December 11, 2020

What Employers Must Know to Maximize PPP Loan Forgiveness

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• PPP Loan recipients must urgently focus on maximizing PPP Loan forgiveness

• Maximizing PPP Loan forgiveness will require:
Knowing how to avoid the commingling of funds
Conveying specific directions to a payroll provider
Understanding the importance of the payroll cost threshold
Familiarity with the calculations for employee retention
Being mindful of any compensation reduction formulas

• Key planning techniques employers should consider implementing

Have Questions? Call us for Your consultation.

Facing collapse in the crumbling economy due to the global pandemic, some businesses around the country were successfully able to acquire capital in the form of forgivable loans via the Payroll Protection Program (PPP).

Navigating the process to obtain these PPP Loans was no easy task—and as a “first come, first serve” program, the applicants were racing to the finish line. In that context, most successful recipients were probably unable to really pause and consider—what happens next?

The big picture answer to that question is that now businesses must shift their focus from obtaining the maximum amount of a PPP Loan to ensuring they are acting to maximize PPP Loan forgiveness.

Until additional guidance is issued from the Small Business Association (SBA) and U.S. Department of Treasury (Treasury), there is a great deal of uncertainty as to certain aspects of effective maximization planning. However, it is critical that the rules that do exist are carefully considered and then correctly employed—ensuring that appropriate PPP loan expenditures are made, and businesses are maximizing their PPP loan forgiveness.

We present here an analysis of the steps that PPP Loan recipients can take to maximize their loan forgiveness. It is also significant to remember that even more than maximum forgiveness itself is at stake—those seeking forgiveness are subject to possible criminal penalties for misrepresentation and false certifications per the SBA. With that in mind, we urge you to consult an experienced legal professional in your pursuit of PPP Loan forgiveness.

The Purpose of PPP Loans

Briefly, it is helpful to remember that the purpose of the forgivable PPP Loan is two-pronged: (1) to provide capital to COVID-19 impacted businesses (including self-employed individuals and independent contractors), and (2) for those businesses with employees, it is intended to incentivize employers to retain employees at pay rates substantially similar to those pre-pandemic.

The major incentive in the second prong comes in the form of up to 100% forgiveness of the PPP Loan proceeds for those borrowers who successfully heed the PPP’s requirements regarding employee retention and compensation levels during the “base period” of February 15, 2020, through April 26, 2020.

It is critical now that PPP Loan recipients are fully cognizant of the following PPP provisions that can reduce, or eliminate, the amount of forgiveness:

  • Spending less than 75% of the PPP Loan on payroll costs
  • Reducing the full time/full-time equivalent employees (FTE)
  • Reducing employee compensation by more than 25% during the base period

Based on our analysis of the PPP and the guidance existing to date, we provide below an outline of the steps that businesses should take to ensure that they are making appropriate PPP loan expenditures and maximizing their amount of PPP loan forgiveness. As new guidance is issued, we will update you accordingly.

Best Practices

1. Maintain a Separate Bank Account

Unless and until further guidance is issued, for 100% forgiveness, a recipient has only 8 weeks from the date of loan origination within which all PPP Loan proceeds should be spent.¹ Furthermore, the proceeds must only be spent on the following eligible expenses/payments:

  • Payroll costs;
  • Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation);
  • Any payment on any covered rent obligation; and
  • Any covered utility payment.²

Thus, upon receipt, the best practice for PPP Loan recipients is to place all proceeds in a separate bank account and ensure that no other business funds are mingled therein.  And write checks from that PPP Loan account. Recipients must be able to substantiate to their lenders that their PPP loan proceeds were spent properly in order to qualify for loan forgiveness.

2. Communicate with Payroll Provider

A recipient must immediately communicate with their payroll provider to ensure that the provider halts any automatic debiting from a non-PPP Loan account. Additionally, if the recipient is supplementing payrolls costs out of another account, the payroll provider needs clear and complete instructions to ensure alignment with the program requirements.

Avoid Practices that Reduce Forgiveness

1.  Focus on Which Payroll Costs are Forgiven

For maximum forgiveness, spend a minimum of 75% of the PPP Loan proceeds on payroll costs.

Note that “payroll costs” is a topic of much discussion and we urge recipients to consult a professional for a more comprehensive understanding, but they generally include:

  • salary, wage, commission, tips, or similar compensation;
  • vacation, parental, family, medical, or sick leave
  • employer contributions to retirement and healthcare
  • payment of State or local tax assessed on employee’s compensation

On the other hand, “payroll costs” do not include:

  • compensation exceeding $100,000 annually, as prorated for the covered period
  • sick or family leave credited under the Families First Coronavirus Response Act (FFCRA)³
  • payments to an independent contract

Remember, the SBA’s Interim Final Rule, suggests that an employer will not even qualify for forgiveness at all if this 75% threshold is not met.⁴ Specifically, therein, the SBA states that:

The Administrator has determined in consultation with the Secretary that 75 percent is an appropriate percentage in light of the Act’s overarching focus on keeping workers paid and employed. Further, the Administrator and the Secretary believe that applying this threshold to loan forgiveness is consistent with the structure of the Act.” ⁵

So, it is imperative that an employer is confident that the 75% payroll threshold is met. Even more alarming, the SBA’s Interim Final Rule indicates that the employer may be found to have improperly used the proceeds—subjecting the employer to civil and criminal penalties.⁶

Once an employer is confident that this threshold will be met, the employer has some flexibility for achieving maximum forgiveness using any or all of the remaining PPP Loan proceeds, including:

  1. Employers may choose to use the entire amount of the proceeds on payroll costs.
  2. And remember, as defined above, “payroll costs” is broadly defined to include things like employer contributions to retirement and healthcare. Unless and until further guidance is issued, it appears that recipients may use any or all of the remaining PPP Loan proceeds to fund any of the “payroll costs”—a useful planning tool to ensure that all PPP funds are spent during the covered period.
  3. Also, all of the remaining amount above the threshold may be used for other eligible expenses including rent obligations, mortgage interest, and utilities—whether on one eligible expense alone or any combination thereof.
  4. An employer may even use any use the proceeds remaining after satisfying the threshold in any desired combination of #1 and #2 here. So, for instance, an employer may end up using 96% of the proceeds on payroll, 2% on rent, and 2% on utilities.
2. Retain (or Quickly Rehire) Employees

Remember, during the 8-week period, if an employer terminates FTEs, then they correspondingly reduce its amount of forgiveness (subject to limited exceptions).

The FTE reduction is determined by taking the following steps:

  1. Employers determine the average number of FTEs during the 8-week period.
  2. Employers must choose their applicable test period for purposes of the calculation.  The periods are from February 15, 2019, through June 30, 2019, or (so long as you are not a seasonal employer) January 1, 2020, through February 29, 2020.
  3. Employer compares the average number of FTEs during the 8-week to the average number of FTEs during the employer’s chosen applicable test period. This show the FTE reduction. For example, if an employer had 9 FTEs during the 8-week period and 10 FTEs during the applicable test period—then there was a 10% reduction.

Once the employer has determined the FTE reduction percentage, as described above, the amount of loan forgiveness is correspondingly reduced. So, if there was a 10% FTE reduction, the employer’s loan forgiveness amount will be reduced by 10%.

SAFE HARBOR: Remember that an employer may rehire any employee(s) that were laid off and reinstate any compensation that was decreased in excess of 25% to satisfy the requirements for forgiveness. Employers must do either or both of these things by June 30, 2020.

3. Be Mindful of Compensation Reduction

After accounting for the forgiveness amount reduction due to FTE reduction, employers need to be mindful of reducing compensation—which can result in dollar-for-dollar forgiveness amount reduction.

First, employers must identify all employees during 2019 who received compensation at an annualized rate, not exceeding $100,000. Employers must then determine the average compensation for the first 2020 quarter (2020 Q1) of any such employee.

Note that if 1/8th of the employee’s total amount of compensation paid during the 8-week period is at least 75% of the employee’s average 2020 Q1 weekly rate—then the employer’s loan forgiveness amount will NOT be further reduced. However, if that employee’s compensation decreased during the 8-week period by more than 25%, then the amount in dollars exceeding the 25% will reduce the loan forgiveness—dollar-for-dollar.

Key Planning Techniques

Remember, the basic PPP forgiveness requirement is that only “costs incurred and payments made” within the 8-week period are forgivable. Obviously, this is poorly drafted language leaving many people asking:

  1. Whether it means that both the incurring and the paying must occur within the 8-week period—i.e. if a recipient receives the PPP Loan on April 20, they will not be able to use the loan proceeds to pay March rent, since the cost was not “incurred” in the 8-week period. This is the “narrow interpretation.”
  2. Whether it means that no single particular expense is required to be both incurred and paid, but instead means that both incurred costs and payments are included—i.e. the recipient described above has a forgivable amount because the rent was paid during the 8-week period. This is the “expansive interpretation.”

Without further guidance to resolve this ambiguity, we urge employers to consider planning strategies which use the more restrictive of the two interpretations—and there are exciting planning opportunities within that frame!

With that in mind, understand that each employee can earn up to $15,384.61 and that entire amount is forgivable. Thus, employers should consider maximizing the payroll amount per employee to result in a larger forgivable amount.

  • Treasury is clear that “payroll costs” include employer contributions to both defined contribution plans (e.g., 401(k) plans) and defined benefit plans. Significantly, employer contributions are not part of the $100,000 cap applicable to employee compensation. Employers may find it advantageous to fund these plans.
  • Consider a “special payroll” to ensure that your payroll cycle doesn’t conflict with the limits of the narrow interpretation, above. In other words, consider the employee who has already performed their work, but three days remain in their bi-weekly payroll cycle—which fall outside of the 8-week period. The narrow interpretation means that compensation incurred during the period, but not paid during the period, will not be forgiven. Employers can correct this potential loss with a special payroll that will ensure that this cost is both incurred and paid within the 8-week period.


Businesses who received PPP Loans must now ensure that they are acting to maximize PPP Loan forgiveness—and the clock is running. Although existing guidance is ambiguous in some areas and utterly lacking in others, it is absolutely necessary that planning begins now using careful and reasonable application of the rules that do exist. Of course, we will continue to update our readers as new guidance is issued.

Employers are encouraged to seek experienced legal advice to navigate these rules and maximize PPP Loan forgiveness. Additionally, counsel should be sought to ensure that the employers use the funds in any way which would implicate Treasury’s warning that, “if the proceeds are used for fraudulent purposes, the U.S. government will pursue criminal charges against you.”

EDITOR’S NOTE: Remember, as we’ve reported before, any EIDL advance proceeds (up to $10,000) will correspondingly reduce your PPP Loan forgiveness amount. Note that the SBA Interim Final rule, effective April 20, expresses it this way:

If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.”

If you have additional questions or concerns regarding how to maximize your percentage of loan forgiveness, then contact Frost Law today at (410) 862-2806.


  1. See, Coronavirus Aid, Relief and Economic Security Act, §1106(b), Pub. L. No. 116-136.
  2. Id.
  3. Pub. L. No. 116-127.
  4. View here
  5. Id.
  6. Id.
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