Maximizing PPP Loan Forgiveness


By now, many businesses received Paycheck Protection (“PPP”) loans. Here are some hurdles businesses must hop over to maximize the amount of PPP loan forgiveness.  Mainly, there are 3 tests that you must pay attention to.

Test 1:   75/25 Allocation

To be eligible for loan forgiveness, borrowed money must be used for designated expenses.  Participants are eligible for loan forgiveness for the amount spent on authorized expenses over the 8-weeks period of time after receiving the loan.  The SBA rules provides that at least 75% of loan funding must be spend on qualifying payroll cost, and not more than 25% of the loan forgiveness amount may be attributable to qualifying non-payroll costs.  Qualify payroll cost and non-payroll costs are two separate buckets that must be tested independently.

To the extent the 75% of the loan amount exceeds the qualifying payroll expenditure made during the 8-weeks, the forgiveness amount will be decreased.

Up to 25% of the loan amount spent on the qualifying non-payroll expenditure during the 8-weeks will be forgiven.

Qualifying payroll costs include gross salary, wages, tips, health care expenses, vacation, sick leave, retirement fund contributions, and state employer payroll taxes.  Gross salaries of employees, earning more than $100,000 in annualized salaries, should be capped at $15,385 ($100,000/52 x 8 weeks).

Qualifying non-payroll costs include rent payment on pre-2/15/2020 lease agreement, mortgage interest on pre-2/15/2020 mortgage loan, and utility payments under pre 2/15, 2020 service contracts.

Example 1:

Company X receives a PPP loan in the amount of $100,000.  During the 8-week covered period, Company X spends $60,000 on qualifying payroll expenses, $10,000 on qualifying non-payroll expenses and distributed the remaining $30,000 shareholders.  Debt discharge is first reduced by $15,000 [75% of $100,000 loan amount less $60,000 qualifying payroll].  The entire $10,000 qualify non-payroll expenses would be forgiven since the amount is within the 25% of the loan amount.  Thus, the total forgiveness is $70,000 [$60,000 qualifying payroll cost plus $10,000 qualifying non-payroll cost].


Test 2:  The Salary or Wage Reduction Test

The amount of loan forgiveness must be reduced if an employee’s salary or wage during the covered 8-week was reduced in excess of 25% of the base period wage used for loan application.  However, if the included employees’ wages are reinstated fully by June 30, 2020, then the salary or wage reduction is waived.  A notable open question in this area is the application of these provision in circumstances where an employee is terminated, quits, retires, is terminated, laid off or furloughed during the 8 week period and the borrow hires a new employee at the same total salary and wages on or before June 30, 2020 and whether that action eliminates the potential forgiveness reduction that would otherwise have occurred.

Example 2:

Company X has two employees, Jack and Smith.  The base period compensation was $10,000 for Jack and $15,000 for Smith.  Provided that Company X paid $10,000 to Jack during the covered 8-week period but was not able to rehire Smith.  First, in connection with Jack, the loan forgiveness will be reduced by $0 [Jack’s compensation in the amount of $10,000 during the 8-weeks exceeds 75% of the based period compensation of $10,000].  Second, in connection with Smith, the loan forgiveness will be reduced by $11,250 [$15,000 base period compensation x 75% less $0 compensation during the 8-weeks = $11,250]. 


Test 3:  The Full-Time Equivalent (“FTE”) Workforce Reduction Test

FTEs are employees working at least 30 hours per week.  Part-time employees, working less than 30 hours per week, can be combined based on hours they worked each week.  The amount of loan forgiveness must be reduced by multiplying the sum of payroll costs by the reduction in FTE from the covered 8-week to the based period FTE.  However, if the workforce is reinstated by June 30, 2020, no reduction is applied.  Note that the workforce reduction is applied to payroll costs after the salary and wage reduction.

Example 3:

The facts are the same as Examples 1 and 2 above, and Company X’s FTE for the base period is 100 and was decreased to 80 during the covered 8-week.  As shown above, the payroll cost subject to discharge is $60,000 and the non-payroll cost subject to discharge is $10,000.  The salary and wage reduction is $11,250.  The work force reduction is 80% [80 /100].  Then the workforce reduction amount is $11,750 [($60,000 + $10,000 - $11,250) x (1-80%) =$11,750].  Thus, out of the $100,000 PPP loan amount, Company X will be forgiven $47,000 [$60,000 qualifying payroll cost + $10,000 qualifying non-payroll cost - $11,250 salary and wage reduction – $11,750 workforce reduction].

Lastly, the maximum forgiveness amount for a PPP loan will be reduced dollar for dollar by the amount of any advance received under Economic Injury Disaster Loan program.



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