Best Practices to Maximize Paycheck Protection Program Loan Forgiveness

May 5, 2020

By: Rod Kubat

Paycheck Protection Program (PPP) Loan recipients will want to maximize loan forgiveness under Section 1106 of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”).  This article suggests best practices to ensure maximum loan forgiveness.


  1. Use PPP Loan Proceeds for Permitted Purposes. An overarching purpose of the CARES Act as it relates to PPP Loans is to enhance small business’ ability to retain employees and maintain wages.  To maximize loan forgiveness, borrowers should use PPP Loan proceeds to pay the following categories of expenses, each of which would qualify for loan forgiveness:
    • payroll costs (as described in 1102(a)(2) of the CARES Act),
    • interest on mortgage obligations incurred prior to February 15, 2020 (“Covered Mortgage Interest”);
    • rent under lease agreements in force prior to February 15, 2020 (“Covered Rent Obligations”); and
    • utility payments, for which service began prior to February 15, 2020 (“Covered Utilities Obligations”) (collectively, “Forgiveness Eligible Costs”).   


SBA requires at least 75% of PPP Loan proceeds be used for payroll costs.  The SBA will require repayment of PPP Loan proceeds used to pay expenses that are not Forgiveness Eligible Expenses, and if a borrower knowingly uses PPP Loan proceeds for unauthorized purposes, the SBA can charge the borrower with fraud.  Therefore, the best practice is for borrowers to use PPP Loan proceeds only to pay Forgiveness Eligible Expenses, 75% of which must be to pay payroll costs.


  1. Segregate PPP Loan Proceeds. PPP Loan proceeds should be segregated in a separate banking account (“PPP Account”) and disbursed from it to pay Forgiveness Eligible Costs.  No other funds should be commingled in the PPP Account. PPP Account bank records will provide a record supporting borrowers’ expenditure of PPP Loan proceeds that can be used with lenders to support their loan forgiveness request.  Alternatively, and at a minimum, borrowers should establish in their accounting records system a separate account in which only the PPP Loan proceeds deposit and expenditures are tracked.


  1. Document PPP Loan Proceeds Expenditures. With each expenditure, borrowers should document the use of PPP Loan proceeds by category, including payroll costs (wages and salaries, group health benefits, retirement benefits, State and local taxes imposed on compensation (but not Federal employment taxes) and certain other specified categories), payments of Covered Mortgage Interest, payments of Covered Rent Obligations and payments of Covered Utilities Obligations.  Retain these documents separately for each category and accumulate them through the 8-week period that begins with the loan origination date (the “Covered Period”).  This documentation must be produced to the lender to support borrowers’ request for forgiveness.


  1. Maintain FTE Records. In order to apply the FTE Test, borrowers will need to produce records that establish borrowers’ FTEs during the Covered Period and also for the Comparison Period selected (see our prior overview post on PPP Loans).  These records should identify employees who had been laid off and were rehired before June 30, 2020.  In addition, because laid off employees who were offered re-employment on the same terms but declined the offer can be excluded from loan forgiveness reduction calculations, the borrowers’ records need to include these employees, the terms offered for re-hiring the employees and the employees’ rejection of the offers.  This information will be necessary in order to apply the CARES Act §1106(d)(5) Exemption for Re-hires and to support the borrowers’ request for loan forgiveness.  Furthermore, Lenders will need these documents in order to confirm whether the loan forgiveness amount borrowers request is accurate.


  1. Maintain Historical Wage Records. Because borrowers will need to apply the Wages Test, they will need to maintain records of wages and salary paid to each employee:

(a) during 2019, in order to identify which employees were paid, in any single pay period, an amount that when annualized is not more than $100,000;

(b) during the full calendar quarter that ends before the Covered Period begins, which in nearly all cases will be the period of January 1, 2020 through March 31, 2020; and

(c) during the Covered Period. 


Borrowers will need to provide copies of these records to the lender in addition to its calculations in order to support the loan forgiveness amount requested.


  1. Collect Payment Records for Covered Mortgage Interest, Covered Rent Obligations and Covered Utilities Obligations. To include these costs in the application for loan forgiveness, borrowers will need to provide their respective lender with cancelled checks, payment receipts, transcripts of accounts or other documentation that verifies payment of these items.  Borrowers should also collect documents establishing that the agreements creating Covered Mortgage Interest and Covered Rent Obligations existed before February 15, 2020 and the services for Covered Utilities Obligations began before February 15, 2020.


  1. Compile Tax Filings. With each payroll, borrowers should compile the related state and local income, employment and unemployment tax filing records to support inclusion of these expenditures in the loan forgiveness amount.


  1. Apply Promptly After 8-Week Expenditure Period Expires. Borrowers must complete a request for loan forgiveness and submit it to the lenders that is servicing the PPP Loan.  Borrowers will need to meet with their lenders and provide to them the completed request and the documentation supporting the use of PPP Loan proceeds and the PPP Loan principal amount they seek to have forgiven.  In fact, borrowers should consider providing the supporting documents to the lenders before the Covered Period expires, such as following each payroll period, so that the lenders can confirm periodically whether the documentation is acceptable and support expenditures that will qualify for loan forgiveness.  This practice may expedite submission of borrowers’ applications for loan forgiveness.  Lenders have 60-days from the date they received the loan forgiveness request to issue their written response to the request.  Therefore, borrowers should submit their applications to their respective lender as soon as they have compiled the required documentation so that the lender can process the request.


  1. Be Prepared for Audit by SBA or Treasury. Borrowers certify in their PPP Loan Applications that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.  The SBA and the Treasury have announced intentions to audit all PPP Loans over $2,000,000 before approving loan forgiveness requests to ensure the borrower was entitled to receive the PPP Loan.

    The SBA may audit other PPP Loans as well. SBA and Treasury have stated they will issue further guidance on loan forgiveness, which we expect will clarify what they mean by “other sources of liquidity.” The only example SBA and Treasury have provided is the following statement in its FAQ #31 issued on April 23, 2020: “For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.” Section 1102(a)(2) of the CARES Act Clearly provides that the SBA’s “credit elsewhere” requirement at 15 USC 632(3)(h) does not apply to a PPP Loan. The credit elsewhere requirement is: “ the availability of credit from non-Federal sources on reasonable terms and conditions taking into consideration the prevailing rates and terms in the community in or near where the concern transacts business, or the homeowner resides, for similar purposes and periods of time.” The regulations at 13 CFR 120.101 provide further clarification that credit is “not otherwise available on reasonable terms…taking into consideration factors associated with conventional lending practices, including: The business industry of the loan applicant; whether the loan applicant has been in operation two years or less; the adequacy of collateral available to secure the loan; the loan term necessary to reasonably assure repayment of the loan from actual or projected business cash flow; and any other factor relating to the particular loan application that cannot be overcome except through obtaining a Federal loan guarantee under prudent lending standards.”

    Ultimately, we will need the SBA and Treasury to provide clear guidance about how this criterion will be applied. In the meantime, borrowers should maintain a complete copy of their PPP Loan Application and all documentation and information given to their lenders to support the Application and the PPP Loan amount, and records and information that: (i) establish whether or not they had access to other sources of liquidity, such as credit or equity capital, to support their respective businesses at the time of the PPP Loan Application and if they did, why those sources were not used; (ii) document and demonstrate the actual economic impact(s) COVID-19 has had on their businesses; (iii) why the PPP Loan was necessary to offset, at least in part, that economic impact; and (iv) how use of the PPP Loan proceeds did, in fact, assist in supporting their businesses and reduce that economic impact.


If you have any questions about the Paycheck Protection Program or any other economic assistance for your business, please contact your Nyemaster Goode attorney.


5/14 Update: SBA issues safe harbor for borrower certification. Read more here.



Visit Nyemaster Goode's Paycheck Protection Program Resource Center