Maximizing Forgiveness of Paycheck Protection Program Loans

By: Kyle D. Kring and Kerri N. Polizzi

On March 27, 2020, the federal Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law. Among a number of other stimulus programs, described in greater detail in our CARES Act overview, the law provided funding for federally-backed, partially-forgivable Paycheck Protection Program ("PPP") loans administered by the U.S. Small Business Administration ("SBA") to provide much-needed cash-flow assistance to employers who maintain their payroll during the coronavirus pandemic.

As of April 15, 2020, nearly $250 billion in PPP funds had been approved and negotiations were underway to approve a second round of funding. On April 21, 2020, U.S. Senate Minority Leader Chuck Schumer (D-NY) announced that the Senate has a deal for approximately $310 billion in additional PPP funding that is expected to be passed in the coming days.

As our clients begin to receive approval of first-round funded PPP loan applications and others consider applying for anticipated second-round funds, maximizing forgiveness of these loans is at the forefront of their minds. It is important to note that loan proceeds can exceed the forgiveness amount, depending on a business's individual circumstances and chosen use of the PPP funds. As receiving maximum forgiveness can be key to the ongoing viability of many businesses, we have prepared the following summary of the important information about PPP loan forgiveness requirements.

Total Loan Amount

As a reminder, the total PPP loan amount is 2.5 times average total monthly payroll costs (defined below) for the one-year period preceding the loan, plus the outstanding amount of any existing SBA Disaster Loan Program loan made between January 31, 2020 and the date of refinance of that loan under the CARES Act, up to a maximum of $10 million.

PPP loan funds may be used to cover the following expenses incurred and payments made between February 15, 2020 to June 30, 2020 (the "covered period"):

  • Payroll costs (defined as compensation to employees (including salary, wages, commissions, cash tip equivalents) up to $100,000 annually per individual, paid time off, severance payments, payments for group healthcare benefits, retirement benefits, and state or local payroll taxes);
  •  Other compensation to employees;
  •  Group health insurance continuation costs during an employee's leave of absence;
  •  Interest payments on a mortgage originated before February 15, 2020;
  •  Rent payments under an agreement in force before February 15, 2020;
  •  Payments to maintain utility services (including electricity, gas, water, transportation, telephone, or internet) which began before February 15, 2020; and
  •  Interest on any other loan predating February 15, 2020.

As discussed in further detail below, the total loan amount can exceed the forgivable amount in two key respects: (1) total loan funds may be used during a broader time period than forgivable loan funds; and (2) total loan funds may be used for additional purposes not subject to forgiveness. Any portion of the loan not forgiven will be subject to repayment under the terms of the loan - i.e. 2 years of maturity at an interest rate of 1%.

Loan Forgiveness

Critically, PPP loans are subject to broad debt forgiveness so long as all of the following conditions are met:

  1.  The funds must be used within eight weeks of the date of the loan's origination. The 8-week countdown begins the day the first disbursement of PPP proceeds is made by your lender. In turn, the SBA requires funds to be disbursed within 10 days of loan approval.
  2.  The funds are used for payroll costs, mortgage interest payments, rent obligations, and utility services payments; and
  3.  At least 75% of the loan funds must be used for payroll costs. It is important to note that payroll costs do not include the following:
    1. Individual employee compensation over $100,000 per year (or the pro-rated amount during the covered period);
    2. Compensation of employees with principal residences outside the U.S.; or
    3. Emergency Paid Sick Leave and Emergency Family and Medical Leave wages paid under the Families First Coronavirus Response Act.

    To maximize loan forgiveness for qualifying uses, employers should maintain all documents related to these expenses. Common examples can include copies of leases, mortgages, utility bills, payment receipts, account statements, canceled checks, direct deposit receipts, and payroll registers.

    Reductions from Forgiveness Amount

    The purpose of the PPP is to provide employers with the influx in capital needed to cover the cost of retaining employees. As such, the total amount of the loan forgiveness is reduced by the employer's failure to retain employees in each of the following ways:

  • Reduction in Employee Count: The forgivable portion of the loan will be reduced by decreases in employee headcount in the amount calculated by dividing the average number of Full Time Equivalent Employees per month during the covered period by, at the borrower's election, either:
    • The average number of Full Time Equivalent Employees per month from February 15, 2019 to June 30, 2019; or
    • The average number of Full Time Equivalent Employees per month from January 1, 2020 to February 29, 2020; and
  • Reduction in Salary: The amount of reduction in salary or wages of any employee (excluding any employee who earned an annualized pay rate of more than $100,000 in any single pay period in 2019) during the coverage period that is greater than 25% of the salary or wages of that employee in the most recent full quarter he or she worked prior to the covered period.
  1. However, borrowers can avoid the reductions listed above if the reduction in Full Time Equivalent Employees and each employee's wages is eliminated by June 30, 2020. This can involve affirmative measures to restore payroll, such as re-hiring employees previously laid off and paying employees for additional wages hours not actually worked.

    As with documenting fund usage, documenting employee counts and wages will be critical to maximizing loan forgiveness. If any use of the loan proceeds involves paying employees additional amounts not based on hours worked, accurate documentation can also be critical to demonstrating ongoing compliance with wage and hour laws, including recordkeeping, minimum wage, and overtime requirements.

    Applying for Loan Forgiveness

    PPP lenders are responsible for processing applications for loan forgiveness. While individual lender applications may vary, applications will generally require borrowers to provide:

    • Documentation verifying the number of employees maintain and their pay rates;
    • Documentation verifying payments on covered mortgage obligations, rent obligations, and utilities; and
    • Certification that the documentations is true and that the amount for which the employer is seeking forgiveness was used in accordance with the requirements set forth above.

    Kring & Chung, LLP is continuing to monitor and work with our clients to respond to federal, state, and local government responses to the evolving COVID-19 pandemic. We strongly encourage those considering applying for loans mentioned in this summary to consult with their employment and business legal counsel, financial advisors, and tax specialists.

    Kyle D. Kring is a Managing Partner of Kring & Chung, LLP. He can be reached at (949) 261-7700 or kkring@kringandchung.com. Kerri N. Polizzi is an Associate of Kring & Chung, LLP. She can be reached at (949) 261-7700 or kpolizzi@kringandchung.com.

    [Disclaimer: Please note that during this time of crisis, the updates, advisories and regulations that we receive from the promulgating agency often contain ambiguities and/or are often amended, modified or updated. The opinions expressed herein are based on our reasonable interpretation of the issuing agency's publication at the time the opinion is expressed and is therefore subject to change based on further developments. The effect of the opinions expressed may be different based on your particular circumstances, and it is recommended that you not rely upon these general opinions prior to obtaining a consultation with your legal and/or financial advisors.]

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