Wondering how to use your Payroll Protection Program (PPP) proceeds now that you’ve been approved? Careful planning and consideration should be exercised to ensure you maximize the loan forgiveness. So, let’s discuss some common questions and pitfalls, and potential solutions, to using PPP loans.

Permitted Uses

First things first—you must ensure your PPP loan proceeds are used only for permitted purposes during the 8 weeks following disbursement. Lenders are still working out the details on tracking use of the proceeds (e.g., must the proceeds be used directly for paying permitted expenses, or is the company reimbursing itself sufficient?). However, what is certain, is the funds can be used only for the following costs the business incurs between February 15, 2020 and June 30, 2020:

• Payroll costs;
• Cost of continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
• Payments of interest on any mortgage obligation (not payment of principal);
• Rent;
• Utilities;
• Interest on any other debt obligations that were incurred before the covered period; and
• Refinancing of certain SBA loans.

Further, at least 75% of the funds must be used for payroll costs incurred during that period.

For employees, payroll costs include cash compensation (capped at $100,000, annualized), payments for health care benefits (including insurance premiums), payment of any retirement benefit (including contributions to a defined contribution or defined benefit plan), and payment of state or local tax (such as state unemployment insurance). Note that cash compensation includes regular salary, wages, commissions, tips, etc., as well as payments for leave and separation pay.

If you have self-employed individuals in the businesses (such as partners or an owner who is considered self-employed), “payroll costs” are based on that individual’s 2019 self-employment earnings (line 31 of the individual’s Form 1040 Schedule C), capped at $100,000. For example, to determine a self-employed individual’s payroll cost for the 4.5-month period of February 15, 2020 through June 30, 2020 is line 31 of the individual’s Form 1040 Schedule C divided by 12 and multiplied by 4.5, but no more than $37,500 for the 4.5-month period.

The 4.5-month period for incurring costs is important to businesses that may have reduced headcount. For example, a business may request 2.5 times their higher, pre-COVID payroll costs, but now have fewer employees. The business may still be able to use the entire PPP loan because it can apply the proceeds to costs over the longer, 4.5-month period.

Permitted Uses v. Forgiven Uses

So after you have identified how you can use PPP loan proceeds, it’s time to carefully consider how you want to use them. Not all the permitted uses will result in forgiveness of the loan, so planning how you will use the proceeds is critical. Employers are eligible for loan forgiveness equal to the amount spent during the 8-week period beginning with the first disbursement on the following qualifying expenses:

• Payroll costs (but excluding any qualified sick and family leave wages eligible for a credit under the Families First Coronavirus Response Act);
• For employees who receive tips, certain additional wages paid to those employees; and

• Covered mortgage interest, rent, utilities (including electricity, gas, water, transportation, telephone, or internet).

Note that while you may use PPP proceeds to pay interest on non-mortgage debt obligations or on any of these expenses during the covered period but outside of the 8-week forgiveness period, those expenses will not be forgiven.  Further, any mortgage, rent, utilities, or other debt obligations must have been in place prior to February  15, 2020, in order to qualify for forgiveness.

If you use 100% of your loan during the 8-week period on qualifying expenses then 100% of your loan may be forgiven. However, the forgiveness on amounts used during the 8-week period will be less than 100% if any of the following are true:

• You use more than 25% of the loan proceeds in the 8-week period for non-payroll costs.
• You reduce your full-time equivalent employee headcount and do not restore those positions by June 30, 2020.

• You reduce total salary or wages of any employee by more than 25% (measured from the most recent full quarter before origination of the loan) and do not restore those wages by June 30, 2020.

For the above, your full-time equivalent employee headcount will generally be the average full-time equivalent employees you employed from either February 15, 2019 through June 30, 2019, or January 1, 2020 through February 29, 2020. You may choose which period to use. If you are a seasonal employer, then you must use the period February 15, 2019 through June 30, 2019.

To receive forgiveness of the loan, you will need to apply to the lender for forgiveness. You will have to provide the lender with documentation to verify your employee counts, wages, and use of funds to support the forgiveness application. The lender will make a decision on forgiveness no later than 60 days after receiving the application.

The 25% Non-Payroll Cost Conundrum

One particularly perplexing result of the above limits on forgiveness is the 25% limit on non-payroll expenses.  In calculating the maximum PPP loan, companies requested a loan equal to 2.5 months’ worth of their annual payroll costs. For example, if we had $520,000 of annual payroll costs, then we requested a loan of $108,333 ($520,000 divided by 12 multiplied by 2.5).

Now that we have our $108,333, we look forward and realize that we have 8 weeks in which we can spend the funds and receive forgiveness of the loan. Assuming the same annual payroll costs, we will have $80,000 of payroll costs in that time ($520,000 divided by 52 multiplied by 8). That means we’ll use 73.8% of our loan proceeds on payroll costs, which is short of the 75% necessary to obtain 100% forgiveness. This will be true for essentially any business that has not increased headcount or payroll costs over the period used to calculate the loan.

So what’s a company to do?

Potential Solutions

First—there is no requirement that you get 100% forgiveness, so you might simply use the proceeds for payroll costs outside of the 8-week forgiveness period, but within the February 15 – June 30 covered period, and repay that portion of the PPP loan. There is still a 6-month deferral on repayment and interest at only 1%, so it’s not a bad credit facility.

However, if you’re aiming for 100% forgiveness, there are a few strategies to consider:

• Are there permitted, forgivable expenses you can accelerate? For example, if you normally fund retirement contributions annually, perhaps fund the accrued benefits during the 8-week period.
• If you reduced wages for employees, perhaps restoring wages to those employees during the 8-week period is a prudent, forgivable, use of the PPP funds.
• Hire someone (as an employee) for the next 8-weeks to help the business during the crisis—perhaps someone who focuses on marketing or building out your online service platform or otherwise increasing your ability to produce revenue in the current environment (or thereafter).
• If you have had staff going above and beyond—perhaps now is an appropriate time to reward them with a bonus for extraordinary performance.

This is not an exhaustive list, but illustrative of the type of careful (and quick) planning business owners need to jump on quickly to efficiently use their PPP loans.