Are your clients losing money in PPP forgiveness? I ran an analysis across all PPP calculations in MoreReporting. On average clients had a 14.3% loss in forgivable amount compared to their PPP loan. With an average loan size of $104,000, each client is losing an average of $15,000!
These $15,000 illustrate the difference between compliance and maximizing. When doing compliance, this loss of $15,000 is accepted as a fact. When maximizing, everything is done to bring that amount down to $0. Which option do you think the clients prefer?
Over the past few months, I have received many questions on how to maximize client forgiveness. The change from 8 to 24 weeks has definitely made that task a lot easier. When clients are impacted minimally by the Covid-19, it is trivial to ensure them a 100% forgiveness. But a majority of clients have experienced a large impact, and therefore it can be complicated to ensure them 100% forgiveness. Therefore, I have made a guide on how to maximize PPP forgiveness.
Make sure to join the Insightful Accountant webinar with Johan Colvig of MoreReporting, "Maximize Your Clients PPP Forgiveness" today, July 30 at 4:00 p.m. Eastern Time. You can register here.
The PPP forgiveness is based on the following formula:
Calculated Forgivable Amount =
(Costs - Salary_Hourly_Wage_Reduction) x FTE_Reduction_Quotient
Finally, for validation, the smallest of the following values are selected:
Calculated Forgivable Amount
Loan Amount
Payroll Costs / 0.60
Maximizing is about making the Calculated Forgivable Amount as large as possible. There are several ways of doing this:
Step 1: Maximize the costs
Incurred Costs
When looking to maximize the forgivable amount, the first look at is the incurred payroll costs. If this is empty, fill it out. Include payroll costs that incur during the covered period, but are paid in the first payroll following the end of the covered period.
Alternative Payroll Covered Period
If the borrower is unlucky with the loan disbursement date, see if it can be an advantage to use the alternative payroll covered period. This can only be used if the payroll frequency is bi-weekly or more frequently. Also, it only covers the payroll costs. The non-payroll costs still follow the covered period.
Other employee related costs
Did they record all expenses for health insurance, retirement, and state unemployment taxes? If these are empty for any employee, make sure that they get recorded. Also make sure that paid vacation and allowances for dismissals are recorded as well.
Commissions or bonuses
If the costs are still lower than the loan amount, it can be beneficial to pre-pay employee commissions or bonuses during the covered period.
24 Weeks
Finally, changing from an 8 week period to a 24 week period might be needed. Many business owners will only do this reluctantly, as it will require more paperwork and documentation. Also, they might want to get the forgiveness over with as soon as possible. However, switching to 24 week might be the only way to secure full forgiveness.
Step 2: Minimize Salary / Hourly Wage Reduction
In most cases, step 1 is enough to ensure maximum forgiveness. However, there are more complicated cases where additional optimization is needed. The first place to look is the salary / hourly rate reduction. If this is $0, skip to the next section. If not, take a good look at all employees for which there is a salary / hourly wage reduction.
+$100K in 2019
Did any of the affected employees receive over $100,000 annualized in any pay period of 2019? So if an employee has a regular salary of $60,000 per year, their bi-weekly pay stub will show a gross payment of $2,307.69. However, if that employee received a bonus of $1,539 or more in one pay period, that employee is over the $100K limit. To verify this, ask the client for all pay stubs from 2019, and go through them all to see if the employee is over the $100K limit in just one pay period. Don’t just rely on the W-2s, as they only show the annual sum, and not if any pay period was over $100K.
Owner-Employees
Owner employees are not included in the salary / hourly wage reduction. Make sure they are excluded from that calculation.
Safe Harbor
The final option is the Salary / Hourly wage safe harbor. Talk to the client about restoring the salary levels to their pre crisis levels. Be sure to explain to the client that he can’t just reduce these salary levels again right away. A little time has to pass before the salary levels are reduced.
Step 3: Optimize FTE Reduction Quotient
The FTE reduction quotient can have a significant impact on the calculated forgivable amount.
Select optimal reference period / FTE calculation method
The FTE reduction quotient is calculated by dividing the FTEs in the covered period with the FTEs in the selected reference period. Don’t just rely on either the advanced or the simple method for calculating the FTEs. Calculate the reduction quotient for all possible permutations, and select the best one. If the first one gives 1, you don’t need to calculate the rest. The method for calculating FTE must be the same in both the covered period and the selected reference period.
Owner-employees
Make sure that owner-employees are not included in any of the FTE reference periods. Owner employees are not included in the FTE calculation for the covered period, so they shouldn’t be included in the reference periods either.
FTE Exceptions
There are 3 possible FTE exceptions. They are all added to the FTEs for the covered period. The first exception is for employees who were dismissed prior to the covered period, but they don’t want to return. However, for this exception to be valid, the business has to prove that they were unable to find an equally qualified replacement. What does the client want to do in this case? Do they actually want to find a replacement?
The second exception is for employees in the covered period who don’t want to return to the previous level of hours. The final exception is for employees who during the covered period were fired for cause, quit, or wanted their hours reduced. Make sure to discuss these exceptions with the client and get all steps documented. It is not enough that the client calls a previous employee to offer them their position back. It has to be in writing.
Safe Harbor
If the business is able to restore their FTE levels to pre-crisis levels, the FTE reduction quotient is automatically set to 1.
Unable to Return To Previous Business Level
Was the client shut down by the government? This is described very vaguely by the SBA. The client will need to document that this was the case. It is not enough that they heard it on the news and shut down their business. Also, the client must document what their business level was prior to the crisis, and that their business level was lower between 02/15/2020 and the end of the covered period. I strongly recommend consulting with an attorney before using this option.
When we built the PPP forgiveness calculator in MoreReporting, the goal was to handle all aspects of the PPP forgiveness process. Including the maximization of PPP forgiveness.
I believe it is possible for almost all businesses to get a 100% forgiveness of their PPP loan. But for many, it will require external help to maximize their forgiveness. If you help them get full forgiveness, you will be their new hero. And you can use that new status to continue building your advisory practice.
Make sure to join the Insightful Accountant webinar with Johan Colvig of MoreReporting, "Maximize Your Clients PPP Forgiveness" today, July 30 at 4:00 p.m. Eastern Time. You can register here.
Author Bio: Johan Colvig has 15+ years of experience as an industry leader in the business intelligence space. He is also a co-founder and architect of MoreReporting, the most advanced financial analytics tool for QuickBooks. His core philosophy is "AI Assisted Advisory." He believes that AI should augment accountants to become advisors to their clients. Before MoreReporting, Johan was a co-founder of Infotrust A/S based in Europe. Infotrust was a leading SAP business intelligence partner. They won the Partner of the Year award 4 times in the Europe North region. He has 8 years of experience in teaching financial analysis. He has been a keynote speaker in different conferences in the US and abroad.