Guide to the Paycheck Protection Program, by Salvatore Zambito

With the PPP (Paycheck Protection Program), loan forgiveness rules are one of the most significant benefits. Back towards the beginning of June 2020, the Flexibility Act was introduced. Among other things, it made loan forgiveness restrictions more generous. Now, small businesses have the support they need to survive (while helping employees) during this turbulent time. 


For those who are unaware, the PPP is a loan that can be converted into a grant. With 1% interest, forgiveness isn’t automatic but will occur when certain requirements are met. If the funds are spent following the rules, the business can send a forgiveness request document to the lender. Today, we’re going to explain more about the loan and how you can maximize the forgiven amount. 


Once the loan is received, you have until the end of 2020 (or 24 weeks, if this is sooner) to utilize the funds. If you don’t, the lender will request a repayment within the timeframe agreed; this can be anywhere between five and ten years. 


If you haven’t paid attention to the 2020 Flexibility Act, many forgiveness conditions have been adjusted. This includes loan usage percentages, applicable dates, and more. What’s more, there has also been the addition of safe harbors. 


Below, we’ve laid out some important considerations and tips. Besides guidance from the SBA (Small Business Administration), we have our own advice and information. If you don’t have time to read everything, save the article and know that the two most important steps are: 


• Document all expenses carefully 

• Follow the rules of the PPP 


1. Document Everything 


Just because you used the funds as requested doesn’t mean that the loan will be forgiven automatically. As lenders will tell you, there is no promise of the government forgiving any loan amounts. To stand the best chance of having any portion of the loan forgiven, you will need to prove appropriate spending, and this comes through documentation. 


2. Keep the 60/40 Rule in Mind 


Initially, the PPP was introduced by the CARES Act for small businesses. The aim was to help companies keep employees and cover payroll; for independent contractors and sole proprietors, it can even cover lost revenue. Based on average monthly payroll costs multiplied by 2.5, some businesses will get a 1% interest loan of up to $10 million. 


Although the main focus is on keeping workers employed during the COVID-19 pandemic, there is an allowance for vehicle payments, rent, utilities, and other operating expenses (hence the importance of documentation!). Either way, loan forgiveness eligibility comes when at least 60% of the money goes towards payroll. Meanwhile, less than 40% is available for overheads. If you stick to the 60/40 rule, you may be entitled to full loan forgiveness. 


If you fail to meet the 60/40 rule, this doesn’t mean that forgiveness is out of the question. Instead, you may be eligible for partial forgiveness. If less than 60% is used for payroll, partial loan forgiveness may be available, and we know this because a statement was released by Steven Mnuchin (Treasury Secretary) and Jovita Carranza (SBA Administrator). 


3. Work Out Your Headcount 


The PPP Loan Forgiveness Application Form lays out many important details. On page 7, you’ll see instructions for determining FTE (full-time equivalent) employees. The calculation is as follows: 


(Average hours paid per week/40) – round to the nearest tenth


This should be done for every employee, and no worker can surpass 1.0. If you choose the simplified method, you can assign all employees who work over 40 hours a 1.0 score and all those under 40 hours a 0.5 score. Whichever method you choose, keep your calculations so that you can explain if asked. 


If loan forgiveness is reduced, it will be based on the difference between two separate figures. The first is the total of FTEs who work during the loan window (24 weeks). The second is the total of FTEs working during a specific baseline period. The lowest of the following is chosen: 


• The eight weeks between January 1st and February 29th 

• The 19 weeks between February 15th and June 30th 

• A consecutive 12-week window between May 1st and September 15th 


Let’s say that, during the 24-week window, FTE employees reduced by 30%, loan forgiveness could then see the same 30% reduction. 


4. Check Numbers after Approval 


After approval, an email will come through from the SBA with a loan amount and loan number. At this stage, we urge you to calculate three numbers. Firstly, the number of FTE employees in your business. Secondly, the average monthly wage or salary of all workers. Thirdly, 60% of the loan amount.


As we’ve already seen, the third number is important because you will need to spend at least this on payroll over the 24 weeks. If you receive $75,000, your employees should receive $45,000 if you plan on being eligible for full loan forgiveness. 


On the other hand, the first two numbers are significant because forgiveness falls with reduced headcount and compensation. 


5. Think about Rehiring 


We understand you might not be able to open again yet, and the regulations surrounding stay-at-home orders and the like have been confusing some. Regarding headcount, people will ask how you can rehire when the business is closed, and when we’ve been told to stay at home. Even when your doors are closed indefinitely, SBA guidance says you should pay employees for maximum loan forgiveness. 


For Congress, the program was important to keep workers employed. With a loan to pay salaries and wages, small businesses don’t have to lay these workers off, they won’t go on unemployment, and there aren’t millions and millions fighting for jobs when everything calms down again. The government would rather pay your employees through you and keep them employed than have them on unemployment for an indefinite period. 


6. Stop Layoffs from Reducing Forgiveness 


Similarly, we understand that some will have furloughed employees or will have laid them off completely between February 15th and April 26th. If this is the case, and you’re worried about FTE headcount, a reduction penalty can be avoided by rehiring to the same number by the end of the year. This way, the rehired (or new) employees will still count towards your headcount for 24 weeks. 


What if your employees don’t want to come back? Firstly, know that headcount is more important than a list of names. Whether you rehire or get new employees, the most important aspect is paying at least 60% for staffing, so loan forgiveness isn’t reduced. 


When calculating headcount, you may claim ex-employees even after leaving the business in three different situations: 


• If the employee resigned 

• If the employee was fired for cause 

• If the employee formally requested a decrease in work hours 


However, bear in mind that this position cannot be filled; if they resigned, you can’t replace them and count two FTE employees. In these three situations, loan forgiveness is not affected by FTE reductions. 


You might speak to your employee, and they may not want to come back with the same pay and hours as before this situation. If so, you should make all communications formal and keep these records. When you send off a loan forgiveness application, include the recorded communication and your offer’s rejection. With this, the worker’s hours won’t be included with averages, but you may still be eligible for forgiveness. 


Unfortunately, there will be some companies who fail to recover from the difficult circumstances of 2020. If you find yourself in such a difficult position, the FTE headcount rule may not apply. If you didn’t reach the same performance levels as you experienced before February 15th, you would be exempt from the rule as long as you can document the lack of performance. 


To support this, there’s guidance available from the Occupational Safety and Health Administration, Secretary of Health and Human Services, and the Director of the Centers for Disease Control and Prevention (applicable between March 1st and December 31st). For example, a failure to reach prior performance may be due to having to comply with social distancing, sanitation, and other health and safety measures laid out by the three organizations. 


7. Keep Separate Bank Accounts 


This one isn’t a necessity, but we think it’s easier to track money from the PPP when it’s in a separate account. Upon approval, businesses need to get funds into an account within ten days. With a unique bank account, you can document exactly where the money went without any other figures getting in the way. While the SBA doesn’t make this a requirement, it can save lots of headaches with this process. 


8. Manage Wage Cuts Carefully 


With the aim of PPP to keep people in jobs, loan forgiveness is affected when average wages for an employee drop by over 25%. With no guidance from the SBA, we don’t know how large or small this penalty will be. However, the Loan Forgiveness Application has calculation instructions, and experts say it’s on a dollar-for-dollar basis. 


What does this mean? All employees need to receive at least 75% of the amount they earned in 2019 (or the first quarter of 2020 when 2019 data isn’t applicable). If an employee earned over $100,000 in 2019, this rule does not apply. 


For employees, there is also a restriction for earnings over the course of the 24 weeks. Therefore, cash compensation cannot exceed $100,000 (prorated over the forgiveness period). Some companies plan to maximize forgiveness with hazard pay and other bonuses, so keep this in mind. 


Amid all the applications and processes, we recommend having monthly payroll costs within reach; memorize this figure and have it ready. If you’re reading this and you’ve already made reductions, the only way to avoid the penalty is to increase the employee’s pay to 75% of what they earned on February 15th. Without this corrective measure, you will have a wage-reduction penalty. 


9. Check Progress 


The worst thing you can do is go through the forgiveness period blindly and realize you made mistakes at the very end. To prevent this, regularly check how the PPP funds have been spent. If you aren’t meeting the 60/40 rule, at least you have time to fix this. Alternatively, it might be that employee wages are below 75% or that the headcount isn’t right. Some will need to hire new workers, give hazard pay bonuses, or give raises/promotions to meet the forgiveness requirements. 


Remember that no employee can earn more than $100,000 over the forgiveness period (prorated) if you try the latter. For those who don’t have time to fix problems, remember that partial forgiveness is an option. 


10. Apply for Forgiveness 


As mentioned earlier, the forgiveness period will end at the end of 2020 or 24 weeks, whichever is sooner. At the end of the period, you’ll need to send a forgiveness request to the lender. Once the last covered day is passed, you have ten months to apply for interest-free forgiveness. With no application, you will be liable for not only the loan but also fees and interest. Payments will begin after the initial ten-month period. 


When pushing for full forgiveness, you need to document and show: 


• That headcount didn’t fall (note the considerations discussed previously). 

• That a minimum of 60% of the loan amount went towards paying employees (independent contractors can use funds to replace income, based on 2019 figures). 

• That each employee received at least 75% of their average wage (note the considerations discussed again). 

• That any remaining funds were used on the allowable overhead expenses. This includes utility bills, mortgage payments, and rent. If you want to use these funds for interest payments, they must come from a loan or mortgage used to operate the business. Unfortunately, you won’t get loan forgiveness for a debt incurred before February 15th. 


Instead of waiting until the end of the forgiveness period, we recommend preparing for the forgiveness application as soon as possible. Rather than guessing, feel free to speak with the lender and learn what documentation they require. For example, this will probably include benefit payment records, statements showing interest payments on debts, tax and insurance filings for IRS and state, receipts of approved expenses, and payroll reports. The latter should include pay rates and FTE employees for the forgiveness window compared to a previous baseline. 


When applying, you’ll need to confirm that all documents are true and accurate. It’s then a waiting game with the request submitted since the lender has sixty days to address the request. 


Qualifying for Full Loan Forgiveness 


For most businesses, complying with the forgiveness requirements is hard enough, and this is without documenting it all. If you don’t qualify for full forgiveness, the good news is that the loan has a 1% interest rate, and you have between five and ten years to pay the money back. Payments don’t start immediately because the SBA needs to send any forgivable amounts to the lender, and you even get a grace period. 


Anyone who doesn’t want to file a forgiveness request will accrue from the moment you take the loan. On the other hand, you won’t be expected to pay a single dollar until ten months have passed. 


As we come to an end, we urge you not to manipulate the program. If you offer false information or use any other technique, extra charges are added to the loan through the Interim Final Rule. Additionally, the PPP funds should never be used for unauthorized purposes. The SBA may take action against shareholders, partners, or members when this occurs. 




We hope this guide has been of help to you and your business during this strange and difficult time. Remember, there are resources to assist whether you’re applying for the first time or are planning your forgiveness request. Also, the lender isn’t the enemy; ask them what documents they require and how their system works. This way, you avoid missing important documents and failing with the request. 


When maximizing forgiveness, don’t reduce wages or headcount. For the SBA they want to keep businesses alive while also keeping workers in a job. Therefore, ensure that at least 60% of the loan amount is being used for payroll. For anything left after that, it should go towards the allowable overhead expenses. 


We’ll leave you with the following advice: 


• Document everything 

• Follow the guidance 

• Don’t try to manipulate the system 

• Run the business as normal as possible and follow the rules and requirements 


Good luck, and we wish your business the best as we continue to recover from the COVID-19 pandemic. 

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