Maximizing PPP Loan Forgiveness under the CARES Act

On Behalf of | Apr 17, 2020 | Business Law |

One of the key features of the Payroll Protection Program (“PPP”) is that PPP loans can be forgiven. As such, it is essential for any business that receives a PPP loan to understand the requirements for loan forgiveness so that they can maximize the effectiveness of the loan. Notably, only portions of a PPP loan that are used for the established permissive uses under the CARES Act may be forgiven and the SBA has weighted certain permitted uses as more important than others.

What is the maximum amount of PPP debt forgiveness a business can receive?

The CARES Act broadly sets the maximum amount of PPP debt forgiveness available as the lesser of either the amount of the PPP Loan, or the portion of the PPP Loan proceeds that the borrower uses on permitted expenditures during the 8-week “Spending Period” following the disbursement of funds. In other words, a business must spend any PPP funds during the Spending Period on permitted expenditures to be eligible for loan forgiveness. The four categories of permitted expenditures are: Payroll Costs, the Interest Component of Covered Mortgage Obligations, Covered Rent Payments, and Covered Utility Payments, as defined by the CARES Act.

Notably, only 25% of the amount forgiven can go towards permitted expenditures other than Payroll Costs. In other words, at least 75% of a PPP Loan must be spent on Payroll Costs, while only a maximum of 25% of the proceeds can be spent on the other three categories. Any expenditures on the interest component of mortgage payments, rent, and/or utilities over the 25% allocated for that purpose will not qualify for forgiveness.

Borrowing businesses seeking forgiveness will be required to provide documentation of how the loan proceeds where spent. Borrowers can streamline the process of tracking permitted expenditures by placing PPP Loan funds in a separate bank account, and paying for permitted expenditures from that account.

Penalties That May Impact PPP Debt Forgiveness

Businesses seeking loan forgiveness should also be aware that they may be subject to any penalties under the CARES Act, which can impact the maximum forgivable amount of PPP loan debt. Specifically, borrowers may be penalized for reductions in force and for reductions in wages.

A penalty for reduction in force is based on a comparison of the borrowing business’s average number of full-time employees per month during the Spending Period to the comparison time period. For borrowers who are non-seasonal employers, the comparison time period either runs from February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020. A reduction in the number of full-time employees between the Spending period and the comparison period will result in a deduction from the total forgivable amount.

The second penalty focuses on reductions in wages. Specifically, if the borrower decreases any employee’s wages during the Spending Period by more than 25% compared to the most recent full quarter in which the employee was employed prior to the beginning of the Spending Period, the amount of loan forgiveness will be reduced by the difference in pay. There is no penalty if the reductions are 25% or less. The penalties are cumulative, meaning that a business’s total forgivable PPP loan debt amount could be reduced by both penalties for reductions in force and for reductions in wages.

Borrowers subject to penalties can take steps to cure penalties and reduce or avoid penalty-based deductions that impact the maximum forgivable amount. Specifically, if the Spending Period falls between February 15, 2020 and April 26, 2020, and if the actions resulting in penalties is cured or repaired by June 30, 2020, borrowers will not be penalized.