Paycheck Protection Program

PPP Loans: Updates, Insights & Planning Ideas

When the CARES Act was signed into law on March 27, 2020, the Paycheck Protection Program (“PPP”) appeared to be a straightforward way to provide liquidity to cash-strapped businesses. Demand for PPP loans was high, and the original $349 billion earmarked for these loans has already been depleted. Pending congressional approval, an additional $250 billion in PPP funds could be available for businesses that missed out on the first wave of loans.

Over the past few weeks, we’ve had a chance to see the PPP provisions play out in real time. While many businesses that are recipients of PPP loans have cash, it remains unclear whether they will be able to spend the cash within the current guidelines of the PPP provisions. With state-mandated closures, some industries may find it impossible to take advantage of one of the cornerstones of the PPP program: loan forgiveness.

The SBA and the Treasury Department are issuing rules and guidance daily. We’ve received clarity regarding a number of topics, but uncertainty still exists, especially with respect to loan forgiveness.

In anticipation of impending loan forgiveness guidance, we thought this would be a good time to bring readers up to speed on where the PPP guidance stands as of today.

This post will be updated frequently, so check back often!

Updates as of 4/23/20


  • SBA and Treasury FAQ as of 4/23/20
  • IRS FAQ for Payroll Tax Deferrals (4/10/20)
  • SBA Supplemental Interim Final Rule (4/3/20)
  • SBA Initial Interim Final Rule (4/2/20)

Summary of Significant Changes and Guidance


Certification in good faith that PPP loans are necessary: The PPP loan application requires borrowers to certify in good faith that the PPP loan is necessary to support their ongoing business operations. The new guidance clarifies that when making their good faith certification, borrowers must take into account their current business activity and their ability to access other sources of liquidity when determining if the loan is necessary. It is anticipated that the new guidance will deter large applicants from applying for PPP loans. It may also result in more companies returning their loans, since borrowers that applied for a PPP loan prior to the issuance of this new guidance may repay their loan in full by May 7, 2020 without consequences.  ​


$10mm Cap for Affiliated Groups: Clarification that separate legal entities within an affiliated group are each eligible to apply for a PPP loan in the maximum amount of $10mm apiece. This assumes that the separate legal entity has its own unique EIN and is otherwise eligible to apply (i.e., uses NAICS code 72 and each physical location has less than 500 employees).


Loan Forgiveness and Payroll Tax Deferrals: Clarification that employers are eligible to defer the employer portion of Social Security tax up until the date the lender issues a decision to forgive the loan. Amounts deferred prior to forgiveness remain deferred until 2021 and 2022; payroll tax deposits and payments after that date must be made timely.


Loan Forgiveness: Clarification that the eight-week covered period begins on the date of the first loan disbursement. According to the SBA, the first disbursement must occur within 10 days of loan approval.


Time Period to Compute “Average Monthly Payroll”: Clarification that in general, businesses can compute their payroll costs for purposes of determining the maximum amount they can borrow using either a trailing 12 months or calendar year 2019.


Gross Payroll Costs: Clarification that payroll costs used in the determination of the maximum loan amount are calculated on a gross basis, with no reduction for federal taxes imposed on the employee or withheld from employee wages.


Compensation Over $100,000: Clarification that the exclusion from payroll costs of compensation in excess of $100,000 annually applies only to cash compensation. Non-cash benefits are not counted in the $100,000 threshold. Examples of non-cash benefits include:

  • Employer contributions to defined-benefit or defined-contribution retirement plans;
  • Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and
  • Payment of state and local taxes assessed on compensation of employees.


Affiliation: Clarification that for purposes of determining whether an applicant has 500 or fewer employees, an applicant’s employee count is combined with the count of its affiliates in one of four circumstances:

  • Affiliation based on ownership;
  • Affiliation arising under stock options, convertible securities, and agreements to merge;
  • Affiliation based on management;
  • Affiliation based on identity of interest.


Affiliation Waivers: Clarification that affiliation will only be waived for:

  • Any business concern with not more than 500 employees that, as of the date the loan is disbursed, is assigned a NAICS code beginning with 72 (e.g., restaurants);
  • Any business concerns operating as a franchise that is assigned a franchise identifier code by the SBA. This will prevent a franchisor and multiple franchisees from having to include each other’s employee count when testing their own eligibility for a PPP loan;
  • Any business concern that receives financial assistance from an SBIC.


Interest Rate: Increase to 1% from .5%


Use of Loan Proceeds: New requirement that at least 75% of the PPP loan proceeds must be used on payroll costs. The remainder of the proceeds can be used for:

  • Costs related to the continuation of group health care benefits during periods of paid sick, medical or family leave, and insurance premiums;
  • Mortgage interest payments (but not mortgage prepayments or principal payments);
  • Rent payments;
  • Utility payments;
  • Interest payments on any other debt obligations incurred before February 15, 2020;
  • Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020. 


Misuse of Funds: New requirement that if funds are used for unauthorized purposes, repayment will be required, and possible charges for fraud may be brought.


Independent Contractors: Cannot be included in an employer’s payroll to determine the maximum loan amount; instead independent contractors must apply for their own loans.


Payroll Costs: Borrowers will not be responsible for any loan payment if the borrower uses all of the loan proceeds for forgivable purposes and employee and compensation levels are maintained. Forgivable purposes including:

  • Payroll costs (see below);
  • Payments of interest on mortgage obligations incurred before February 15, 2020;
  • Rent payments on leases dated before February 15, 2020;
  • Utility payments under service agreements dated before February 15, 2020.


Amount of Loan Forgiveness: Up to the full principal amount of the loan and any accrued interest


Loan Forgiveness: Borrowers will not be responsible for any loan payment if the borrower uses all of the loan proceeds for forgivable purposes and employee and compensation levels are maintained. Forgivable purposes including:

  • Payroll costs (see sidebar);
  • Payments of interest on mortgage obligations incurred before February 15, 2020;
  • Rent payments on leases dated before February 15, 2020;
  • Utility payments under service agreements dated before February 15, 2020.


Loan Forgiveness: Clarification that not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs. This aligns with the intent of the CARES Act, which is to provide a loan, 75% of which is equivalent to eight weeks of payroll.


Loan Forgiveness: According to the Final Interim Rule, the SBA will issue additional guidance on loan
forgiveness. Presumably this will cover reductions in the amount of loan forgiveness due to failure to meet the 25% use test, FTE and salary reductions and the re-hire exemption.


Guidance Needed

Guidance is still needed in a number of key areas of the CARES Act in general and the Paycheck Protection Program specifically. We’ve amassed a few of the common issues we continue to watch closely and present them here for your consideration.

Revise Loan Restrictions In Light of Industry Realities: In order to achieve forgiveness, the Department of the Treasury mandated that 75% of the PPP loan must be spent on payroll. In industries currently operating with skeleton staffs – if at all (e.g. restaurants) – this limits the benefit to business owners. Some operators spend as much as 50% of their monthly expenses on lease or mortgage obligations.

Clarification of the loan forgiveness language in the CARES Act that refers to “costs incurred and payments made”. The CARES Act refers to “costs incurred and payment made” for payroll costs, mortgage interest, rent and utilities. Clarification is needed with respect to payments in arrears – are these permitted to be made current with loan proceeds without jeopardizing loan forgiveness?

Revision to the 2-year term. Given the significant ramp-up time that many businesses will need to be up and running, it will be difficult for business owners to repay unforgiven portions of PPP loans over 2 years. Restaurants, for example, are lobbying for a restoration of the original 10-year term provided in the CARES Act.

MFA Observations

While the Paycheck Protection Program provides small businesses with much-needed cash to pay up to eight weeks of payroll, rent, mortgage interest and utilities, a significant amount of uncertainty exists. This is especially true for businesses that are relying on loan forgiveness, who need guidance with respect to reductions of forgiveness amounts and the re-hire exemption.

Consider these planning ideas as you wait for future guidance:

Continue to negotiate for rent reductions and utility deferrals. This is especially important in light of the new requirement that 75% of the loan proceeds must be used for payroll costs and the clarification that not more than 25% of the loan forgiveness amount can be attributable to non-payroll costs. In addition to rent reductions, ask your landlord if you can apply your security deposit to current rent obligations.

Prepare cash flow projections. Ensure you make the necessary cuts to expenses that are not included in loan forgiveness so that forgiveness is not jeopardized. Plan ahead for additional cuts to these expenses so that you can continue to use loan proceeds for forgivable purposes (payroll, rent, mortgage interest and utilities).

Maintain a spreadsheet in a centralized location to track payments made for forgivable purposes. Save electronic copies of invoices and the checks or EFT documentation used to remit payment. This will not only allow you to track how the loan proceeds are spent but will make applying for forgiveness easier.

Amend your 401(k) plan’s match provisions. To conserve cash, you can temporarily stop your employer match. You can also change the payment date of your match to an annual payment that is made after 2020 but before the extended due date of your 2020 federal income tax return.

Maximize 2020 tax losses to take advantage of the temporary 5-year carry back for net operating losses. Businesses that generate a tax loss for tax year 2020 as a result of closures and/or reduced sales can take advantage of the temporary reinstatement of the 5-year NOL carry-back period. Losses generated in tax year 2020 can be carried back to each of the five prior tax years starting with 2015 and can be used to offset taxable income in full. While this applies to the owners of businesses that operate as flow-through entities as well as to those that are taxed as corporations, corporations will receive a significant benefit by carrying 2020 losses back to 2015, since the corporate tax rate at that time was 35% (compared to the 21% rate in effect in 2020).

  • Consider forgoing the FICA and/or WOTC credit in 2020 to maximize your tax loss. When you forego these credits, you instead receive a tax deduction for social security tax (FICA credit) and compensation (WOTC credit). These deductions will contribute to the amount of loss that can be carried back to the five prior tax years.

Don’t overlook tax refund opportunities for the 2018 and/or 2019 tax years that can potentially generate immediate cash. 

  • The limitations on the amount of business losses that can be deducted by non-corporate taxpayers have been repealed for the 2018 -2020 tax years. Business owners that had excess business losses in 2018 from businesses that they operate either as a sole proprietor or through a pass-through entity are required to amend their 2018 individual tax returns to remove the loss limitations imposed on that return. Depending on the facts, this could generate cash refunds for individual taxpayers.
  • Qualified Improvement Property (“QIP”) made by a taxpayer is (finally) eligible for 100% bonus depreciation. Depending on your specific tax situation, you may be able to amend your 2018 tax return to claim 100% bonus depreciation for QIP placed in service during 2018 and generate a cash refund. Alternatively, depending on your specific tax situation, you may be able to claim 100% bonus depreciation on your 2019 tax return for QIP placed in service in both 2018 and 2019.
  • The Empowerment Zone (“EZ”) credit was retroactively reinstated to 2018.  The EZ credit is a federal general business credit for a portion of the wages that you pay to employees that both live and work in designated empowerment zones. You do not need a 3rd party provider for either the determination of whether your business is located within an EZ or the computation of the amount of the credit. Depending on your specific tax situation, you may be able to amend your 2018 tax return to claim the EZ credit and generate a cash refund.

Definition of Payroll Costs as of 4/2/20:

Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of:

  • 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, wage, commissions, income, or net earnings from self-employment or similar compensation

Payroll costs do not include:

  • Any compensation of an employee whose principal place of residence is outside of the United States;
  • The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary;
  • Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and
  • Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.

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