COVID-19 - The Do’s And Don’ts Of Using Your PPP Loan In Order To Ensure That It Is Forgiven

Friday, May 8, 2020

Were you successful in obtaining a Paycheck Protection Program (“PPP”) loan?  If so, you are likely aware that if you use loan funds for allowed expenses such as payroll, rent and utilities for the first eight (8) weeks after the loan is issued, the loan amount can be forgiven.  Loan forgiveness, however, is not as straightforward as it seems and there are many practical considerations that businesses are facing that will weigh on whether their PPP loans are actually forgiven.  We will address some common issues below, although we are still waiting for the SBA and Treasury to issue final guidance on forgiveness, and so additional issues may arise.

1. Covered Expenses

Covered expenses, beginning on the date the loan is first funded and continuing for eight weeks thereafter (the “Covered Period”), are eligible for forgiveness.  Covered expenses include payroll costs, payment of interest on pre-existing mortgage obligations, rent under pre-existing leases, and utility payments (“Covered Expenses”).  Importantly, payroll costs must account for at least 75% of the Covered Expenses.

  • Payroll costs means salary, wages, commissions or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wages, commissions, income or net earnings from self-employment or similar compensation, paid during the Covered Period, in an amount up to  $100,000 per person on an annual basis, prorated over the Covered Period.
  • Rent, mortgage or other interest payment obligations must be paid during the Covered Period for an obligation that was in place before February 15, 2020.
  • Utility payments include electric, gas, water, transportation, telephone, or internet access during the Covered Period for services that commenced before February 15, 2020.

2. Staffing and Pay Requirements

Employers are required during the Covered Period to maintain their full-time employee headcount as of February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020, whichever is lower.  An employer has until June 30, 2020 to reach the previous headcount level.  If an employer does not maintain the headcount, the forgivable expenses will be reduced proportionally (i.e., in proportion to the wages paid to the non-renewed position).   

An employee’s pay over the Covered Period must not be 75% less than the pay to that employee for the period during the most recent quarter in which the employee was employed.  If the employee’s pay reduction is greater than that threshold, then the eligible amount for forgiveness will be reduced by the difference. 

Importantly, an employer is not required to retain the same employees, only the same headcount.  Employees who were laid off or put on furlough, therefore, are not required to return to their previous roles.  Further, an employee who rejects an offer of employment, perhaps because he or she is receiving greater compensation through  unemployment benefits than they would receive in wages when employed, may no longer be eligible for unemployment benefits.  The employer, however, will have to challenge the unemployment claim with the applicable State Department of Labor, which is a time consuming process.  As an alternative, an employer can consider offering a retention bonus to incentivize the employee to return.  If an employee rejects an employer’s offer of employment and the employer cannot find a replacement employee, an employer may be able to exclude the position from the employer’s headcount.  In order to reduce the headcount, the employer must 1) have made a written offer to return; 2) have offered to return at the same salary/wage and number of hours prior to the termination/furlough; and 3) have documentation of the employee’s rejection of the offer.

Following the end of the Covered Period, the employer is not required to maintain any specific headcount.

3. Applying For Forgiveness

In order to receive forgiveness, employers must document the use of the PPP loan proceeds during the Covered Period.  Specifically, the employer must be able to provide the following documentation and information:

  • The number of full-time equivalent employees on payroll and their pay rates to verify that the employer met the staffing and pay requirements, including:
    • Payroll reports;
    • Payroll tax filings;
    • State income, payroll, and unemployment insurance filings;
  • Retirement and health insurance contributions; and
  • Eligible interest, rent, and utility payments (i.e., cancelled checks, payment receipts, account statements, etc.).

Importantly, Covered Expenses are forgivable only to the business that received the PPP loan. PPP loan monies, therefore, cannot be used for or intermingled with affiliated entities that were not included in the PPP application. Companies must be prepared to keep detailed records during the Covered Period to ensure that they are able to provide the documents necessary to receive forgiveness.   


Please contact Scott R. Matthews or John H. Keneally if you have any employment questions or wish to develop and implement a policy to maximize your ability to receive PPP loan forgiveness.  


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