UPDATE: As of April 24, 2020, the federal government approved replenishment funding for the PPP by way of the Paycheck Protection Program and Health Care Enhancement Act. Learn more.

As applicants receive their Paycheck Protection Program (PPP) loan proceeds, their focus is quickly shifting to the maximization of the estimated PPP forgiveness. Unfortunately, specific guidance is limited, which leaves applicants in the dark regarding the exact details of the use of their funds.

The purpose of the PPP is to provide economic relief to small businesses negatively impacted by the COVID-19 pandemic. Generally, the legislation allows for forgiveness of the loan if used for payroll costs, mortgage interest, rent, and utilities throughout an eight-week period beginning with the receipt of the PPP loan funds. Forgiveness is reduced for any reduction of full-time employees (FTEs) or significant cuts in pay during the eight weeks.

Borrowers should consider the following:

  1. The eight-week period begins upon receipt of the funds. The eight-week period starts on the date the lender makes the first disbursement of the PPP loan to the borrower. The lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval. Note: Some people are reporting that this period may change for businesses that are precluded by governmental orders from fully opening their businesses.
  2. Payroll costs include more than wages. Payroll costs consist of compensation to employees in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent; payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; and payment of state and local taxes assessed on the compensation of employees. Non-cash benefits are not allowable. Payroll costs are limited to $100,000 when annualized.
  3. The forgiven amount of non-payroll costs is limited to 25% of the total loan. Non-payroll costs include mortgage interest, rent, and utilities. The underlying mortgage, rental agreement, or utility service must have been present at 2/15/2020. As well, these expenses must relate to the business’s operations. Utilities can include electricity, water, gas, sewer, and other services necessary to conduct business.
  4. Forgiveness is reduced by a decrease in workforce. The forgiveness amount is reduced by the ratio of FTEs employed during the covered period divided by the number of FTEs employed from 2/15/19 to 6/30/19 or 1/1/20 to 2/29/20. The borrower may choose which period to use as the comparison.
  5. Forgiveness is reduced by a decrease in compensation. The forgiveness amount is reduced by any reduction of an individual employee’s compensation in excess of 25% during the covered period as compared to the most recent full quarter of payroll. Employees with annualized compensation of $100,000 or more are not considered.
  6. Accounting method is not specified. There are no specific guidelines regarding the use of the cash basis or accrual basis of accounting; however, the U.S Treasury specifically prohibits the prepayment of interest and rent.

As June 30 approaches, the SBA and U.S. Treasury will likely provide more specific guidelines to the borrowers and lenders. Each lender’s interpretation of the legislation and required supporting documentation may vary. Contact your local CRI advisor to see how these guidelines may affect your PPP forgiveness.