Maximizing Forgiveness of Your PPP Loan

by: Smith and Howard

June 11, 2020

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The Paycheck Protection Program Flexibility Act, which was signed by the President on June 5, 2020, made changes to the terms of PPP loans. This article reflects those changes.

Marvin Willis, the partner in charge of Smith and Howard’s Accounting and Advisory group, recently appeared in a webinar organized by the Forsyth County Chamber of Commerce to advise businesses on maximizing forgiveness if they were successful in obtaining a Paycheck Protection Program (PPP) loan. Willis cautioned that there have been several changes to the terms of the PPP, so while loan recipients should follow the most recent guidance, published on May 15, when applying for forgiveness, they should also be prepared for more guidance to be issued.

PPP calculation process

One of the most attractive features of the PPP is the promise of loan forgiveness if certain criteria are met. Among them is that 60% of a loan must be used for payroll, including benefits, while the remaining 40% can be used to cover non-payroll costs such as mortgage interest, rent and utilities. The steps below address how businesses can maximize their PPP loan forgiveness. Note that the PPP Flexibility Act states that if 60% of the loan is not used for payroll costs, the loan will not be forgiven. Businesses that do not qualify for full loan forgiveness will be given five years to pay back the loan, at an interest rate of 1%.

Step 1: Determine payroll costs, covered mortgage interest, covered rent and covered utilities

The first step in calculating how much of a loan will be forgiven is to determine all eligible payroll costs (excluding salaries/wages exceeding $100,000 and qualified sick or family leave) as well as non-payroll costs like covered mortgage interest, rent and utilities (MRU) for the period that the loan covers. Covered MRU in this case refers to any contracts or agreements for mortgages, rent or utilities that were entered into before February 15, 2020. It includes the interest on mortgage obligations, business rent and utility payments for electricity, gas, water, transportation, telephone or internet access.

Step 2: Calculate Maximum Non-Payroll Costs Including Mortgage Interest, Rent, Utilities (MRU) Costs

To calculate the maximum MRU costs that can be forgiven, divide the payroll costs by 33%. Mathematically, that will result in MRU costs that are 40% of the total eligible costs for loan forgiveness. For example, if payroll for the loan period is $100,000 and 60% of the loan that will be forgiven is for payroll costs, take that $100,000 and divide it by 0.60, which gives you a loan amount of $166,666. 40% is the maximum amount of the loan that can be spent on MRU. Therefore, in this example, the maximum MRU costs would be $66,666 (40% of $166,666).

Step 3: Determine the Eligible MRU Costs

Once the loan recipient has calculated the maximum MRU costs in Step 2, the next step will be to determine the MRU costs that will be eligible for forgiveness. To arrive at that sum, look at both the actual MRU costs and the maximum costs that were calculated in Step 2. The lesser of these two costs will be the amount eligible for forgiveness. For instance, if payroll costs were $100,000 but total MRU expenses came to $70,000, using the example in Step 2, only $66,666 would be eligible for forgiveness.

Step 4: Calculate Total Eligible Costs

To calculate the total eligible costs that will be forgiven, combine payroll costs with the eligible MRU costs calculated in Step 3.

Step 5: Determine Maximum Forgiveness

To determine the maximum forgiveness amount, look at both the total eligible costs that were calculated in Step 4 and the principle PPP loan amount. Whichever amount is lesser is the maximum amount of the loan that will be forgiven.

Step 6: Calculate Reduction in Maximum Forgiveness on Reduction in Number of FTEs

Employers will also have to meet full-time employee (FTE) or FTE equivalent criteria in order for their loans to be forgiven. Full-time employment for the PPP refers to an employee working 40 hours a week. This equals 1.0 FTE. Those working more than 40 hours a week are capped as 1.0 FTE. FTE equivalent refers to a combination of part-time employees who work enough hours to match a full-time employee.

For the purposes of the PPP, the Small Business Administration has proposed that borrowers can use a simplified method, where an employee who works less than 40 hours a week is referred to as an 0.5 FTE. If a business has two employees who are 0.5 FTE, that can be combined to represent one FTE. To qualify for loan forgiveness, a business has to have the same number of FTEs during the loan period as they had during one of the following options:

  • Option 1 – Average FTEs, calculated by pay period, by month, for the period from 2/15/2019 –6/30/2019.
  • Option 2 – Average FTEs, calculated by pay period, by month, for the period from 1/1/2020 – 2/29/2020.

If headcount during the loan period had to be reduced, then an average percentage of FTEs will have to be used and the forgivable amount of the loan used for payroll costs will be reduced. The table below shows how to calculate that average. In this example, the FTE count from 2019 is the least advantageous because there was a bigger reduction in the number of employees, meaning less of the loan would be forgiven.

Example - Reduction Based on Reduced Headcount
Average FTEs 8-week period100
Average FTEs 2/15/2019-6/30/2019120
Average FTEs 1/1/2020-2/29/2020105
Choose Most Advantageous Percentage95% (100/105)

Step 7: Calculate Reduction in Maximum Forgiveness Based on Pay Cuts

If pay cuts were made during the loan period and those pay cuts were greater than 25% for employees making less than $100,000 in 2019, the amount of the loan that will be forgiven is reduced. To calculate that reduction, the formula in the table below should be used. The example below is based on receiving a loan of $1,000,000, with the 95% reduction in FTE that was outlined in Step 6.

Example - Forgiveness Reduction
Maximum Forgiveness$1,000,000
Reduction % Based on Headcount95%
Reduction in pay in excess of 25% for employees making < $100,000 in 2019$100,000
Final Forgiveness Amount$850,000 ($1,000,000 * .95) - $100,000

Things to consider for PPP economic uncertainty certifications

During the loan application process, companies have to certify in a document that they have an economic uncertainty and outline how the funds are being used. This certification is also necessary when applying for loan forgiveness, in order to prevent misuse of the program. Document all use of the funds so that proof is available when applying for forgiveness. Loan recipients will have to certify that their documentation is true and correct, and that the funds were used only to retain employees and make interest, rent and/or utility payments. Other expenditures cannot be included. Since there was not a typical underwriting process, loan applicants will also have to provide “certifications to hold harmless” the lenders and bankers.

Companies receiving these loans should ensure that their actions cannot be perceived as taking advantage of the crisis and should remember that the loan will be a matter of public record.

Forecasting and data collections activities

To be sure that a PPP loan will qualify for forgiveness, businesses need to be able to calculate their total expected payroll costs and maximum eligible MRU for the loan period, in order to forecast the maximum amount of loan forgiveness they can expect.

To calculate the total expected payroll costs during the covered period, use either the first payroll after PPP funding is received or the most recent payroll available. Exclude annualized pay that exceeds $100,000, non-U.S. residents, paid sick leave or FMLA that is eligible for credit under the First Families Coronavirus Response Act (FFCRA) and any non-qualifying items, such as expense reimbursement. Carefully predict any pay that is inconsistent from payroll to payroll, such as overtime, tips, commissions or severance. Estimate group health and dental costs in the covered period (usually two months). The total estimated payroll costs eligible for forgiveness will equal the estimated salaries, wages, overtime, commissions and tips plus the estimated group health and dental and retirement contributions.

To forecast the maximum MRU eligible for forgiveness, employers should look at one to two months of mortgage interest, rent and utilities and compare the total forecasted MRU to the maximum MRU (40% of the maximum payroll costs eligible for forgiveness).

Contact Your Smith and Howard Advisor

There are a lot of moving parts when it comes to PPP forgiveness. If you have any questions on PPP loan forgiveness, please contact Marvin Willis or your Smith and Howard advisor by completing the form below.

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