The Small Business Association recently published a model forgiveness application to help Paycheck Protection Program borrowers decide how they can best use their loans, and according to the law firm of Freeman Mathis & Gary, LLP, which has offices in California, Connecticut, Florida, Georgia, Kentucky, Massachusetts, New Jersey, New York, Pennsylvania and Rhode Island, if you borrowed less than $2 million, by following the guidelines you can maximize forgiveness and not be "questioned by the government on whether you really needed the money."

The statement released by the law firm, and republished by the New Jersey Landscape Contractors Association, does point out however that there are important limits to follow "so that when you apply for forgiveness, you can in good-faith certify that your business used the money to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments."

For instance, the cap on compensation for owner-employees, self-employed individuals, and general partners is the eight-week equivalent of their applicable compensation in 2019, but Freeman Mathis & Gary, LLP believes that compensation in the form of bonuses for non-owner employees is not as clearly defined.

 

And to obtain full forgiveness, you must spend all of the loan proceeds, 75% of which needs to be on payroll costs in an 8-week period starting from when the loan is disbursed. 

"That requirement has proved daunting to some employers, particularly seasonal ones or those whose employees refuse to return to work," reports the law firm although the most recent guidance from the SBA does offer a little flexibility.

"First, it allows employers to line up the eight-week forgiveness period with their payroll using the Alternative Payroll Covered Period.  Second, it makes clear that forgivable expenses must be either paid or incurred during the eight-week forgiveness period.  Additionally, costs incurred during the eight-week period but paid outside of it must be paid during the next regular payroll or billing date."

A reduction in the forgiveness amount of a loan will occur if the borrower does not maintain certain levels levels of Full-Time Equivalent (FTE) employees, which are those that, during the defined period, average at least 40 hours per week. However, this requirement can also be met by the combination of part-time employees' hours that add up to 40 per week.
To calculate your FTE level: enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth, with the maximum for each employee being 1.0. But a borrower can choose to use a simplified method that assigns 1.0 for employees who work 40 hours or more per week and 0.5 for those who don't.
Also, there could be a reduction in the forgiveness amount of a loan if there are pay reductions. 

"Frankly, the statute that Congress passed didn't make sense and would have inevitably resulted in a reduction in forgiveness if the language was applied literally as it read," states the law firm. "Fortunately, the SBA's guidance fixed what was likely a drafting error: as long as an employer maintains 75 percent of its salary or wage levels when compared to the first quarter of this year, it can avoid reductions in forgiveness. If you don't do that, it gets complicated. You should work closely with a legal or accounting professional in assessing the reduction in forgiveness based on compensation reductions."

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