Traps to Avoid in Obtaining Paycheck Protection Program (PPP) Loan Forgiveness

The PPP allows certain employers (primarily those with less than 500 employees) to obtain low cost (1% interest), short-term (2 years) financing from the federal government for certain operating expenses consisting of payroll costs, interest on certain loans (not principal), rent on real and personal property, and certain utilities.

The limitation on the use of the loan proceeds means that employers cannot use the money to pay suppliers, contractors, or insurers.

In addition, recent regulations impose a requirement that is not in the statute--75% of the loan proceeds must be spent on certain payroll costs to qualify for forgiveness. This requirement ignores the fact that many businesses in normal times do not spend 75% of their revenue on payroll costs and those businesses may not survive if other obligations are not paid.

Furthermore, not all of an employer’s payroll costs are counted in determining loan forgiveness. For example, the maximum cash compensation (salary, wages, vacation pay, etc.) that can be considered for loan forgiveness purposes is approximately $1,923 per employee per week. Moreover, the employer’s share of FICA and other federal taxes cannot be treated as payroll costs for loan forgiveness purposes.

Staff reductions also may reduce the amount of loan forgiveness.

These and other potential traps may be avoided with proper planning and legal advice.