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Don’t beg for forgiveness, prepare for it. Learn what steps you can take and the documentation you must provide to help your business qualify for loan forgiveness.

COVID Financial Management

How to Help Your Business Qualify for PPP Loan Forgiveness

  • Jennifer Witts
  • 4/20/2020

Key insights

  • Paycheck Protection Program loan funds are being disbursed to business owners across the country.
  • To help qualify for PPP loan forgiveness, borrowers must follow specific documentation processes.
  • Review the documentation requirements and details that could help you qualify for loan forgiveness.

Small business owners across the nation are breathing a short sigh of relief as they receive highly anticipated government loans from the Paycheck Protection Program (PPP). One of the most attractive features of this loan is that all or at least a portion of the loan will be forgiven, if borrowers follow certain rules after receiving the loan.

How does a business qualify for loan forgiveness?

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In general, the Small Business Administration (SBA) will provide loan forgiveness to businesses that use at least 75% of the loan proceeds for documented payroll costs, and not more than 25% of the loan proceeds for allowable rent, mortgage interest payments, and utilities during the eight weeks after receiving the loan.

In addition, during this same period, businesses must also maintain their full-time equivalent (FTE) headcount and at least 75% of employee salary and wages compared to prior periods, measured on an individual employee basis. The forgiveness amount is limited to the amount spent on allowable uses during the eight-week period following receipt of the PPP loan proceeds, if the full loan proceeds are not spent during that time.

Beyond these general guidelines, the specifics around the loan forgiveness rules are somewhat unclear. We anticipate the Department of the Treasury will release further clarification over the coming weeks. However, despite the limited guidance, there are ways you can help to enhance the benefit of your PPP loans and qualify for forgiveness.

Take these three steps surrounding PPP loan forgiveness

1. Get grounded in your numbers

Calculate and document these dates and numbers today, to identify the parameters you will have to work within for loan forgiveness.

  • Your eight-week period (covered period) — The eight-week period in which businesses must use loan proceeds for allowable uses starts as soon as the business receives the loan. Know your start date and calculate your end date. This is the covered period for which you’ll need to provide documentation of your allowable uses.

  • Your full-time equivalent headcount — The SBA will reduce the loan forgiveness by the proportion in which the FTE headcount during the covered period is less than a comparable pre-COVID-19 period. Your FTE headcount in the covered period is the average monthly FTEs employed during the eight-week period, subject to adjustment for the re-hire provisions noted below.

    Your pre-COVID-19 FTE headcount is either the average monthly FTEs from February 15, 2019, through June 30, 2019, or the average monthly FTEs from January 1, 2020, through February 29, 2020. You can choose which pre-COVID-19 period to use, so calculate the headcount for each period and select the lower of the two to help minimize any reduction in the forgiveness amount.
  • Individual employee salary or wages — The loan forgiveness amount could also be reduced if salary or wages in the covered period are less than 75% of a pre-COVID-19 quarter. The covered period is the eight-week period following the loan origination, while the pre-COVID-19 period is the most recent full quarter before the covered period (most likely, Q1 2020 or Q4 2019). We are still awaiting guidance on how to equalize the eight-week period to a quarter’s 12-week period.

  • Re-hire dates — The loan forgiveness calculations disregard FTE or salary reductions that occurred between February 15, 2020, and April 26, 2020, as long as the employer has eliminated the reduction in FTEs and/or salary by June 30, 2020.

2. Get organized and document your expenses

Knowing the numbers above is only half the battle. Applying for forgiveness with your lender will require strict documentation to prove your numbers and how you used the proceeds.

Maintain the following documentation throughout your covered eight-week period to assist in your application process:

  • Payroll tax filings reported to the IRS;
  • Payroll summary reports reflecting FTE headcount numbers and individual salary and wages over the eight-week period (use this to compare to numbers you calculated for the prior period);
  • State income, payroll, and unemployment insurance filings; and
  • Payment receipts, canceled checks, bank statements, or other documents verifying payment on covered mortgage interest, lease, or utility payments

Maintain this documentation from day one of your covered period. This is the time to insist on receipts, transparent reporting, and an organized system for document storage.

3. Develop strategies to impact the long-term outcomes for your business

While the spirit of the PPP is to give employers the means to keep as many employees employed as possible during the COVID-19 crisis, there may be circumstances where employers simply cannot maintain their pre-COVID-19 workforce. Employers faced with such circumstances may have difficulty spending the entire loan on allowable uses in the applicable eight-week period.

By way of example, a construction business that applied for the maximum PPP loan may be unable to keep its hourly employees working full time because many jobs have been canceled or delayed due to the outbreak. Or, in the case of restaurants, many employers have already furloughed their employees and, while they can bring them back on their payroll to qualify for forgiveness, it may not make sense to do so for restaurants that are not running at full capacity within eight weeks. In addition, it may be difficult to get furloughed employees to come back, because some furloughed employees may actually be earning more from recently expanded unemployment benefits than they would earn if they came back to work.

In all of these situations, employers may have difficulty spending the full loan proceeds during the eight-week period and 75% of their loan amount on payroll during that time with a reduced workforce. Note that loan forgiveness is not all or nothing. If you have not met all of the requirements for loan forgiveness, a portion of the loan will be forgiven based on what you were able to spend on allowable uses in the period.

This is where different strategies can come into play. In some situations, it may be more beneficial to operate with a reduced workforce and convert a portion of the loan to a two-year, low interest loan or immediately repay any unforgiven portion of the loan without penalty. In other situations, it may be a better strategy to push more payroll-related expenses, such as employer 401(k) contributions or bonuses, into the eight-week period to meet the 75% payroll cost threshold. Employers should think through the various available strategies to help enhance loan forgiveness, while also balancing the near-term needs of employees and long-term needs of the business.

Bringing it all together

During a time when so much is outside our control, understanding what you can control as it relates to the PPP loan will help prepare your business for enhancing loan forgiveness. Here’s what you can control now: calculate the dates and numbers impacting your forgiveness calculation, maintain your documentation, and model out various strategies that demonstrate 100% forgiveness versus a sliding scale of forgiveness. This model should incorporate the numbers you calculated above, along with an updated cash flow forecast. This will enable you to see what levers you can pull to impact longer-term outcomes for your business during and beyond your eight-week covered period.

How we can help

At CLA, we can discuss additional ideas, help you navigate how to bring these factors together, and come alongside you to build this critical modeling tool using CLA Intuition 2.0. Reach out to your CLA service team or contact us to talk through how we can help.

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  • Jennifer Witts
  • BizOps Chief Financial Officer