Part of our You Belong in Business podcast

Photo of a business owner determining how to spend the Paycheck Protection program so most of the loan is forgiven.

7 ways small businesses can maximize PPP loan forgiveness

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As a business owner maybe you’ve already applied for emergency federal relief from the Coronavirus Aid, Relief, and Economic Security (CARES) Act through its popular Paycheck Protection Program (PPP), which ended August 8, 2020, and began accepting applications for loan forgiveness on August 10, 2020.

The legislation was quickly assembled by Congress and deployed by the Small Business Administration (SBA), and applications flowed in even faster. It’s been a whirlwind. And if you’ve secured a loan, you likely put the funds to use to keep your employees working and business open—all while trying to understand how the “forgiveness” part of the loan works.

Lance Schoening, director of government relations for Principal®, sums it up: “The primary premise of PPP is that these are loans in name only.”

In other words, PPP loans were designed to be largely converted into grants. But understanding exactly which expenses qualify for PPP loan forgiveness isn’t easy. (The SBA and Treasury received exactly that sort of feedback to their detailed forgiveness application and responded with simplified versions of the application: Form 3508EZ and Form 3508S. To use either of these simplified forms you must meet certain requirements outlined in our PPP Overview (PDF).

We’ve compiled seven strategies based on business owners’ top concerns.

Use our Paycheck Protection Program expense tracker (Excel) to document your expenses along the way.

1. Don’t short yourself on allowable payroll costs.

What qualifies as payroll during the forgiveness period following the loan (eight or 24 weeks) is broader than you might think. It’s not limited to salary, wages, commissions, and tips. PPP also includes:

  • payments for leave (vacation, parental, family, medical, and sick leave),
  • employer contributions to group health care benefits (including insurance premiums) for employees,
  • employer contributions to defined benefit or defined contribution qualified retirement retirement plans for employees, and
  • employer -paid state and local taxes assessed on compensation.

Employee bonuses also qualify, but Mark West, national vice president of business solutions for Principal, cautions that business owners ask themselves a key question: “Would you pay out this bonus if PPP didn’t exist?”

In other words, don’t dole out bonuses with loan forgiveness in mind.

2. But don’t go beyond PPP payroll boundaries.

The most employee payroll expense you can count toward forgiveness is $100,000 annually per employee or:

  • $8,333 monthly,
  • $1,923 weekly.

However, owner compensation is limited to a portion of the owner's 2019 compensation, or $100,000—whichever is less. If you use an eight-week forgiveness period, your limit can be up to $15,385. With a 24-week forgiveness period, your limit can be as much as $20,833. For details, see Frequently Asked Questions, A-15 (PDF). Employer contributions for group health, retirement, and other benefits for employees are in addition to this cap. For details about group health and retirement benefits for owners, see Frequently Asked Questions A-17 and A-18 (PDF).

PPP payroll also excludes:

  • employees living outside the United States,
  • the employer portion of Social Security payroll taxes,
  • wages where the company receives a Families First Coronavirus Response Act payroll tax credit, and
  • independent contractors who’ve worked for your business.

3. Maintain your staffing.

Maximize your PPP loan forgiveness by retaining your full-time and full-time equivalent employees.*

“It’s not the entrepreneur protection program,” says Kimberly Weisul, editor-at-large for and Inc. Magazine. “If you’re an entrepreneur and don’t want to bring your employees back until right before you think you’ll reopen, that makes sense from a financial point of view. But that’s not what this program is for. It's to take employees back earlier than that, even if you don’t have anything for them to do, so they remain employed.”

Here's how it works:

Your staffing level during the forgiveness period following the loan will be compared to one of two prior periods (you can choose which):

  • February 15–June 30, 2019, or
  • January 1–February 29, 2020.

To maximize forgiveness, the deadline to rehire or replace employees who were let go between February 15 and April 26, 2020, is December 31, 2020. For the forgiveness calculation, if you offer to rehire an employee for the same hours and wages, your head count will not be reduced, even if they decline. The percentage of your loan forgiveness may decline by the same amount as any staff reduction.

If your loan amount is $50,000 or less, you are exempt from having your forgiveness reduced based on any reductions in head count and/or salary and wages under the de minimis exemption. For more information about this and other exceptions, see our PPP overview (PDF).

4. Avoid drastic pay cuts.

For employees earning less than $100,000, loan forgiveness is reduced for any amount of employee salary cut more than 25%. However, if your loan amount is $50,000 or less, you are exempt from having your forgiveness reduced based on any reductions in head count and/or salary and wages under the de minimis exemption.

5. Focus most of your PPP loan on payroll.

Payroll expenses must make up at least 60% of your PPP spending to maximize loan forgiveness. For additional clarification, see Frequently Asked Questions A-22 (PDF).

6. Stay within allowable expenses for the rest of your PPP loan amount.

Paychecks are the main concern of PPP loan forgiveness, but up to 40% can be spent on rent or lease payments, mortgage interest, and utilities. (PPP funds also can be used for interest on other debt but can’t be included in forgiveness.)

The guidance on allowable “utilities” expense includes what’s necessary to keep the business operational, such as gas and electric, water, transportation, phone, and internet access.

Keep in mind that all these agreements—for office space or utility service—must have been in place before February 15, 2020.

7. If necessary, forge ahead without loan forgiveness.

“Ultimately don’t run your business based solely on loan forgiveness,” West says. The long-term stability of your business should be your guiding light and might require you to repay some or all of the PPP at its very favorable 1% rate. And for loans taken prior to June 5, you have up to two years to repay any portion not forgiven. For those taken on or after that date, you have even longer—up to five years.

“Having to pay back that loan understandably may make many business owners nervous,” West says. But your first loan payment can be deferred, potentially for a year or more.

What’s next?

* A full-time employee is one who works at least 30 hours per week. A full-time equivalent employee is a combination of part-time employees who collectively are employed at least 30 hours per week.

Inc. Magazine and not affiliates of any company of the Principal Financial Group. 

The subject matter in this communication is educational only and provided with the understanding that Principal® and its employees are not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.​

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