New PPP Loan Rules for Maximizing Your Forgiveness

Oct 9, 2020

Your forgiveness of the loan is one of the most attractive potential benefits of the Paycheck Protection Program (PPP). Thanks to the Paycheck Protection Program Flexibility Act (effective since June 5th, 2020), your options for loan forgiveness are more achievable and generous than before. The aim of the PPP loan is to help relieve small businesses and their employees during the economic impact of coronavirus/COVID-19.

The PPP is a 1% interest loan that can convert into a grant — as long as you spend the funds according to the rules. But PPP forgiveness is not automatic. Borrowers will have to request and submit a forgiveness document to the lender. This article explains several ways you can maximize the amount of your PPP loan that is forgiven.

If you’ve already received your PPP loan, congratulations — but you now have just 24 weeks (or until December 31, 2020, whichever is sooner) to use the funds appropriately, or you’ll have to repay them within the next 5-10 years (depending on your lender).

On June 5, 2020, the Payroll Protection Program Flexibility Act of 2020 (PPPFA) was signed into law. Several of the conditions of forgiveness, including applicable dates and loan usage percentages, have been changed, and new safe harbors were added. This article has been updated to reflect these changes. You can find the full text of the PPPFA here.

Here are some clarifications, considerations, and suggested documents that can help achieve your maximum PPP loan forgiveness. Last updated on June 9, 2020, the information that follows is based on official Small Business Administration (SBA) guidance in the SBA’s PPP Loan Forgiveness Application Form (SBA Form 3508), and updated with information from the more recent Payroll Protection Program Flexibility Act. Many of these rules (especially dates) have changed, and this article will be updated again as additional final guidance from the SBA becomes available.

While forgiveness details are complex, two overarching principles stand out: follow the PPP’s intent, and carefully document.


1. Remember the Basic 60% / 40% Rule

The CARES Act established the PPP to help small businesses maintain their employees and their payroll (or your own expected income in the case of sole proprietors or independent contractors) over this next period of 24 weeks. Qualified businesses can borrow up to $10 million at a 1% interest rate, calculated based on 2.5 times your average monthly payroll costs.

As the program’s name implies, its intended purpose is to keep employees (or yourself) paid and employed, with some allowance for operating expenses like the business’ rent, vehicle payments, and utilities. As a general guideline, your business may be eligible for full loan forgiveness if you allocate 60% of the loan money to keeping all the full-time equivalent staff on payroll, with no more than 40% allowed for other overhead.

What if you’re unable to meet those criteria? Fortunately, partial forgiveness may be available under the 60% payroll threshold. Specifically, if a borrower uses less than 60% of the loan amount for payroll costs during the forgiveness covered period, they may continue to be eligible for partial loan forgiveness, according to a joint statement from SBA Administrator Jovita Carranza and Treasury Secretary Steven Mnuchin.

2. Documentation Can Be Your Salvation

Don’t take for granted that the SBA will forgive you simply on the assumption that you used the funds appropriately. Similarly, lenders cannot promise that the government will forgive all or any portion of the loan. The burden of proof will fall on you. Therefore, your best protection lies in the thoroughness of the documentation you maintain during the loan forgiveness period, as well the documents you provided when applying to your PPP lender.

3. Upon Loan Approval, Check These Numbers

If your loan was approved, you’ll get an email with an SBA loan number and the loan amount. When that happens, immediately do some math, because you’ll need to know three numbers:

  1. 60% of the total loan amount. That’s the minimum you’ll need to spend on payroll over the next 24 weeks (or if you were approved prior to June 5, 2020, you may still choose an 8-week period) to be eligible for full forgiveness. For example: if your loan is for $50,000, you’ll need to pay at least $30,000 to your employees.
  2. Your number of FTE employees.
  3. Each employee’s average monthly salary or wage. 

Numbers 2 and 3 are important because your total loan forgiveness can be diminished if you reduced employee headcount or compensation during the 24-week forgiveness period.

4. Calculate Your Headcount

To determine full-time equivalent (FTE) employees, follow the instructions on page 7 of the SBA’s PPP Loan Forgiveness Application Form. For each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. A simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the Borrower.  Make sure to keep records that show your work on these calculations.

Any reduction in loan forgiveness will be based on the difference between two numbers:

  1. Your number of FTEs at work during the 24-week loan window, and  
  2. Your number of FTEs at work during one of these baseline periods (whichever is lowest):
    • February 15, 2019 to June 30, 2019 (19 weeks)
    • January 1, 2020 to February 29, 2020 (8 weeks)
    • If you’re a seasonal business, you also have the option of using either date range above, or any consecutive twelve-week period between May 1, 2019 and September 15, 2019, whichever yields the lowest FTEs.

For example, if you had 20% fewer FTE employees during the 24-week loan window, then your loan forgiveness may be reduced correspondingly by 20%.

5. Keep Layoffs from Affecting Forgiveness

Did you have to lay off or furlough employees between February 15, 2020 and April 26, 2020? If you see you’re going to  come up short in your FTE headcount, you may still be able to avoid that reduction penalty. As long as you rehire all those employees (or an equivalent number) by December 31, 2020, then they will be included in your FTE count for the 24-week forgiveness period.

If those employees don’t want to return, you may be able to fix that too.

  • It’s the headcount that counts — so you could even hire new employees to replace them.
  • Whether you rehire or replace, be sure to pay them at least 60% of the previous compensation, to avoid the forgiveness penalty for reduction in pay.
  • In determining FTE headcount, there are three exceptions that let you claim an individual as a FTE even though they are no longer employed with the company on the date of your forgiveness application. These are: 1) an employee that was “fired for cause”, 2) an employee who voluntarily resigned, or 3) an employee who voluntarily requested and received a reduction of his or her hours. In all of these cases, you’re only allowed to claim this individual if the position was not filled by a new employee. Any FTE reductions in these cases do not reduce the Borrower’s loan forgiveness.
  • If a former employee refuses to come back to work (at the same hours and pay as before the layoff), document that communication. As long as you keep a written record of your offer to the employee and a record of their refusal, you can submit these later with your loan forgiveness application. Their FTE hours won’t be counted in your comparative averages, and you may still qualify for loan forgiveness.
  • If your business could not bounce back, you may be exempt from the FTE headcount rule. The PPPFA adds this exemption if “the employer is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.”

6. Consider rehiring even if you can’t reopen yet

One common question over the headcount issue is: how can you rehire employees if your business is still closed, even as mandated by stay-at-home orders? If your goal is to maximize forgiveness of the loan, current guidance from the SBA suggests you pay your employees anyway, whether your doors are open or they can work from home or not.

“It’s counterintuitive, but Congress designed this program as a way for small businesses to keep their employees rather than laying them off and putting them on unemployment,”advises Neil Bradley, executive vice president and chief policy officer at the U.S. Chamber of Commerce. “[Congress] anticipated that you might be paying employees who actually physically can’t come to work who aren’t providing services — but they would rather pay you (through the paycheck protection program) to pay those employees rather than you laying them off.”

7. Keep Wage Cuts from Reducing Forgiveness

Because a pillar of the PPP is to keep workers paid, your loan forgiveness may be reduced if you cut the average wage of any employee by more than 25%. While the SBA has yet to issue guidance on how the amount of loan forgiveness would be penalized, it’s assumed to be on a dollar-for-dollar basis. The SBA form 3508 (PPP Loan Forgiveness Application) includes instructions on calculating the forgiveness amount.

So, for the covered period, you need to pay your employees at least 75% of their average wage based on what you paid them in 2019 (or if 2019 data isn’t applicable, based on their gross wages in the first quarter of 2020). This rule does not apply to employees who earned an annual salary of $100,000 or more ($8,333 per month) in 2019.

Note that there is a limit to the cash compensation any individual employee can be paid during this 24-week period ($100,000 prorated over the number of weeks in your forgiveness period). Keep this in mind if you’re considering adding bonuses such as “hazard pay” to help maximize forgiveness.

As part of your PPP loan application process, you should have already calculated your monthly payroll costs according to the guidelines provided for employers. It’s in your best interest to double-check and have those figures and supporting documents at your fingertips.

In the event reductions were made, you have one recourse. If, by December 31, 2020, you restore the employees’ pay to at least 75% of the same wage that they earned as of February 15, 2020, you can avoid this wage-reduction penalty.

8. Setup a Separate Bank Account (Optional)

Once you’re approved by the SBA, the lender has just 10 days to put the money into your account, but usually this happens very quickly. To make it easier to manage, track, and later document your loan’s appropriate usage, some accounting firms recommend that you open a separate bank account to hold the PPP funds. If you do this, remember to switch your payroll withdrawal account to your dedicated PPP account for the 24-week period. While a separate account is not required by the SBA, your alternative is to keep very meticulous records of all your finances and expenses, and that can be a headache.

9. Check Your Progress in a Month or Two

Halfway through your forgiveness period, take a look at how you’ve spent your PPP funds so far. If you notice that 60% of your expenses aren’t going towards payroll, or that your average FTE headcount or employee wages are below your thresholds, you may have time to make necessary adjustments in how you spend the funds you have left, including considering “hazard pay” bonuses, giving people promotions and raises, or hiring new employees.

If you’re trying to use bonuses or raises to get your payroll spending up to the 60% required for full forgiveness, just remember that there is a total cash cap per employee ($100,000 prorated over the number of weeks in your forgiveness period). [Note: as of June 10, 2020, we’re still awaiting guidance from the SBA on a specific dollar cap amount.] However, you may still be eligible for partial forgiveness if you do not meet this 60% threshold.

10. Prepare and Apply for Forgiveness

Once your loan forgiveness window has closed (or by December 31, 2020, whichever is sooner), you can submit a forgiveness request to your lender. The deadline to apply for interest-free forgiveness is 10 months after the last day of the covered period. If you miss this deadline, you may have to make payments of principal, interest, and fees on the covered loan, beginning on the day that is not earlier than the date that is 10 months after the last day of your covered period.

As the borrower, you’re responsible for documenting how you used the PPP proceeds and to demonstrate that you did the following:

  1. Used at least 60% of the loan to cover for payroll costs (or if you’re an independent contractor, replaced your compensation based on your 2019 net income)
  2. Did not reduce headcount during the forgiveness window (unless you’re able do document in good faith that you tried — see step #5 above)
  3. Paid each of your employees at least 75% of their average wage (see step #7 above)
  4. Used the remaining 40% of the loan (or less) for allowable overhead expenses:
    1. Rent or mortgage payments for your business
    2. Interest payments on a mortgage or other loan (such as an auto loan) you use to perform your business (but interest payments on any other debt incurred before February 15, 2020 are not eligible for loan forgiveness)
    3. Utility payments for your business

Even before your forgiveness period is up, it’s a good idea to prepare by organizing what you’ll need. First, ask your lender if they will require any specific documentation. As a general guideline, such documents may include:

  • Payroll reports verifying your number of  full-time equivalent employees and pay rates (during both your baseline period and the forgiveness window)
  • IRS and state tax and insurance filings
  • Records of benefits payments
  • Receipts, canceled checks. or other records of PPP-approved expenses like rent and utilities
  • Statements for interest paid for debt obligations

You must also certify that the documents are true. Once you submit your request, your lender has 60 days to make a decision on the forgiveness.

What If You Don’t Qualify for 100% Forgiveness?

It may be difficult to flawlessly comply with (let alone document) the forgiveness requirements. However, amounts not forgiven simply convert into a 1% interest loan, payable over the next five to ten years (depending on the lender). There’s even a grace period. No payments would be required until the SBA remits the forgivable amount to your lender . If you do not request forgiveness, you will not have to make any payments for 10 months following the date of disbursement of the loan. (However, interest will still accrue from the date loan was disbursed.)

If there is evidence that you tried to manipulate the program, such as by providing false information, the SBA’s Interim Final Rule warns that you could be subject to additional charges for knowing violations or misappropriations. Furthermore, the rule states, “If a shareholder, member or partner uses PPP funds for unauthorized purposes, the SBA may have direct recourse against such shareholder, member or partner for the unauthorized use.”

Summing Things Up

To maximize your forgiveness, the first and most important step is to consult with your lender on the process and ask what documents you’ll need.

It’s also helpful to remember that the payroll protection program was passed for the purpose of preserving people’s pay during the primary period of this pandemic. That’s the basic theme behind the forgiveness rules. (We’ll update this post to reflect any final rules.)

To maximize your potential loan forgiveness, first make sure you’re not reducing headcount or wages. Then make adjustments (through rehiring or increasing pay) to avoid reduction penalties and demonstrate that you’ve dedicated at least 60% of your loan to paying your employees (or yourself, if self-employed. Finally, ensure that what’s left over is spent only on approved business expenses.

Three keys to remember are: 1) follow the PPP’s intent, 2) carefully document, and 3) don’t do anything that makes it look like you’re trying to game the system. Just operate your business like you normally would, and play by the rules.

This article was written by Dan Biewener over at Fundbox. You can view the original article here.