PPP Loan Terms

(Updated June 18, 2020)

The best place to start is to remember that, by default, the PPP is a loan. 
You can spend it however you want. It is a two-year loan, payments are deferred for the first 10 months, the loan is payable over five years (if received your loan before June 5 the term is two years, discuss this with your bank) and the interest rate is 1%.  That in and of itself is not a bad deal. 

The real question about spending the PPP is how to ensure the government forgives the loan so that you don’t have to pay it back. 

That makes things more complicated.  And given how the rules around applying for the loans shifted, we fully expect changes to the conditions for forgiveness.  Everything I write here is subject to change and interpretation, but this is what we understand as of June 11, 2020 (including changes as a result of the Flexibility Act)

Is PPP Loan forgiveness automatic

No, you must apply for loan forgiveness.

What percentage of the PPP loan must be spent on payroll for the loan to be forgiven

60% of the forgiven amount must be spent on Payroll expenses.

What are Payroll Expenses as defined by the PPP

Salary, wages, commissions, or tips capped at $100,000 annually ( $1,923 a week or $46,153 for the 24 week “covered-period”.) Employee benefits the big one being health insurance. State and local taxes assessed on compensation.

What are acceptable non-payroll expenses

Rent, under lease agreements in force before February 15, 2020.
Utilities, for which service began before February 15, 2020.
Interest on mortgage obligations incurred before February 15, 2020.

You will have the option to apply for loan forgiveness and there are four broad conditions for forgiveness.

Condition 1: You use the money over the 24 or 8 weeks following your receipt of the loan.

We start with the easy condition first. The 24 or 8 week period following receipt of the loan is your “covered period.  If you got the loan on May 1, that is the day the 8 or 24 week period starts.

The original legislation called for 8 weeks, the Flexibility Act passed on June 5 changed this to 24 weeks. If you received your loan before June 5 you definitely have the option to chose either the 8 week or 24 week period.

If you received your loan after June 5 you may not have the option to choose an 8 week covered period. The legislation suggests you will still be able to choose, the treasury department rules say you cannot.

We suspect these rules will change, but cannot promise that.

Condition 2: You use at least 60 percent of the loan for payroll. 

Payroll includes

  • Salary, wages, commissions, or tips capped at $100,000 annually ( $1,923 a week or $46,153 for the ) 24 week “covered-period”.
    (The 24-week covered period is new, this used to be 8 weeks. Companies who received their loan before June 5 can still elect an 8 week period.)

Add to this amount:

  • Employee benefits the big one being health insurance.
  • State and local taxes assessed on compensation.

The rule is the same for sole proprietors and independent contractors: the payments to yourself are your payroll. If you pay yourself up to $46,153, we believe the government will forgive that amount. This is new with the Flexibility Act, the total used to be $15,385.

Payroll excludes

  • Any compensation to any individual that exceeds $100,000 annually ($8,333 a month or roughly $1,923 a week).
  • Federal employment taxes withheld between February 15, 2020, and June 30, 2020. Qualified sick and family leave wages covered under the Families First Coronavirus Response Act.
  • Qualified sick and family leave wages covered under the Families First Coronavirus Response Act.
  • Federal employment taxes withheld between February 15, 2020 and June 30, 2020.

Condition 3: You spend 40% or less on acceptable non-payroll expenses, which include: 

  • Rent, under lease agreements in force before February 15, 2020.
  • Utilities, for which service began before February 15, 2020. (note that the exact definition of utilities is unclear and depends on which version of the rules/legislation you read. It definitely includes electric, gas, phone, and internet access. Some sites and analyses have suggested that some transportation costs are included in this, but the rules from Treasury say only “utility costs”.)
  • Interest on mortgage obligations incurred before February 15, 2020.

The new 60% rule caveat introduced by the Flexibility Act:

Before, spending less than 75% on payroll would reduce forgiveness eligibility by the amount not spent on payroll. Now the rule is that the amount spent on payroll must be 60% of the total amount forgiven.

This is a mind bender so here is an example: if you spend $30,000 of your PPP money on payroll the total amount eligible for forgiveness will be $50,000. Regardless of how much you borrowed.

So if you borrowed $100,000 and spent $30,000 on payroll and $70,000 on permissible expenses the total amount you can possibly have forgiven is $50,000.

Condition 4: You maintain your staff and payroll.

This condition has changed dramatically. This application of this rule requires some patience to internalize so bear with me.

First, start with the amount eligible for forgiveness.  That is the money you spent per the 3 points above.

Second adjust that based on your staff levels and payroll:

  • Reducing your staff will lead to a proportional reduction in the amount forgiven.  This means: if you reduce staff by 10%, that will reduce the amount forgiven by 10% (READ the CAVEATS below). For example, if you have 100,000 eligible for forgiveness and reduced staff by 10%, then $90,000 would be forgiven.
  • If you reduce salaries by more than 25% for any employee that earned less than $100,000, that will impact the amount forgiven.  We think the amount forgiven will decrease by the amount of salary reduction, which exceeds 25%. So if someone earned $100,000 and you reduce their salary by 30% or $30,000, that would reduce your forgiveness by $5,000.

(Use our calculator to estimate forgiveness not yet updated for the Flexbility Act).

Then there are caveats (of course),

  • If you already laid people off, you can rehire them and pay them.
  • You have until December 31st to rehire employees.
  • If you make a good faith, written offer to rehire, and the employee rejects the offer, then this will likely NOT impact loan forgiveness (note that this could make the employee ineligible for unemployment.)
  • If you can’t find qualified people to hire, this will not impact your forgiveness (new with the Flexibility Act).
  • If you can’t hire people due to business conditions this will not impact your forgiveness (new with the Flexibility Act).

And the frequently asked questions:

What if I don’t have anything for employees to do?

In that case, all of the rules still apply. Though the Flexibility Act does give you, well, flexibility.

You have more time to pay people and a lack of business is now a reason to not hire people back. Still, our recommendation is to hire the people you can and use the time to build something. The purpose of the grant is to keep people employed so that they can spend money and keep the economy from collapsing. 

Can I spend the money on 1099 employees and call that payroll.

No. 1099’s apply for themselves and pay themselves.  

Can I hire my spouse, kid and cat and call that payroll.

Well, maybe.  I mean not the cat, that is a definite no. However, we don’t think the employees during the eight week period have to be the same employees as before the 8 week period you just have to have the same number of employees.

So, you could hire different employees, and if the person you are hiring does work for the company that will likely count even if they are a relative.

But, expect some scrutiny here.  If you are hiring your 2-year-old to get around the maximums and make the numbers work for you that is fraud.  The line between acceptable and fraud is fuzzy at the moment so you will have to use judgment.  


What if I don’t want to rehire my employees?

The rules still apply.

What if I adjust all salaries by 24.9%, hire an employee on the last day and spend the rest of the money on board games

The rules apply.  There are many creative ways to manipulate the rules.  In the end you will have to apply to your bank for forgiveness and they will decide.  Anything can be negotiated and ultimately we think that as long as you stick close to the spirit of the law you will likely get most of the loan forgiven.Board games, however, are NOT considered and acceptable use of funds, so you will have to pay that money back, over 2 years at 1% interest (and yes, video games and Liberty Puzzles, same thing).


What about future programs, how will they impact this program

There may well be future programs and new rule interpretations, but we don’t know what they are yet.  The best we can do is plan with the information we have. 

Here is the thing: most of the complications come from overthinking this.  Just spend the money per the rules and we think the loan will be forgiven.  Many of the details were not well thought through and there will have to be some flexibility as a result.

How do I support my application for forgiveness

Keep good records. Show that you spent the money on acceptable uses.

We have a checklist of documents that you may find helpful here.  One of our clients recommended creating a separate bank acount.  We can help you categorize your spending in Quickbooks.  All of this will help.  We suspect the bias will be toward forgiveness for any loan less then $2 million.