Guide to Maximizing Loan Forgiveness of the Paycheck Protection Program

April 17, 2020

Guide to Maximizing Loan Forgiveness of the Paycheck Protection Program

Note:  Information is current as of 4-17-2020; further updates will be provided at

The Paycheck Protection Program (PPP) component of the CARES Act has a major employment stabilization goal. Its primary purpose is to provide loans to help businesses with the resources they need to maintain payroll, hire back employees who may be laid off, and cover applicable overhead during the COVID-19 pandemic.

For small businesses, one of the most appealing features of the PPP is the possibility that they may never have to pay it back: there is potential for a PPP loan to be forgiven up to 100%.

And while the PPP is designed to help employers impacted by the COVID-19 pandemic continue to pay their employees, its loan forgiveness provision is certainly the “big carrot” of the program.

The challenge is that small businesses have not received definitive guidance on how the PPP loan will be forgiven. This adds stress to an already difficult situation as business owners now are speculating what will be required in order to obtain PPP loan forgiveness.

The Basics of PPP Loan Forgiveness
There is a two-step process to qualify for the loan forgiveness after the loan is funded:

  1. Businesses will need to aggregate the total payments for the 8-week period, after the date of funding (the “8-week post funding period”), for payroll costs, interest payments, rent payments and certain utilities.
  2. Then, compare your company’s average monthly full-time equivalent (FTE) during the 8-week post funding period to a “comparison period,” defined as:
    • Average monthly FTE from February 15, 2019 through June 30, 2019; or
    • Average monthly FTE from January 1, 2020 through February 29, 2020.

Seasonal employers must use a comparison period of February 15, 2019 through June 30, 2019

  • Those applying should note that the Small Business Administration (SBA) has stated that no more than 25% of forgiveness can be from non-payroll costs. The SBA has also clarified that any interest that accrues before the loan is forgiven or paid will be at the borrower expense.
  • Full forgiveness will not be available if you reduce FTEs during the covered period or reduce pay of an employee making less than $100,000 by more than 25%.
  • Your lender will determine the loan forgiveness amount and upon receipt of the forgiveness request and necessary documents, will have 60 days to approve or deny the forgiveness.

Is there a loan forgiveness documentation “game plan” to follow?
There continues to be uncertainty about exactly what kind of documentary evidence will be needed from borrowers to demonstrate compliance with the terms and conditions of the PPP loan – and how the banks will evaluate how much of the loan proceeds are eligible for forgiveness. Until there is better guidance from Treasury or the SBA on exactly what information will be needed to determine loan forgiveness, Herbein + Company (Herbein) suggests the following “best practices”:

  • Keep a secure file for all PPP documents. Borrowers need to be able to easily access all your PPP-related correspondence, receipts and other documentary evidence. The last thing you want to do is have to scramble for a piece of evidence your lender specifically requests.
  • Track your average monthly FTE.PPP loans are eligible for forgiveness if your organizations average monthly FTE during the 8-week post funding period is the same or higher than one of the approved comparison period dates.
  • Track payroll costs.Payroll costs during the 8-week post funding period must be 76% or more of the comparison period average to be eligible for full forgiveness.
  • Track qualified non-payroll costs. The PPP loan allows for up to 25% of the loan proceeds to be spent on non-payroll costs, such as:
    • Mortgage interest, on loans originating before February 15, 2020;
    • Rent, under lease agreements in force before February 15, 2020; and
    • Utilities, for which service began before February 15, 2020.

Keep a detailed log of these payments during the 8-week post funding period.

  • Create a transaction log.Create a detailed log of the uses of the loan proceeds. The log should clearly identify when and how the proceeds were used. Prepare a reconciliation from the day the proceeds were received through the date proceeds were depleted.
  • Consider implications of other CARES Act Provisions. There may be other CARES Act provisions that your organization may be eligible for, that could impact the timing and extent of your PPP loan forgiveness.
  • Create a PPP loan forgiveness model.Using the information you gathered in the steps above, create a model to estimate what percentage of the PPP loan may not be eligible for forgiveness. Consider the cash flow impact accordingly.

Please visit our COVID-19 Resource Page for more information or to contact a Herbein team member for additional direction email us at Article contributed by David Peritz.