7 Ways Small Businesses Can Maximize PPP Loan Forgiveness

Or forge ahead without it

Image: INC

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 Financial Group, 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. 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),
• 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 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 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 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 Inc.com 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 won’t be reduced, even if they decline. (For other exceptions, see our PPP overview.) The percentage of your loan forgiveness may decline by the same amount as any staff reduction.


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%.


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.
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 accept PPP at its very favorable 1% rate for 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?

• Reach out to your trusted business advisor or seek one through Principal.
• Contact your local SBA district office or visit the SBA's page dedicated to full details on the PPP.
• Check out our resources to help businesses through this challenging year, such as our CARES Act Paycheck Protection Program calculator to help estimate your loan forgiveness.