How to Maximize Paycheck Protection Program Loan Forgiveness

Paycheck Protection Program Loan Forgiveness

On April 2, 2020, the Small Business Administration (“SBA”) published an interim final rule regarding the Paycheck Protection Program (“PPP”). Hours later on April 3, 2020, thousands of PPP loan applications were filed and businesses started to receive funds. Once PPP loan proceeds are received it is important for business to know what to expect and how to properly use those funds in a manner that will result in forgiveness of the PPP loan. There are at least three things a business obtaining a PPP loan should know.

First: Be Aware of Differences Between the SBA Rule and the text of the CARES Act.

First, businesses should be aware of a few differences between the SBA rule and the text of the PPP in the CARES Act. The SBA rule provides that “[t]he amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest.” This is different from the text of the PPP in the CARES Act, which limits loan forgiveness of a PPP loan to the principal amount. Business should probably plan that the least favorable statement will apply, meaning that only the principal could be forgiven, and be pleasantly surprised if any of the interest is forgiven. The SBA rule also provides that “not more than 25 percent of the loan forgiveness amount may be attributable to nonpayroll costs,” even though no such limitation exists in the text of the PPP of the CARES Act. Again, planning for this additional restriction in the SBA rule to apply would be prudent. 

In addition to what portions may or may not be forgiven, the SBA rule discusses how the proceeds of a PPP loan may be used and, while not present in the text of the PPP in the CARES Act, imposes the restriction that “at least 75 percent of the PPP loan proceeds shall be used for payroll costs.”  The SBA rule also adds the admonition that: “If you use PPP funds for unauthorized purposes, SBA will direct you to repay those amounts. If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud. If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.”  Using less than 75% of the PPP loan proceeds on payroll costs, as required by the SBA rule, may constitute an unauthorized use, so business should pay close attention to how the PPP loan proceeds are used.

Second: Understand the Possible Reductions to the Forgivable Amount.

Second, businesses that receive a PPP loan should have a plan to make sure the PPP loan proceeds are used in a manner that would maximize the potential forgivable amount. Subject to the SBA rule that 75% of PPP loan proceeds must be used on payroll costs, the amount that should be eligible for forgiveness is the total amount of “costs incurred and payments made [1] on payroll costs, mortgage interest, rent, and utilities during the 8-week period following the origination of the PPP loan. However, the amount eligible for forgiveness may be reduced in two ways.

The SBA rule acknowledges the possible reduction in the amount eligible for forgiveness by providing that “the borrower will not be responsible for any loan payment if the borrower uses all of the loan proceeds for [sic] forgiveable purposes described below and employee and compensation levels [sic][2] levels are maintained.” However, the SBA rule does not give any detail regarding the possible reductions, but instead states that the “SBA will issue additional guidance on loan forgiveness.” Therefore, the text of PPP portion of the CARES Act is what businesses must rely on in making a plan to avoid possible reductions in forgivable amounts.

The first possible reduction to the amount eligible for forgiveness is based on a reduction in the number employees. To determine if a reduction applies, the borrower will be required to determine the average Number of full time equivalent employees (“FTEEs”) per month during the 8-week period after origination of the PPP loan and divide that number by, at the election of the borrower[3], either:

  • Average number of FTEEs per month between February 5, 2019 and June 30, 2019; or
  • Average number of FTEEs per month between January 1, 2020 and February 29, 2020.

To calculate average number of FTEEs per month, the average number of FTEES for each pay period falling within a month is used. The number generated by this equation (if less than 1 on account of a reduction in employees[4]) is then multiplied by the amount eligible for forgiveness, which will result in a reduction in the amount that may be forgiven. However, if the reduction in FTEEs occurred between February 15, 2020 and April 26, 2020, and that reduction in FTEEs is eliminated by June 30, 2020 (meaning that the number of FTEEs on February 15, 2020 is restored by June 30, 2020) this reduction on account of a reduction in employees can be disregarded. A business seeking to take advantage of the ability to eliminate a reduction in the number of FTEEs before June 30, 2020, must remain mindful of the SBA rule requirements that at least 75% of PPP loan proceeds be spent on payroll and that no more than 25% of non-payroll expenses can be included in any amount ultimately forgiven.

The second possible reduction to the amount eligible for forgiveness is based on a reduction to salary and wages. This reduction only applies to employees that during any single pay period in 2019 were not paid at an annualized rate of $100,000 or more. For those employees (those making less $100,000 on an annual basis), any reduction in total salary or wages during the 8-week period after loan origination that is in excess of 25% of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the 8 week period will result in a commensurate reduction in the amount eligible for forgiveness. The text of the PPP in the CARES Act, read literally, would require a business to take the salary or wages paid to each employee over the 8-week covered period and compare that amount to the entire salary or wages paid to each employee during 1st quarter 2020 (which is more than an 8-week period) to see if there is a reduction of more than 25% that results in a reduction in the forgivable amount. This literal reading would likely result in a reduction in the forgivable amount unless each employee received a raise in salary or wages during the 8-week covered period, which does not appear to be what Congress intended. The SBA has not issued guidance on this forgiveness reduction possibility based on a reduction in salary and wages, but hopefully the SBA will issue a clarifying rule soon.

The possible reduction to the amount eligible for forgiveness based on a reduction in salary or wages is also subject to an exception that would allow a business to disregard any such reduction. If there is a reduction in employee salary or wages between February 15, 2020 and April 26, 2020, and the reduction in salary or wages is eliminated by June 30, 2020, there will be no reduction in the forgivable amount on account of a reduction in salary or wages. However, it is not clear if any reduction in salary or wages has to be completely eliminated or whether it just needs to be brought back within the 25% reduction threshold. Again, the SBA has not yet provided guidance, but hopefully this will be clarified soon.

Third: Keep Watching for Further Guidance.

Third, things are happening and changing fast. This means that business obtaining a PPP loan need to monitor the rules and guidance as it comes out to make sure that they understand how to use the proceeds of the PPP loan. There have recently been many changes regarding basic PPP loan terms (such as interest rates and duration) and to eligibility for a PPP loan (such as affiliation requirements) because most people are currently focused on obtaining PPP loans at this time. There has not yet been much published regarding forgiveness of the PPP loan proceeds, which may be just as (or more) important to borrowers than simply obtaining a loan. Therefore, every business that obtains a loan should be prepared to continue to monitor the evolving guidance regarding PPP loans to make sure that they are able to maximize the potential for forgiveness.

Finally, best practices for businesses obtaining a PPP loan include:

1.  When you get your loan proceeds, put them in an isolated account, or ensure that you’ll be able to show where the money went.

2.  Use as much of the loan proceeds as possible to pay payroll costs incurred in the 8-week period following the origination of the loan, and in event and use at least 75% of the loan proceeds to payroll costs.

3.  Use as much of the 25% of loan proceeds allowable for non-payroll costs to pay rent, mortgage interest, and utility payments during the 8-week period following origination of the loan.

4.  Document all payments made with loan proceeds, along with proof of when the obligations were incurred.

5.  Keep watching the news (and reading Bell, Davis & Pitt blog posts!) for further developments.


[1] The CARES Act provides that these types of “costs incurred and payments made” may be forgiven.  It is not clear if this requires something to be both incurred and paid during the 8-week covered period such that work performed by an employee leading up to but not during the 8-week covered period, but paid within the 8-week covered period would not be included in the forgivable amount.  The SBA has not yet provided any guidance.

[2] The typographical errors in the SBA rule are likely a result of the frantic pace at which the PPP is being implemented, and may also signal that additional or amended rules will be published in the near future.

[3] A seasonal employer may not have this option, but instead may have to use February 15, 2019 to June 30, 2019.

[4] This equation cannot increase the forgivable amount.  If more employees exist during the 8-week covered period and the numerator is greater than the denominator in this equation such that a number greater than 1 is generated, there will be no increase or reduction in the forgivable amount. 

About the Authors

Andrew A. Freeman

Andrew Freeman litigates matters in all levels of trial and appellate courts, including business, employment, banking, insurance,
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Alan M. Ruley

Alan Ruley is a seasoned civil trial and appellate lawyer. He represents clients in a wide variety of disputes in federal and state court, focusing primarily on business litigation, intellectual property, insurance, banking and employment.
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Justin Hardy

Justin M. Hardy

Justin focuses his practice on property tax appeals, intellectual property law, tax controversy law, and general business law.  He is a regular contributor to both The North Carolina Property Tax Law Monitor and The Trademarketing Blog.  You can follow him on Twitter @JustinHardyBDP.
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Kris Bryant Winston Salem attorney Bell Davis Pitt

Kris Bryant

Kris Bryant primarily practices in the area of general corporate law. Kris has been a member of the Bell, Davis & Pitt team since 2009. Kris’s principal areas of practice are:
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