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

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).

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,” he says.

In other words, PPP loans were designed to be largely converted into grants. But understanding exactly which expenses qualify for PPP loan forgiveness is not always self-apparent. These questions were heard loud and clear in a recent webinar about the CARES Act and PPP featuring: Schoening; Mark West, national vice president of business solutions for Principal; and Kimberly Weisul, editor-at-large for and Inc. Magazine. So we’ve compiled seven strategies based on business owners’ top concerns.

We also have a Paycheck Protection Program expense tracker (Excel) to help you document your expenses along the way to reach maximum loan forgiveness according to your unique financials.

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

What qualifies as payroll during the first eight weeks following the loan 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),
  • payments used for group health care benefits (including insurance premiums),
  • employer contributions to defined benefit or defined contribution qualified retirement plans, and
  • state and local taxes assessed on compensation.

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

In other words, bonuses shouldn’t be doled out only with loan forgiveness in mind.

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

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

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

However, employer contributions for group health, retirement, and other benefits are in addition to this $100,000 cap.

PPP payroll also excludes:

  • employees living outside the U.S,
  • 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.

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

“It’s not the entrepreneur protection program,” Weisul says. “If you’re an entrepreneur and don’t want to bring your employees back until right before you think you’re going to 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 even if you don’t have anything for them to do—so that they can stay employed.”

Here's how it works:

Your staffing level during the eight weeks 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 June 30, 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 will decline by the same amount as any staff reduction.

4. Avoid drastic pay cuts.

Loan forgiveness is reduced for any amount of employee salary cut more than 25% (for those employees earning less than $100,000).

5. Focus the vast majority of your PPP loan on payroll.

Payroll expenses must make up at least 75% of your PPP spending to maximize loan forgiveness.

6. Stay within allowable expense for the other one-fourth of PPP.

Paychecks are the main concern of PPP loan forgiveness, but up to 25% can be spent on infrastructure: 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 you don’t want to 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 accept PPP at its very favorable 1% rate for two years.

“Having to pay back that loan in two years understandably may make many business owners nervous,” West says. But keep in mind that your first loan payment can be deferred up to a year.

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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