Businesses desperately needed help keeping their workforce employed during the Coronavirus. In order to quickly get money into the hands of employers to pay employees during the economic shutdown, Congress established the Paycheck Protection Program (PPP) through the CARES Act on March 27. The key component of the PPP was forgivable loans made available through the Small Business Administration (SBA).  Many business owners applied right away, knowing the demand would exceed the supply.

At this point many businesses’ loan have been funded, but business owners are needing additional guidance as to how the forgiveness provisions of these loans will be administered or applied.

Based on recent announcements from the SBA and Treasury questioning a business’s certification that a loan was necessary, business owners may need to reflect and rethink whether they should repay the loan.  The SBA and Treasury have set a deadline for May 14 to repay the loans without any question or penalty of whether or not the loan was a necessary for ongoing operations. The summaries below about loan forgiveness and repayment will help business owners evaluate the best course of action under deadline and provision interpretation.


With the most PPP loan applications in process or completed, the next phase of the program will become loan forgiveness. Here is our current understanding until we get better guidance:

General Rule for Forgiveness

Within the eight weeks following receipt of the loan, employer must use no less than 75% of loan proceeds for payroll costs and 25% for rent, mortgage interest or utilities.

What eight weeks?

The eight-week window begins upon your receipt of the loan proceeds. This can create an awkward situation if this is received in the middle of a payroll cycle. For borrowers who may be impacted beyond eight weeks, this gives them money to make payroll for a time but then they will have to make a difficult decision about employee layoffs later.

75% of the Loan Proceeds Used for Payroll Costs

There are two aspects to this requirement. First, no less than 75% of the loan proceeds must be spent on payroll costs for the employees over the eight-week period. Second, no employee can be paid less than 75% of what he or she was previously paid in the prior regular quarter. This second requirement prevents paying some employees more of their salary to the detriment of other employees.

What are Payroll Costs?

This has been defined as gross payroll. So, it would encompass all of those things that are typically deducted from an employee’s gross payroll such as employee’s share of FICA, income tax withholding, 401k contribution, health insurance, etc. However, payroll costs would not include the employer’s share of FICA. An employer’s match into a 401k plan would be a payroll cost. Remember, that the maximum salary amount for any employee cannot exceed $100,000. However, the other payroll costs associated with that salary can make that amount more than $100,000. Additionally, payroll costs do not include amounts paid to independent contractors.

Use of 25% of Loan Proceeds

The borrower can use 25% of the loan to pay other business expenses, limited to rent, mortgage interest or utilities. The statute indicates that rent also includes “rent under a lease agreement”. It is possible this could include a lease of personal property and not just real estate but need additional guidance. It is important to note that only the interest component of a mortgage payment is counted, not the principal portion. Interest on other outstanding indebtedness is allowed if it’s secured by real or personal property. Utilities are specifically defined to include electric, gas, water, telephone, transportation, internet. All of these items have to be in existence or service began prior to February 15, 2020.

Requirement to Maintain Employee Count

This last forgiveness requirement is separate from previous summarized requirements related to the use of the loan proceeds. This requirement is based on maintaining the number of Full-Time Equivalent Employees (FTEs) for the period prior to February 15, 2020. Generally, it requires that the borrower compare the FTEs prior to February 15, 2020 with the average FTEs per month during the 8-week period of the loan. Ultimately, the borrower must restore any reductions in the FTEs prior to June 30, 2020 to avoid any reduction in loan forgiveness.

The SBA has clarified that an employee who has been laid off is offered to be rehired (on same terms) and refuses to return to work will not impact forgiveness. This overall requirement still needs some additional clarification from the SBA or Treasury. Questions still needing answered include what about normal employee turnover or reduction, what is the significance of the June 30, 2020 date compared to the average monthly FTEs during the eight-months, and what’s the impact of employee layoffs after June 30, 2020?

New Pressure for Repayment of PPP Loan

There have been many new developments and some change of perspective about who these loans were intended to benefit. When these loans were initially rolled out, the Act waived the requirement for borrowers to show that they were unable to obtain credit elsewhere (which is typically required for an SBA loan). The PPP loan application asked that the borrower (and any 20% or more owner) to certify, in good faith, that the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant”. This certification is subject to certain civil and criminal penalties. The problem is there was no guidance to borrowers about the time frame to consider if the loan is “necessary for ongoing operations”. Is it eight weeks or a longer period of time? There was also no guidance on what makes it “necessary”. Is it more likely than not to be needed or absolutely necessary? Should a borrower consider other current resources or not?

SBA and Treasury’s Repayment Deadline 

On April 23, the SBA and Treasury made it clear that businesses owned by a large company with adequate sources of liquidity likely didn’t make a “good faith” certification as to the necessity for the loan. The guidance went on to state that a borrower, such as a public company with access to liquidity, can repay the loan by May 7, 2020 and will be deemed to have made a certification in good faith. Although this guidance was primarily directed at large or public companies, it left it unclear as to if this same approach applied to private companies. More recently, the SBA and Treasury made it clear that private companies with adequate sources of liquidity also need to consider if they made the certification in good faith and consider repayment of the loan by May 7, 2020.

 Treasury Secretary Steven Mnuchin’s Comments

The media has written many stories about borrowers who took PPP loans and have chosen to repay the loans. On April 28, Mnuchin proclaimed that any company that receives more than $2M of a PPP loan will be subject to an audit or full review before there is any loan forgiveness. Mnuchin went on to express that civil and criminal penalties will be enforced. Shortly thereafter, the SBA made clear that loans less than $2M will be reviewed, “as appropriate” following a borrower’s forgiveness application. Mnuchin targeted private elementary and high schools with large endowments and other resources to repay loans as being not “necessary”.

This new development around who these loans were intended for and focus on a borrower’s financial situation has created significant uncertainty. It would have been prudent to provide upfront guidance to borrowers on what financial impact warrants a loan. Congress expressed financial requirements in other relief provisions. To express a new standard in the middle of the loan program is unfair to borrowers. Although it is also appropriate to make sure that the almost $600 billion loan program is utilized by those who need it the most.

 What Should Borrowers Do?

Obviously, there are a lot of unanswered questions and interpretation issues with regard to PPP loan forgiveness as well as whether the PPP loan was “necessary” to begin with. It is hoped that future guidance that has been promised will provide additional answers and clarity. Until we have more guidance, here are some thoughts on how to consider a decision to repay the loan and best practices to maximize forgiveness.

Should I Repay the Loan?

There is an emphasis on liquidity and payroll. Is the business considered essential or non-essential? It would seem that a non-essential business would have a greater “necessity” but depending on size and access to liquidity maybe not. For essential businesses, you should analyze the businesses financial position at the time of application and throughout the shutdown.

Review and document access to liquidity at the time of application for the loan. Consider cash-on-hand, accounts receivable collectability, available credit facilities, accounts payable and potential deferrals of payments.

Review and document revenue and budget projections at the time of application. Consider impact of lost revenue, lost customers, reduced capacity, change in supply chain and how this impacts your ability to retain employees and payroll.

·         Review and document how you’ve performed against prior years.

·         Document potential risks to the business that would significantly impact liquidity and retention of employees.

·         Ownership and ownership’s access to liquidity.

Best Practices to Maximize Forgiveness

To receive forgiveness, a borrower will need to make application to the SBA. The requirements and disclosures on this application have not been identified. However, this application will likely request not only questions about how the proceeds were utilized, but also investigate and evaluate the borrower’s need for the loan. It will likely be how the SBA will determine which loans under $2m to review.

·         Place loan proceeds in a separate account to better track utilization of proceeds for designated purposes.

·         Use this separate account to pay only those payroll costs and other designated costs.

·         Attempt to rehire and restore FTEs as quickly as possible and no later than June 30.

·         Make sure that each employee is being paid at least 75% of their prior gross wages.

·         Make sure that 75% of loan proceeds are used for payroll costs and no more than 25% of loan proceed are used for other designated expenses

·         Do not make any large capital expenditures with other resources, unless necessary or previously committed.

·         Do not make distributions of profits to ownership with other resources.

·         Do not payoff other outstanding debts or obligations with other resources.

·         Be prepared to document need for the loan.

Wealth management teams at Budros, Ruhlin & Roe are here to help clients interpret the provisions of the PPP and evaluate best next steps. Generally, it would be ideal to get together with your executive team and outside advisors to review your need for the loan and steps to maximize forgiveness. In short, if you don’t believe that you can demonstrate a need for the loan, repay it by the May 7 deadline. If you can demonstrate a need for the loan, be prepared to do so, and then take the steps outlined above to maximize your opportunity for forgiveness.

John Schuman, JD, CFP®, CPA (Inactive)
Chief Planning Officer, Chief Compliance Officer, Co-CEO

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