Article written by:
Rebekah Smith, CPA, CFF, CVA, MAFF
   Director of Forensic & Dispute Advisory Services
Dustin Minton, CPA, MBA
   Director, Restaurant Services
Jeremy Bronson, CPA
   Director, Accounting & Business Advisory Services

Now you have made it past the application process from the Paycheck Protection Program (“PPP”) or have been approved and funded – congratulations. The question now is what should businesses be doing next?

The “next” is that businesses need to develop a plan to spend the PPP funds in a way that maximizes debt forgiveness by complying with the requirements of the loan and does so in a way that makes good business sense.

Key Elements of Forgiveness

There are some key elements to managing the funds and the provisions as it relates to debt forgiveness. These elements are explained in detail in the FAQ at the end of this article.

  • 8-week time period starting on the date of the loan disbursement for the dollars to be eligible for forgiveness;
  • Funds must be spent on eligible expenses which include payroll expenses (salaries, wages, commissions, tips, etc., up to $100,000 on a prorated basis plus the cost of providing group healthcare plus the employer retirement cost plus any employer state and local taxes), rent, mortgage interest and utilities;
  • No more than 25% of the forgivable amount can be on non-payroll expenses (the 75/25 rule). Said another way, at least 75% of the loan must be spent on payroll for the entire loan to be forgivable;
  • There are reductions in the amount of forgiveness measured as a percentage of the decrease in average full-time equivalent employees (FTEES) during the 8-week period as compared to February 15, 2019 to June 30, 2019, or January 1, 2020 through February 29, 2020, whichever is more favorable. (“Workforce reduction”);
  • There is a further reduction if you have reduced your employees’ pay by more than 25%. (“Payroll reduction”); and
  • The key to debt forgiveness will be maintaining the appropriate documentation of how the funds were spent.

Strategic Decisions

For some companies, the debt forgiveness calculation would appear to be straightforward. Their workforce is at the same levels or higher than the baseline period and the expectation is that most, if not all, of the loan proceeds will support payroll costs.

For other companies, the analysis is not as easy. A company that has laid off substantially all or a significant portion of its workforce will not have the level of payroll costs at current staffing levels as they did in the past. The question then becomes, how does that company maximize debt forgiveness in a way that makes good business and economic sense?

At one end of the extreme, the employer could simply rehire its entire workforce, regardless of whether there is any work to be done, thereby, increasing payroll costs and FTEE to a level that results in 100% debt forgiveness. At the other end, the company could continue with its reduced headcount, understanding that it means less debt forgiveness not only in terms of the dollars spent but also as a percentage of the dollar spent. Weighing these options, as well as a variety of scenarios in between, is a strategic analysis that has to happen prior to, or very quickly after, the 8-week period begins.

For many businesses, the goal is to determine a payroll and FTEE level that results in full forgiveness of the non-payroll amounts (rent, utilities and mortgage interest), which means carefully managing the 75/25 target between payroll and non-payroll expenses.  One way to achieve that could be by rehiring employees on a phased approach and then planning to reinstate the entire workforce by June 30, 2020, in order to nullify the workforce reductions (as described below, a company can cure its workforce or payroll reductions by rehiring to pre-COVID-19 levels by June 30, 2020).  However, only payroll costs incurred during the 8-week period are subject to forgiveness.

The language in the CARES Act also penalizes a company for reducing payroll more than 25%.  However, that also means that you can reduce payroll up to 25% without incurring a reduction in the forgiveness percentage. Another approach to maximize FTEE but control payroll costs would be to bring some employees back at reduced wages in an amount that does not trigger the payroll reduction clause.

For many clients, the possibility of delaying receiving the loan proceeds, and thus pushing the start date of the 8-week close, would be helpful. If a company could push the 8-weeks to later in May or June when the likelihood of being fully operational, then that company could do a better job of spending the money on payroll, rehiring to pre-COVID-19 FTEEs and maximizing debt forgiveness.  Unfortunately, this strategy is not one that we are confident will be allowable. Certain language in the Q&A issued by the Treasury on April 6, 2020, appears to require the banks to distribute the proceeds no later than 10 days after the loan is approved, and it is the first distribution that triggers that 8-week period.

Developing a Plan

Making a plan is critical moving forward. First, it is important to determine what your goals are. Some companies want to hire back as many people as they can because they want to retain those employees regardless if there is work to be done. Some companies only want to spend what will ultimately be forgivable. Some want the money to last as long as possible and are not concerned if they have a loan to repay at the end. Others may have different objectives.

Once those objectives are understood, start with a baseline plan that projects the next 8 weeks of expenses and FTEEs as they are now or as they would expect to run but for the PPPL funds. That analysis will give you a baseline. Then, start to layer on that baseline scenarios to understand how hiring back certain employees will impact the FTEEs, the eligible funds and forgiveness.

After developing the plan, implement a process to monitor the plan to actual to ensure that you are staying on track to achieve those results and adjust as needed. The COVID-19 business environment is ever-changing and fluid, and you need to make sure you can be nimble to react to those changes.

Further, you need to be sure that you are retaining the appropriate documentation and making a clear paper trail of how the funds were spent. As detailed in the FAQs, when it comes time for debt forgiveness, the banks will want a clear picture and supporting documentation that evidences appropriate use of the funds and your FTEEs.

To view answers to FAQs related to PPP and debt forgiveness, click here.

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