The Federal Reserve has designated an additional $600 billion in loans for small and medium businesses.
The Federal Reserve has designated an additional $600 billion in loans for small and medium businesses. AFP / Olivier DOULIERY

If you recently applied for and received a Paycheck Protection Program (PPP) loan, congratulations! Before spending that money however, we want to remind you of a few key items to ensure that you receive forgiveness for the maximum amount possible as well as to go over certain steps you can take in order to avoid any legal pitfalls. There is a significant amount of overlap between these two points and taking care of the one will take care of the other.

How Loan Forgiveness Works

After you decide to keep the PPP loan, your next thought may turn to how to ensure forgiveness. In order to maximize loan forgiveness, keep in mind the following points:

  1. Only amounts expended during the eight weeks immediately following the issuance of the loan can be forgiven
  2. Note that no more than 25% of the loan can be forgiven for specified non-payroll expenses (rent, mortgage interest, and utilities)
  3. Your average Full-Time Equivalent (FTE) head count must be the same on June 30 as it was for either the period: February 15, 2019 through June 30, 2019 or Jan. 1, 2020 through February 29, 2020. If you are a seasonal employer the period to use for average payroll is 12 weeks beginning Feb.15, 2019
  4. No individual making under $100,000 can receive a pay cut of more than 25%
  5. Note that based on the best info we have currently, for purposes of a head count, an FTE is considered an employee (or together more than one employee) working at least 30 hours a week

By way of example, if you were to receive a $400,000 PPP loan, 25% or $100,000 can be spent on non-payroll expenses and thus be totally forgiven. Of the remaining $300,000, the full amount is forgivable if entirely spent on payroll costs. However, if your FTE falls by 50% due to laying off employees, only $150,000 of this remaining amount will be forgiven. Thus, a total of $250,000 ($100,000 + $150,000) will be forgiven while the other $150,000 must be repaid.

Forgive But Don't Forget

If 100% of your workforce is not needed, keep in mind that paid leave benefits for these employees can be counted for forgiveness. Thus, if you do not need the employees working in your business, you have the option to pay them as if they were on paid leave and still receive loan forgiveness. This also applies if you reduce salaries by no more than 25% in an effort to maximize usage of the loan. If you have received a loan based on a certain amount of FTE payroll, every effort should be made to keep employees on payroll through June 30.

After the eight weeks have expired, you will need to apply with your lender in order to receive loan forgiveness. The banks will rely on payroll records, utility bills, rent or mortgage statements, and check copies and cancelled checks in order to substantiate the amount you request to have forgiven. Maintaining the loan proceeds in a separate, designated bank account will also ensure that the full amount has been expended without any cross-over to other business funds. The lender has 60 days from receiving your application to confirm the amount forgiven.

One final note: Although the Paycheck Protection Program well ran dry on April 16, both chambers of Congress have worked feverishly in the days since to infuse it with an additional $250 billion. The expectation at this point is that additional funds will come available later this week. Thus, if you were considering applying but have not yet, we encourage you to reach out to your bank and begin or resume discussions about an application.

Peter N. Riefstahl is a supervisor at Louis T. Roth & Co., PLLC, a Louisville, KY-based Certified Public Accounting firm that specializes in tax planning, accounting, and business consulting services.