Optimize Your PPP Loan Use for Forgiveness

SBA PPP forgiveness tools

How to Optimize Loan Use for Forgiveness

Approximately 1.6 million of companies have received loans under the Small Business Administration’s Paycheck Protection Program (PPP), and those funds are beginning to hit bank accounts across the country. Now that the money from your PPP Loan is here, or on its way, it is time to think about doing everything you can to ensure forgiveness. 

While we still do not have the final Small Business Administration (SBA) rules on how the forgiveness provisions will work, we do have the statute to give us some level of guidance. To avoid surprises, small businesses must clearly understand the loan forgiveness requirements of the PPP, as well as the restrictions on a borrower’s use of proceeds.

Under the CARES Act, borrowers may use PPP loan proceeds to pay any of the following:

  • “Payroll costs,” a defined term that includes all of the following:
    • salaries and wages (capped at $100,000 on an annualized basis for each employee);
    • payments for vacation, parental, family, medical or sick leave;
    • severance payments;
    • payments required for the provision of group health care benefits, including insurance premiums;
    • retirement benefits; and
    • state and local taxes assessed on the compensation of employees.
  • Interest (but not principal) on any debt or mortgage obligations that existed prior to Feb. 15, 2020.
  • Rent arising under a lease agreement (for both real and personal property) in force before Feb. 15, 2020.
  • Utility payments (including electricity, gas, water, transportation, telephone or internet access) for which service began before Feb. 15, 2020.

The statute itself does not require any specific allocation of proceeds. However, per recent Small Business Administration (SBA) guidance, borrowers expecting full forgiveness should plan to spend at least 75% of the loan proceeds on “payroll costs.” Here’s a more detailed look at the math when it comes to maximizing your opportunity for loan forgiveness:


Once the PPP Loan funds hit your account, that starts an eight-week race. To be assured of maximum forgiveness, plan to spend 100% of those funds before the end of the eight-week period. The CARES Act calculates forgiveness based, in part, on “(approved) costs incurred and payments made during (the eight-week period),” and there is no guidance yet on whether there is any leeway on the timing of these expenditures. Also, you are going to need to prove all of this later, so you must keep meticulous records of what you spent PPP Loan funds on and when.

Take some time to plan out how you will budget and allocate these funds once they arrive.

  • First, we suggest you open a separate deposit account solely for the PPP Loan funds and then write checks from that account.
  • Second, spend as much as you can on designated payroll costs incurred during the eight-week period – under the SBA’s interim rule if you do not spend at least 75% of the loan proceeds on payroll costs, the dollar amount of the shortfall from 75% reduces the amount of forgiveness.
  • Third, all remaining proceeds not spent on payroll costs should be spent on the three other approved costs: covered rent, covered utilities, and covered mortgage interest.


The amount you manage to pay out in approved costs for the eight-week period determines your maximum forgiveness. But, this can be further reduced due to declines in headcount. If you had 10% fewer full time employees in the eight-week period than in your baseline period, then your loan forgiveness is proportionately reduced, by that same 10%.


Whatever forgiveness is left after the headcount reduction math can be further reduced, dollar-for-dollar, for major reductions in wages. To calculate this you first need to identify all employees during the eight-week period whom you employed at any point during 2019. Then determine “who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.


The statute includes a “fix” for the headcount-related reduction in forgiveness. If by June 30th, 2020, you bring your FTE levels back up to where they were on February 15, 2020, then that excuses whatever reduction in forgiveness was attributable to a drop in headcount between February 15th, 2020, and April 26th, 2020. (The CARES Act wording is that the employer by June 30 “has eliminated” that reduction in the number of FTEs.)

The statute also includes a separate “fix” for the salary/wage-related reduction in forgiveness. If by June 30th, 2020, you have restored the salary/wage levels of the below-100 people to at least the level existing on February 15th, 2020, then that excuses any salary/wage level reductions which occurred between February 15th, 2020, and April 26th, 2020. 

Business owners are focused on the forgiveness feature of the PPP loans. Forgiveness is certainly an important part of the CARES Act incentives for small businesses to retain as many employees as possible and to keep up their wage levels. However, the ultimate objective for those who own and operate such a company will be to protect the long-term health of the business. If business realities are such that you are unable to achieve 100% forgiveness, recognize that 1% loan with a two-year payback period with no collateral and no personal guarantee is a boon in and of itself. The loan forgiveness features of the Paycheck Protection Program are complex and will require detailed planning, precise execution, and meticulous documentation.

We want to help make this process simple for you, contact us for more information.