The 501 S(c)ene

The latest view on not-for-profit accounting issues

PPP loans – planning for forgiveness

So you got through the process of obtaining your PPP loan. Now is the time to plan for the amount of your loan forgiveness. There may be things you can do now to maximize that amount. Here are some examples that you may help.

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Example #1:

  • The loan amount is $2M, which was based on 2.5 months of payroll costs from last year, which means the average monthly amount last year was $800,000.
  • The actual payroll costs in the “covered period” (8 weeks, beginning on date you receive loan proceeds) are basically the same as last year, so it totals $1.6M (2 months @ $800K per month).
  • Utilities, rent and mortgage interest expenses during the 8-week period are $1M.
  • The total potential forgiveness amount is $2M ($1.6M + $1M, maxed out at loan amount of $2M).
  • Payroll costs must make up at least 75% of the forgiveness amounts, so since $1.6M is 80%, the whole $2M should be forgiven.
  • However, if the # of FTE’s (full-time equivalents) is less in the 8-week period, as compared to the prior year, then the forgivable amount is reduced proportionately (unless you bring the FTE count back up by June 30).
  • And, if wages were cut more than 25% in that 8-week period, there is also a reduction of the forgiveness.

Example #2:

  • The loan amount is $2M, which was based on 2.5 months of payroll costs from last year, so the average monthly amount last year was $800,000.
  • No employees were furloughed or fired as a result of the pandemic, but the entity cut wages across the board by 20% beginning on February 15, 2020.
  • Because of the 20% cut, payroll costs for the 8-week covered period were $1,280,000.
  • Utilities, rent and mortgage interest expenses during the 8-week period are $1M.
  • Since $1,280,000 is 75% of $1,706,667, and since there are enough utilities/rent/mortgage interest expenses to cover the difference between $1,706,667 and $1,280,000, the maximum loan forgiveness amount is $1,706,667 (also see last 2 bullet points in example #1). This is because payroll costs have to be at least 75% of the forgiven amount.

With example #2, you may be able to increase the amount forgiven by increasing wages back up now, before you get too far into that 8 weeks. It may be the difference of paying your employees versus paying the government back. At Henry+Horne, we can help you with planning for maximization of your loan forgiveness if needed. For more information and resources on COVID-19, see our coronavirus page. Feel free to contact your Henry+Horne tax adviser with any questions.

DISCLAIMER: Guidance on PPP loan forgiveness from banks has not yet been finalized and the above information is therefore subject to possible change.

Colette Kamps, CPA