What You Need to Know About Your PPP Loan

Hannah E. Mudd

By Hannah E. Mudd

As you are aware, the Paycheck Protection Program (“PPP”) was developed as a relief measure under the CARES Act. Unsurprisingly, the initial round of PPP funding was  fully claimed by businesses across the country. Congress passed a bill providing additional funding for PPP loans. If you previously applied for either loan, you may not need to re-apply. For more information, click here.

If you are one of the fortunate businesses to secure funding, you may be wondering – now what? Whether it be how you may use those funds or ensuring you receive maximum loan forgiveness, here’s what you need to know for your business.

Fortunately, the SBA anticipated these questions and provided some clarifying guidance for business owners. One of the most important clarifications is that no more than 25% of a PPP loan can be used for non-payroll costs if the business wants to be eligible for complete loan forgiveness. They also clarified that any interest which accrues before the loan is officially forgiven or paid in full must be repaid at the borrower’s expense. Additionally, full forgiveness will not be available if you reduce the number of full-time equivalent employees (“FTE”s) during the 8-week loan period or reduce the pay of an employee making less than $100,000 by more than 25%.

The SBA also clarified that your lender will be the one to actually determine the amount of the loan that is deemed forgivable and will have 60 days to approve or deny the forgiveness once they receive your business’ request and relevant documentation. What exactly will be required by your particular lender to demonstrate proper usage of loan proceeds and ensure maximum loan forgiveness is still unclear.

What to Track and Monitor for PPP Loan Forgiveness

We recommend creating a method to track, record, and document anything at all PPP or expense-related for the next several months.

Additionally, the following are several things to specifically monitor and keep inside this ‘file’ that will make your request for forgiveness much easier and streamlined.

1. Implications from other CARES Act Provisions. Depending on your business’ situation, you may have qualified for, and received, alternative relief under another provision of the CARES Act. You will want to evaluate the timing implications these alternatives may have on your PPP loan forgiveness before using any of the funds.

The primary example would be if your organization received a PPP and an Economic Injury Disaster Loan (EIDL) loan and/or the EIDL emergency grant. PPP and EIDL loan proceeds are to be used for separate expenses and can impact how much forgiveness you receive under the PPP. One way to make sure this does not happen is to keep detailed records on how you use the proceeds from each loan. It is also helpful to not pay any payroll costs with EIDL proceeds if you received a PPP loan. Please keep in mind that if you received the $10,000 EIDL emergency grant, these funds will automatically reduce the amount of forgiveness you receive on your PPP loan by $10,000. If you have more questions on either loan program see The CARES Act: Loans and Credits for Small Businesses, Sole Proprietors, and Nonprofits – Part One.

2. Create a Log. Track your uses of loan proceeds in a detailed log. You will want to identify when and how proceeds were used and to whom payments were made. A reconciliation page can be made from the day the proceeds were received through the date they are exhausted. If you want to take this a step further, you could create a separate checking account, or cash account in your ledger, specifically for the PPP proceeds. Choose a method that works for you and will provide a streamlined process and ease the review burden for your lender. Additionally, you will want to ensure you do not commingle funds. This will all go towards an efficient review and important transparency with your lender during the loan forgiveness review.

3. Track Your Payroll Costs. As mentioned earlier, the 8-week loan period must have 75% or more of loan proceeds utilized to cover payroll costs. To help monitor how you are using these funds, consider logging each pay period, payroll reports, and other filings, like employment taxes, created in the normal course of business. Start with the earliest date of the approved comparison periods through the date your PPP loan forgiveness gets approved. This will help determine which comparison period is more beneficial for your company with relative ease.

4. Track Your Average Monthly FTE. Another important aspect for forgiveness eligibility is that your organization’s average monthly FTE during the 8-week loan period is the same or higher than one of the approved comparison periods. If the average monthly FTE in the 8-week period is less than the average FTE in the comparison period, you can expect the forgiven loan amount to be proportionately adjusted downward.

Practically speaking, track FTEs for each normal pay period starting from the earliest date of the comparison period through the date the PPP loan forgiveness is approved. Just as mentioned above, this will make compiling approved expenses easier and enable flexibility to adjust for any changes down the road. If you will be re-hiring furloughed or laid-off employees as a result of receiving the loan, track re-hire statistics clearly as well.

5. Track Qualified Non-Payroll Expenses. Keep logs of non-payroll payments made during the 8-week period. You should also keep the actual documentation, statements, invoices, and payment transfers with this log as well. This will ensure, or at least monitor, if more than 25% of the loan proceeds are being spent on non-payroll costs. It will also give you insight as to how much of the loan will not be forgiven if you exceed this 25% threshold. Click here for more details on what are considered payroll versus non-payroll costs

6. Create a Forgiveness Estimate and Evaluate Cash Flow. If you are concerned over how much of the loan will be forgiven, you can prepare an estimate for what percentage of your loan may/may not be eligible for forgiveness. We have described how to prepare such estimate in detail below, but of course, keep in mind your lender may have other factors involved that they will consider as well. This will help your business be ready to handle any possible repayment requirements with ease and have a firm grasp on how that figure was determined when you receive a determination from your lender. While you are already closely monitoring expenses, now is a great time to evaluate what the anticipated revenue drivers and costs your organization may face when returning to pre-COVID-19 functionality.

7. Re-evaluate and Be Flexible. You may now have roles or job functions that have changed. Consider whether these jobs, tasks, or processes can be modified now to put your business in a better place later. Consider how employees can transition to different roles or duties. Remember, these programs are totally new for everyone, not just borrowers, and were rolled out quickly so there will likely be some ‘growing pains.’ Reach out to your employees and ease their fears. Continue to keep your eyes open for program changes, modifications, or additional programs that may be helpful as well.

How to Estimate the Percentage of Your PPP Loan Likely to be Forgiven

As we mentioned above and in prior articles, there are particular requirements to satisfy in order to qualify for full loan forgiveness. If you would like to prepare a rough estimate to determine if you stay within the 25/75% threshold and if not, how much of the process may not be forgivable, these comparisons will be helpful. While tracking the 25/75% split will be relatively simple, the other reduction factors are a bit more complicated as you will see a reduction in the forgivable loan amount if you have certain reductions in employees, wages, and salaries.

To see if your business has made an improper reduction in employees, wages, or salaries resulting in a reduction to location forgiveness, compare your statistics from the 8-week period to those from before the COVID-19 crisis. This reduction reinforces the idea that the PPP loan should keep your employees employed and receiving their normal wages.

First, aggregate the total payroll payments for the 8-week period after the date of receiving your loan proceeds. As mentioned, this will include items like regular payroll costs, interest payments, rent payments, and certain utilities.

Then compare your business’ average monthly FTEs for each pay period during the 8-week period to a “comparison period.” You determine the average monthly FTEs by calculating the average number of full-time equivalent employees employed by your company each pay period during a month. The comparison period is comprised of data from either the average monthly FTE from February 15, 2019 through June 30, 2019 or the average monthly FTE from January 1, 2020 through February 29, 2020. Seasonal employers will need to use a comparison period ranging from February 15, 2019 through June 30, 2019.

The amount of loan forgiven will be reduced by multiplying the amount in step one by the quotient from dividing the average number of FTEs per month by the chosen comparison period.

These matters can easily become complex and convoluted. Should you have any questions regarding your options, the impact on your workforce and operations, or tax concerns, please do not hesitate to reach out to your accountant or one of our corporate attorneys.

For additional COVID-19 related information, go to our Coronavirus/COVID-19 Resource Center.

Posted by Attorney Hannah E. Mudd. Mudd is a member of Danna McKitrick’s transaction team. As a member of the team she advises clients on a variety of corporate and business transactions including entrepreneurial, real estate, banking, employment, and corporate formation and governance matters.


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