April 21, 2020 | Posted in:

The Key to Paycheck Protection Program Loan Forgiveness

You received your Paycheck Protection Program loan. Now what?

Business owners who were able to secure SBA funding from the Paycheck Protection Program (PPP) are beginning to receive their loan proceeds. A major benefit of the Program is the advertised loan forgiveness. However, forgiveness is only applicable if the proceeds were spent on specific expenses.

In order to maximize your chance at PPP loan forgiveness, your next steps are very important. Keep the following in mind.


Qualifying Expenses

Built into the CARES Act, the purpose of the PPP was to encourage small business employers to retain employees during the COVID-19 pandemic and extend them the funds to do so. The amount eligible for forgiveness is instructed to be allocated in the following ways:

At least 75% towards payroll costs:

  • Full and part-time employee wages for 8 weeks; Excludes independent contractors
  • Salary cap is $100,000 per employee
  • Health insurance, benefits, and state taxes can exceed that amount

No more than 25% towards:

  • Interest on mortgage obligations in place prior to February 15, 2020
  • Rent for lease agreements signed prior to February 15, 2020
  • Utilities for services in place prior to February 15, 2020


Self-Employed and Independent Contractors

Schedule-C filers and independent contractors are not included in the above payroll costs as they are eligible to file their own PPP loan application. The forgiveness amount is based on the borrower’s average monthly profit for 2019 (owner compensation replacement).

To be eligible for forgiveness, the loan proceeds must be spent on employee payroll costs, interest payments on business related debt (real or personal property), business rent payments (real or personal property), and/or business utility payments. However, in order to include the interest, rent, or utility payments as forgiveness in 2020, those expenses must be present on the 2019 Schedule C. To know exactly what to expect and how to prepare, it is important to discuss the forgiveness rules with your lender.


Recommendations for Forgiveness

Loan forgiveness is not a given. For the best chance at forgiveness, thorough recordkeeping from the beginning is a must. The forgiveness period lasts for eight weeks and starts the day the borrower receives the money from the lender. Borrowers have to provide proof of qualified expenses and apply for forgiveness.

The following recommendations can increase your likelihood of forgiveness after the 8-week period:

  • Separate the PPP funds. Consider depositing the loan proceeds in a separate account to avoid co-mingling with other business income or operating funds. This is especially important if you received relief funds from other programs, such as the EIDL.
  • Track in your General Ledger. Create account codes or sub-codes to support your paper trail for the qualified expenses.
  • Retain supporting documentation. Be diligent about keeping clear and organized documentation for use of the PPP funds, especially for payments made on payroll, interest, rent, and utilities.
    • Payroll: Payroll registers and proof of ACH transfers. If you outsource to a PEO, save your payroll invoice that shows payroll costs and other employee benefits backup. Keep in mind that once payroll has posted, there is no going back to change it.
    • Utilities: Invoices and statements for electric, gas, and heating provider
    • Rent: Proof of rent payments.
    • Mortgage interest: Statements showing the obligations were paid.
  • Talk with your lender. The banks may have their own forgiveness process and interpretations. It is very important to have open communication with your banker so there are not any surprises at the end of the eight weeks.

What happens if you don’t use all of the loan proceeds? There are two options. You can pay the balance off with the loan amount not used, and there is no prepayment penalty. You could also not include that amount in the forgiveness portion and keep the money as a 1% loan for the 24 months.

Reduced PPP Forgiveness

The amount eligible for forgiveness will be reduced in the following scenarios:

  • Proceeds were not spent on the qualifying expenses. (at least 75% payroll and no more than 25% interest, rent, utilities.)
  • The loan double-dipped with another relief loan to cover the qualified expenses.
  • Employee compensation and wages were reduced by 25% (for those earning $100,000 or less in 2019).
  • Full-time employee headcount is decreased.

Borrowers have until June 30, 2020 to restore full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.


If you have any questions or concerns, Alloy Silverstein’s accountants and business advisors are here to help you throughout this process. Contact us or give us a call at (856)667-4100.


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