Strategies to Consider for Loan Forgiveness

Written by Dan Chodan, CPA

UPDATE - On June 3, 2020, the Senate passed the HR 7010 - Paycheck Protection Program Flexibility Act of 2020, which, if signed by President Trump, will allow businesses to choose to extend the eight week period to 24 weeks or they can keep the original eight week period. Therefore the strategies to maximize costs in this article are not nearly as important anymore. Businesses should still consider the strategies to avoid reductions. You can read more about the Flexibility Act here:

5/26/20 Note: Congress has been discussing changes to the PPP program. We also expect more SBA/Treasury rulemaking. The most significant proposed changes are an extension of the 8-week period and removal of the 25% limit on non-payroll expenses. Additional changes may significantly impact your planning for loan forgiveness. 

Step 1 - Avoid Reductions

Even if the PPP loan is fully spent for eligible expenses, forgiveness of the loan will be reduced if the number of full-time equivalent employees is down or if salaries/wage rates are cut in the eight-week period.

  • Do not reduce salary or wage rates more than 25% during the eight weeks or at least restore rates by June 30.
  • Select the lowest FTE base period and increase hours during the eight weeks (or by the June 30 restoration date).
  • Offer to rehire employees or restore hours if they were laid off. Even if the employees do not accept the offer, they will not count against your FTE calculation. Document the offer at the same salary/wages/hours, the refusal, and the reporting to the state unemployment office of the rejection.
  • Document any employees who during the eight weeks were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in their hours. If the position was not filled by a new employee, these reductions would not count against your FTE calculation.
  • Increase hours and/or hire strategically to meet the FTE threshold either in the eight-week period or by the June 30 restoration date. There is no requirement that the same or similar positions be filled. There is also no requirement that the positions be maintained after the PPP period is over.

Step 2 - Maximize Payroll Costs 

  • Pick the best payroll period. Borrowers either use the eight weeks beginning on the loan funding date or eight-weeks beginning on the next pay period following funding (if pay schedule is biweekly or less). This choice is important because costs qualify both if paid during the eight weeks or if incurred during the eight weeks and paid by the next regular payroll date. This flexibility in the rules means borrowers will likely be able to claim nine or ten weeks of payroll in total.
  • Pay hazard wages, rehiring bonuses, or other bonuses. Recent guidance has clarified hazard pay and bonuses do qualify as forgivable wages up to the $15,385 maximum total wages per employee for the eight weeks. Better to pay staff more than to repay a portion of the loan. Note: Owners are further limited to 8/52 of their 2019 pay, if lower.
  • Pay retirement plan profit sharing or match in the eight weeks.
  • Accelerate health insurance payments into the eight weeks.
  • Pay the full amount of health insurance premiums during the eight weeks. If a business has highly-paid staff who are already capped at $15,385 maximum per employee, a creative way to maximize forgivable cost is to cover the employee’s portion of their health premiums. Additional pay is not forgivable over the $15,385 maximum, but health insurance expense is not part of this cap. This can be a beneficial strategy in certain circumstances.

Step 3 - Maximize Non-Payroll Costs  (Utilities, rent, and interest secured by hard assets)

  • Accelerate and prepay wherever possible. The CARES Act and subsequent guidance has specifically excluded prepayment of interest from forgivable expenses but has left the door open to prepayment of rent and utilities. Recent guidance has further cemented this position by clarifying qualified costs must be paid in the eight weeks or incurred in the eight weeks and paid by the next regular billing date. So accelerating rent and utility payments when possible will have a positive impact overall. Recent guidance notes that “the 25% cap on non-payroll costs will avoid excessive inclusion of non-payroll costs.”
  • Gas includes gas used in business vehicles. Interim guidance focusing on the self-employed included an example of auto fuel qualifying as gas utility expense.
  • Be aware of other utilities, but do not count on them. The CARES Act defined utilities as electricity, gas, water, transportation, telephone, or internet access. Utilities have not been further defined or clarified since the CARES Act. While additional guidance may come and other utilities may be accepted, it is recommended to try to fill the 25% PPP non-payroll costs with known expenses instead or even exceeding your 25% portion.
  • Do not forget the other leases. Rent expense is not limited to building leases and can include other items like vehicle leases, copier leases, and other equipment rentals if in place before 2/15/20.

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