Paycheck Protection Program: Understanding the Rules and Potential Options May Be Required to Maximize Loan Forgiveness


By Brandon N. Mourges of Rosenberg Martin Greenberg LLP
Published April 27, 2020

The Paycheck Protection Program (“the PPP”) has, by most accounts, been a great success in providing needed financial assistance to small businesses. While funding through the PPP is characterized as a “loan,” many business owners view these proceeds as grants due to the loan forgiveness offered by the CARES Act. Whether the PPP loan has been funded yet or not, businesses should carefully review their financial situation and the requirements of the PPP in order to maximize the amount of loan forgiveness.

Amount of PPP Loan.

The PPP was designed to incentivize the retention of employees during government-mandated shutdowns and the related financial downturn caused by the COVID-19 pandemic. Accordingly, lenders calculate the maximum amount of loans offered through the PPP by calculating monthly pre-pandemic payroll costs of the employer. Upon receiving proof of wages paid, health insurance premium, retirement contributions, and other direct costs for their employees, a lender can issue a loan of up to 250% of monthly payroll costs pursuant to the PPP. (This amount is capped at the pro rata amount of $100,000 per employee—or $20,833 per employee, exclusive of allocable benefits.) For example, if a business employs 10 individuals that earn $50,000 annually (including allocable benefits), it could be authorized for a PPP loan of up to $104,167.

Components of PPP Loan Forgiveness.

After the loan has been funded, the employer has an eight-week period (“the covered period”) to incur expenses eligible for the loan forgiveness component of the PPP. Eligible expenses include the following “cost incurred and payments made during the covered period”

  • Payroll costs: Salary, wages, commission, similar compensation and related, allocable benefits (e.g., vacation, sick leave, health insurance premium, retirement benefits, etc.) (compensation capped at $15,385 during the covered period)
  • Payment of interest on a covered mortgage obligation: Interest related to a debt incurred in the normal course of business that is a liability of the borrower, is a mortgage on real or personal property, and was incurred before February 15, 2020
  • Payment on any covered rent obligation: Rent obligated under a leasing agreement in force prior to February 15, 2020
  • Covered utility payment: Payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020

After these expenses are incurred and paid, the borrower must make a certification to the lender with supporting documentation. If deemed eligible expenses upon review by the lender, a corresponding amount of the loan is forgiven. The CARES Act further stipulates that this loan forgiveness is not considered taxable income to the business.

Hurdles to Maximizing Loan Forgiveness.

While many business owners think that sufficient eligible expenses will easily be incurred during the covered period, there are several significant limitations that may challenge businesses attempting to have the entire loan forgiven.

  • Retention Ratio: As the purpose the PPP is to incentivize the retention of employees, the amount eligible for forgiveness is proportionally reduced if employees are not retained. For this purpose, a lender will compare the number of full-time equivalents during the eight-week covered period to a reference period (at the election of the borrower, either the period from February 15, 2019 through June 30, 2019 or from January 1, 2020 through February 29, 2020). Accordingly, if 25% of employees are dismissed as a result of the pandemic, only 75% of the loan is eligible for forgiveness.1 Particularly after a loan has been funded, employers should carefully consider dismissing an employee as it will likely have a greater financial cost than simply keeping an employee on payroll.2
  • Covered Period: The covered period for purposes of loan forgiveness is only 8 weeks. The maximum amount of the PPP loan is based upon 250% of monthly payroll. Accordingly, the reference period for forgiveness is less than 74% of the reference period for the loan amount. If an employer has no eligible expenses aside from payroll costs, close to 25% of the loan may not be eligible for forgiveness.
  • Definition of Payroll/Documentation: In order to qualify for loan forgiveness, payroll costs must be documented and certified. Unfortunately, some businesses do not properly treat payments to owners as compensation and/or may misclassify workers. These businesses will not be able to maximize loan forgiveness unless they address these compliance issues and correct issues on payroll tax filings.
  • 25% Rule: While the CARES Act did not specifically address acceptable ratios of non-payroll expenses for forgiveness purposes,3 rules implementing the PPP mandate that no more than 25% of the eligible expenses can include non-payroll costs. As a result, employers cannot easily cram rent, mortgage, or utility payments into the covered period in order to both maximize loan forgiveness and avoid paying employees.

Opportunities to Maximize Loan Forgiveness.

In order to maximize forgiveness and to mitigate the effects of the aforementioned issues, businesses should engage in a thorough financial review. It is likely that many businesses will have difficulty having the entire loan forgiven if they have relatively low non-payroll costs, such as rent and utilities. Others who have potentially qualified for a loan amount based on payments to independent contractors may have difficulty documenting qualifying payroll. Once this review has occurred, businesses may consider implementation of one more of the following strategies to maximize loan forgiveness under the PPP:

  • Additional Short Payroll Period? Businesses can potentially include an additional period of payroll in the covered period to increase payroll costs.4 For example, if a PPP loan originates on April 24, 2020, the covered period will run until June 19, 2020. If payroll is run bi-weekly, payroll falling within the covered period may be paid on May 1, 2020, May 15, 2020, May 29, 2020, and June 12, 2020. While the payment made on May 1, 2020 may cover amounts earned by that employee from days prior to April 24, 2020, it should still be an expense eligible for forgiveness under the terms of the PPP. That said, businesses may want to run an additional one-week payroll on June 19, 2020 in order to capture additional payroll costs that are subject to forgiveness.5
  • Hiring Additional Employees for Backlogged Work? Businesses may also be incentivized to hire additional employees during the covered period. For instance, if it is clear that an employer will not have the loan fully forgiven based upon current employment levels (and costs), it may make sense to hire additional employees towards the end of the covered period, provided work is available for them. In doing so, the net effect would be that the employer has gained a “free” employee for the remainder of the covered period.6
  • Raising Employee Compensation or Frontloading Benefits? If businesses do not otherwise satisfy the 25% rule or utilize the full extent of eligible expenses for the PPP, they may consider raising employee compensation or frontloading benefits. Much like with hiring additional employees, raising employee compensation during the covered period is potentially a no-cost proposition to the employer. (Raising employee compensation to more than $100,000 annually would not be a no-cost proposition since that portion of payroll is not eligible for loan forgiveness.) Obviously, other considerations would need to be made if this option is pursued—e.g., which employees would this apply to and would there be an expectation of continued raises once the covered period expires. Similarly, and perhaps a more viable option, business might consider paying previously unfunded retirement benefit obligations or health insurance premiums during the covered period. There is currently no prohibition against such a maneuver. Moreover, this could provide a work-around from the $100,000 compensation limit set by the CARES Act.7 On the flip side, implementation may require consultation with a benefits expert to ensure that no other applicable rules or regulations are violated.
  • Reclassification of Workers? In addition, there are businesses that may not be able to qualify for either the largest possible loan amount or for the greatest amount of loan forgiveness due to worker misclassification. Stated differently, if worker payments are not documented and/or if workers are misclassified, a business will not have a basis to justify the full extent of “payroll costs” (i.e., since they are off payroll). While this occurs for a variety of reasons, businesses have a significant incentive to include those individuals on payroll in order to have their pay subsidized by the government through the PPP, at least during the covered period. Employers may consider reclassification on a prospective basis or may retroactively reclassify or report workers by filing amended Forms 941 or engaging in the Voluntary Classification Settlement Program, if eligible. (More information can be found here.)

In conclusion, small businesses should work with both their internal personnel and outside advisors to ensure that maximum benefits are derived under the terms of the PPP. While the prevailing view may be that the proceeds easily qualify for loan forgiveness, this will not necessarily be true for many businesses. Even if none of the above options is available, now is the time for businesses to properly plan, document, and evaluate different strategies offered by the PPP and other government initiatives.

These descriptions are intended for informational purposes only and should not be taken as legal advice on any particular set of facts or circumstances. Rosenberg Martin Greenberg, LLP is experienced in all aspects of federal and state tax laws, legislative developments concerning the CARES Act, addressing prior compliance issues, white collar criminal litigation, and more.

Brandon N. MourgesBrandon N. Mourges is a Partner at Rosenberg Martin Greenberg LLP. His practice involves the representation of individuals and businesses throughout all stages of federal and state tax controversy. Brandon also has experience advising clients on issues involving tax and business planning, litigation, and compliance For more information, He can be reached at or 410.951.1149.

End Notes

[1] The use of this ratio encourages the retention of relatively low-paid workers versus high-paid workers.
[2] If an employee is kept on the payroll during the covered period, their entire compensation is essentially government subsidized. On the other hand, if low-paid worker is dismissed, it will decrease the retention ratio. This could cause a greater amount of expenses to become ineligible for forgiveness than just the employee’s compensation.
[3] Inclusion of any additional ratio testing was likely not necessary to fulfill policy goals as the employee retention ratio requires payment of certain payroll costs to remain eligible for loan forgiveness.
[4] As with all of the options discussed, any strategy will necessarily entail countless financial and non-financial considerations. Before implementation, businesses should consult with the appropriate advisors and professionals.
[5] If this week was simply run with the normal payroll on June 26, 2020, it is not likely that it would be counted as an eligible payroll cost.
[6] If the employer is not able to substantiate enough eligible expenses, portions of the PPP loan will not be forgiven. Here, since all of the payroll costs would be eligible expenses, there is effectively no cost to the employer during the covered period.
[7] As with any of the options discussed herein, businesses should carefully follow legislative and administrative updates. Additional rulemaking could impact or eliminate certain options.