minimum, you should have a forecast/model along with notes that address economic uncertainty tied to your business, the detriment to your ongoing business operations and your access to other sources of liquidity.

If you feel that you don’t qualify under these clarified standards, you can return loan by May 7 and you will be deemed to be in good faith.

As always, our team at BFLC is here to help. Please feel free to reach out if you have any questions on this topic or anything else.