You have just received your PPP loan money. Now what? | SmithAmundsen LLC

REMARK: This is general information and should not be construed as legal advice. New guidelines are continually being released. This information is only valid until April 16, 2020.

So far, the CARES Act and related guidelines issued by the Treasury indicate that two general factors will be considered in determining forgiveness:

1: Has at least 75% of the funds been spent on “salary costs”?

2: Have you maintained the same staffing and salary levels for full-time equivalent (FTE) employees?

First factor keep in mind: AT LEAST 75% of the PPP loan proceeds were used for “payroll costs”.

  • Payroll costrefers to the same definition that employers considered when calculating the amount of loan proceeds available.
    • This includes raw cash compensation up to $100,000 pro-rated
    • Employer money spent on retirement plan funding (such as pension contribution payments or 401(k)/403(b) matching funds)
    • Employer money spent on health plan premiums (do not include amounts billed to and paid by your employees)
    • Employer taxes paid to national and local governments
      • This does NOT include the employer’s share of federal payroll taxes such as Social Security and Medicare
      • This includes employer payroll taxes paid to state unemployment agencies.
  • No Fraud DO NOT worry if you don’t spend 75% of the funds on staff costs. There are several potential scenarios where this could innocently happen. Some examples:
    • You have a large part of your salaried population eligible for paid leave via the FFCRA. Since you will receive payroll tax credits to fund this paid leave, you cannot claim it as a salary cost incurred by the Company.
    • You have no work to take over the employment of individuals. And, depending on an employee’s annual salary level, current unemployment levels may have provided them with an increase in compensation. You don’t have to interfere with that and disqualify them from unemployment by taking back their compensation.
  • How was the remaining percentage (no more than 25%) spent?
    • Allowable expenses include interest on mortgages, rent and utilities.
    • Generally, the service obligation or contract must have existed before 02/15/2020.

Next factor Things to keep in mind: Determine if there is a reduction in the number of employees OR an employee’s salary.

  • Forgiveness is NOT all or nothing – it can be pro-rated. Proration is based on headcount or salary levels – or both.
  • Calculation used to determine if downsizing:
    • First divide A by B
      • A =
        • Average number of full-time equivalent employees per month employed during the 8 weeks following receipt of loan proceeds
      • B=
        • the average number of full-time equivalent employees per month from 02/15/2019 to 06/30/19
        • OR, the average number of full-time equivalent employees per month from 01/01/2020 to 02/29/2020
    • Then multiply that percentage by:
      • The total amount spent on authorized “payroll costs” and other authorized expenses such as business debt/mortgage interest and utilities in the first 8 weeks after receiving the loan proceeds
      • The resulting final number is the main amount eligible for rebate.
  • Forgiveness can also be reduced if you reduce employee compensation:
    • Review wages paid within 8 weeks of receipt of loan proceeds.
    • The loan forgiveness will be reduced by the amount of an employee’s salary reduction.
      • The reduction is determined by looking at the total amount paid during the 8-week period following receipt of the loan proceeds and comparing it to that employee’s total salary during the most recent full quarter.
      • Taken into account only when the reduction is greater than 25%
    • As long as a pay cut does not cause an individual to fall below $100,000 pro-rated over the 8-week period, it should not count towards the rebate.
      • This is a conclusion based on 2 different parts of the Act. One part allows for any reduction made for someone earning $100,000 or more per year to be disregarded, and another part of the law that requires 75% of loan proceeds to be paid as payroll costs ( and with that same individual presumably counting for at least $100,000 to determine loan availability).

What about the option to fix things?

  • CARES offers employers the opportunity to “fix” things and ensure that staff or wage reductions are entirely ignored when determining forgiveness.
    • Circumstances where “repair” is an option:
      • Employer reduced headcount or salary between 02/15/2020 and 04/26/2020 (30 days after CARES takes effect), but employer corrects it by:
        • Increase in the number of full-time equivalent employees by 06/30/2020.
        • At least 1 employee has had their salary reduced by more than 25%, and the employer eliminates this reduction by 06/30/2020.
      • There is no clarification on the meaning of “patches”. We assume that some averages will be published to eliminate the potential abuse of allowing last minute corrections.

What documentation should I keep?

  • CARES lists the following as eligible documents that can be provided to a lender to verify rebate calculations:
    • Payroll tax returns (state and federal)
    • Account statements attesting to payments made
    • Attestation from a person authorized to do so on behalf of the business that the documentation is true and correct and that the amount for which the rebate is requested was used to retain employees, make interest payments on a mortgage bond covered, make payments on a covered rent obligation, or make covered utility payments.

Summary: Things to do and keep in mind

  • Keep a record of total loan principal received
    • Immediately calculate 75%:
      • This is the total minimum amount you must spend on payroll, unemployment contributions, and the employer’s share of health and pension benefit costs (including insurance premiums paid).
    • Note the number of 25% remaining:
      • This is the total maximum amount you can spend on all utilities, all business interest expenses, and any rental or lease obligations.
    • Keep in mind the documentation mentioned above. These items may be needed to verify the expenses you are claiming for the required percentages.
  • Forgiveness calculations are complex with some potential implications that do not yet occur and/or are beyond your control. All you can do initially is carefully monitor how you spend the loan proceeds during the first 8 weeks after receipt.
  • Amounts for which you cannot benefit from a discount will be reimbursed and will be the subject of a loan under the following conditions:
    • No payments due for the first 6 months


TOTAL Loan received of $645,421.00

A=? (Maybe 14)** (average FTE employees per month for 8 weeks following receipt of loan proceeds)
B=21 (Average FTE workforce per month over the period from 02/15/19 to 06/30/19 OR from 01/01/20 to 02/29/20)
66.7% = $430,281 (Ratio of potential percentage/$ eligible for rebate)
75% of the total loan amount = $484,065.75 (Minimum loan amount that must be spent on “salary costs”)
25% of total loan amount = $161,355.25 (Maximum loan amount that can be spent on rent, lease, utilities and/or mortgage interest)
Loan amount to be repaid at 1% interest —> $215,140 Total loan proceeds less the ratio described above

**Note that this example anticipates a scenario where wages are not paid to individuals in the event that there is no work for them to perform with unemployment as a better alternative for individuals. If the estimated number for A increases, the loan amount available for forgiveness will also increase.

**Also note that this example does not don’t count for any pay cuts for anyone earning less than $100,000 a year.

Previous Top CEOs agree culture is key before, during and after the crisis
Next Small business bailout needs more money, fewer rules