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Best Practices for Maximizing Loan Forgiveness Under The Paycheck Protection Program

John Fitzgerald, CPA

4.20.20 | Client Alert – COVID-19 Update

As companies begin to receive their loan proceeds under the Paycheck Protection Program (PPP),1 it is beneficial for them to immediately take steps to ensure they maximize potential forgiveness under the loan provisions.

With all the outstanding questions regarding when and how businesses will get up and running again, this article provides some suggested best practices to assist companies in meeting the forgiveness requirements and putting them in the best position to benefit from this generous program to sustain themselves and grow going forward.

Loan Forgiveness Conditions

The PPP, part of the Coronavirus Aid Relief and Economic Security (CARES) Act, provides that the loan will be forgiven if the loan recipient utilizes the proceeds for their intended purpose within a given time frame. The Expected Forgiveness Amount is defined as the amount of principal that a lender expects a borrower to expend, during the covered period – the 8-week period beginning on the date that PPP proceeds are deposited – on the sum of:

  • Payroll costs, which encompasses payments of:
    • Employee wages, commissions, tips, vacation, sick pay, limited to $100,000 per employee prorated for the covered period (or $15,385 for the 8 weeks);
    • Employer-provided group health care benefits during the covered period;
    • Employer-provided retirement payments during the covered period; and
  • Payment of state and local employer payroll taxes paid during the covered period.
  • Payments of rent, utilities, and mortgage interest under agreements that existed before February 15, 2020, not to exceed 25% of the loan proceeds.

The amount of loan forgiveness will be decreased if the company reduces its headcount during the covered period (benchmarked against the choice of two periods indicated below) or reduces the salary by more than 25% of any employee making less than $100,000 per annum (benchmarked against the first quarter of 2020). Because these rules are susceptible to multiple interpretations in terms of measuring employee head count and salary reductions, we await further guidance from the regulatory authorities before providing concrete examples on the mechanics.

Expected Requirements and Documentation

In order to meet the forgiveness obligations, it is anticipated that companies will be required to submit evidence clearly demonstrating the payment of payroll, rent, utility and interest from the borrowed funds during the covered period.

With this in mind, companies should consider the following:

Keep PPP Funds Separate

Deposit all PPP proceeds in a separate bank account and ensure that PPP loan proceeds are used only for expenditures that are eligible for forgiveness. Keep all related support to corroborate disbursement of such funds.

For payroll funding, only payroll for amounts within the forgiveness parameters should be funded from the PPP segregated account. Ideally, employees making more than the threshold would receive two separate checks. Where circumstances do not permit this or where it is too impractical (e.g., if payroll must be funded into a single account), only funding within the forgiveness parameters should come from the PPP account, with the excess funded from non-PPP sources. It is key to understand that the $100,000 annual salary limit per employee is on gross compensation, so associated applicable withholding taxes should be paid from these funds.

PPP Loan Recordkeeping

Good recordkeeping will be critical for loan forgiveness. Over the eight-week period, keep track of eligible expenses and their accompanying supporting documentation. Lenders will likely require these documents in digital format, so take the time to scan any paper documents and keep backups of the digital records. The documentation should include:

  • Payroll registers or ledgers
  • Health insurance invoices and payments
  • Payments for retirement amounts
  • Support for rent expense (lease and cancelled checks/Automatic Clearing House (ACH) or wire transfer evidence)
  • Support for interest paid on debt obligations
  • Evidence of utilities paid including invoices
  • State and local payroll tax payments (e.g., for New York State, the MCTMT and State unemployment insurance) supported by tax returns, vouchers, or other documentary evidence.

Maintain Employee Data

Maintain a headcount of all full and part-time employees on payroll. In many cases your payroll processing company will be able to provide this information. The company will need to account for the average number of full-time equivalent employees per month during:

  1. The eight-week period beginning with the receipt of loan proceeds (numerator)
  2. The period covering 2.15.19 to 6.30.19 (denominator benchmark 1)
  3. The period covering 1.1.20 to 2.29.20 (denominator benchmark 2)

Additionally, the company will need to carefully track payroll during both the eight-week period and first quarter of 2019 for all employees who earn $100,000 or less annually.

The Act also permits companies to avoid any reduction in the potential forgiveness in connection with reductions to headcount or salary levels   by (i) rehiring by June 30, 2020 any staff that were terminated between February 15 and April 26 and (ii) restoring their pay to required levels by June 30. However, these cures do not impact the requirement that the funds be properly spent in the 8-week period following loan funding.

To date, PPP regulators have rightly focused on providing guidance on PPP loan eligibility and the application process. As the forgiveness feature of this program is central to its purpose, and susceptible of borrower abuse, it is expected that the SBA will soon provide detailed guidance on the forgiveness process, including relevant forms and documentation requirements for submission. In particular, and of great importance, is direction on how the forgiveness reductions for failure to maintain employee headcount and pay rates are computed.

Look for our next Client Alert on PPP loan forgiveness when this new guidance is released.

A PPP loan can make a pivotal difference during this unprecedented economic period and following these best practices can go a long way in helping reduce a company’s liability so that the business can survive the pandemic and continue operations in the future.

For more information on this topic or any other matter related to the COVID-19 pandemic, please contact your Berdon Advisor.

Berdon LLP New York Accountants

1 Relevant PPP content for review:

SBA Issues Third Interim Final Rule Providing More Guidance on Paycheck Protection Program

SBA Issues New Guidance on Paycheck Protection Program

SBA issued an Interim Final Rule (“IFR”) relating to the Paycheck Protection Program (“PPP”)

[Updated] COVID-19 Pandemic: Business Relief Options Analysis

CARES Act provides Significant Relief for Small Businesses