You Obtained your PPP Loan, Now What? Maximizing the Loan Forgiveness - COVID-19 Legislation

On April 3, 2020, businesses could start applying for Paycheck Protection Program (“PPP”) loans.  Under the PPP, the loans can be forgiven in an amount equal to the sum of any payroll costs and mortgage interest, rent and utility payments during the 8-week period following receipt of the funds.  Please note that the Small Business Administration and Treasury Department will be releasing additional regulations and guidance on the forgiveness aspect of the PPP at some point.

Maximum Forgiveness Amount

The highest potential amount for forgiveness is the sum of the following costs incurred and payments made during the 8-week period after receiving the loan:

• Payroll costs

• Salaries, wages, commission, or similar compensation[1];
• Payment of cash tips;
• Payment for vacation, parental, family, medical, or sick leave;
• Dismissal or separation payments;
• Group healthcare benefits, including insurance premiums;
• Retirement benefits; and
• State or local tax on employee compensation.

• Mortgage interest payments for mortgage obligations incurred before February 15, 2020,
• Rent payments for leases dated before February 15, 2020,
• Utility payments (electricity, gas, water, transportation, telephone, or internet access) under service agreements dated before February 15, 2020

However, not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.

Example: If a business spent $150,000 on payroll costs during the eight-week period after receiving the PPP loan, a maximum of $50,000 of non-payroll costs (rent, mortgage interest, utilities) incurred during the eight-week period are eligible for forgiveness.

Forgiveness Reductions

The amount of potential loan forgiveness is reduced based on reductions in salary or wages over a certain amount and reductions in the number of employees.

Salary/Wage Reduction

The maximum forgivable amount is reduced on a dollar for dollar basis for any reduction in wages or salary of more than 25% for employees earning less than $100,000.00 in 2019, as compared to an employee’s salary in the most recent full quarter during which the employee was employed before receipt of the PPP loan..

Example: If a business reduced the total salary of an employee earning $10,000 on February 15, 2020 to $5,000 on June 30, 2020, the amount of potential loan forgiveness is reduced by $2,500.  A reduction to $7,500 would not result in a penalty because it is within the allowed 25% reduction, but any further reduction results in a dollar-for-dollar penalty.

Headcount Reduction

The maximum forgivable amount is also reduced in proportion to any reduction in the number of employees compared to one of two periods during the prior year or the first two months of this year.

In order to calculate a reduction in the number of employees, a business calculates the average number of full-time equivalent employees per month during the 8-week period after receiving the loan and compares it to one of two time periods that the business can select:

• The average number of full-time equivalent employees per month during the period from February 15, 2019 to June 30, 2019; or
• The average number of full-time equivalent employees per month during the period from January 1, 2020 to February 29, 2020.

Example: If a business has a monthly average of 9 full-time equivalent employees in the 8-week period after receiving the loan but had a monthly average of 10 full-time equivalent employees from January 1, 2020 to February 29, 2020, the amount of potential forgiveness would be reduced.  If a business had $100,000 in otherwise eligible forgiveness costs, only 90% (9/10) of that amount, $90,000, would be forgivable.

Curing Reductions

In order to encourage employers to rehire employees that have already been released due to the COVID-19 crisis, however, businesses can offset these reductions if, by June 30, 2020, they restore the reductions in employees and wages that occurred between February 15, 2020 and April 26, 2020.

If a business attempts to rehire staff to cure the reduction in the number of employees, but the employees refuse to come back, those employees are excluded from the loan forgiveness reduction.  A business must make a good faith, written offer to rehire an employee at the same number of hours and the same amount of compensation, and the employee’s rejection of that offer must be documented.  Businesses and employees should be aware that an employee’s unemployment benefits may be forfeited if they reject an offer of re-employment. 

Application for Loan Forgiveness

The loan forgiveness does not happen automatically; a business must actively apply for the forgiveness with the bank that approved the loan.  As of now, there is no certain date by which a business must apply for forgiveness.  The business must submit documentation to apply for loan forgiveness which includes:

• Documentation verifying the full-time equivalent employees on payroll and their pay rates;
• Documentation of mortgage, rent and utility payments;
• Certification that the documentation is true and correct and that forgiveness amounts requested were used to retain employees and make other forgiveness-eligible payments; and
• Any other documentation the SBA Administrator may require.

Lenders are required to make forgiveness determinations within 60 days of receiving a loan forgiveness application, and forgiven amounts that might otherwise typically be included in gross income and subject to taxation, are excluded.  That is, a business will not be taxed on the forgiven loan as it would on other loans.

If you have any questions related to this legislation, please contact your attorney at Pedersen & Houpt or the attorneys below and we will answer your questions and walk you through the program

[1] Remember that cash compensation to an individual employee is capped at $100,000 per year prorated for the 8-week period after receiving the loan and any cash compensation over that amount will not be forgiven.

Larry Byrne  
Attorney at Law
161 North Clark Street, Suite 2700
Chicago, Illinois 60601
312-261-2155
lbyrne@pedersenhoupt.com

Eric J. Kordish
Attorney at Law
161 North Clark Street, Suite 2700
Chicago, Illinois 60601
312-261-2249
ekordish@pedersenhoupt.com

Matthew J. Schmidt
Attorney at Law
161 North Clark Street, Suite 2700
Chicago, Illinois 60601
312-261-2281
mschmidt@pedersenhoupt.com

David A. Martin
Attorney at Law
161 North Clark Street, Suite 2700
Chicago, Illinois 60601
312-261-2286
dmartin@pedersenhoupt.com