Paycheck Protection Program – Maximize Forgiveness

Paycheck Protection Program

Paycheck Protection Program – Maximize Forgiveness

It is important that small businesses receiving the Paycheck Protection Program (PPP) loans manage the loan proceeds. For that reason, we are sharing some best practices for managing PPP loans. Download PPP Loan Forgiveness Calculator we developed with Elevate Performance, LLC to help you. NOTE: Check back for the latest version of the PPP Loan Forgiveness Calculator as we update it for additional SBA guidance.

Payroll and Full Time Equivalents (FTEs)

PPP loans are forgivable, but reductions in employees, work hours and total payroll decrease the forgiveness. To manage this, recipients determine the baseline FTE and payroll amounts to calculate the forgiveness.

This requires the average FTEs for the periods:

  • February 15, 2019 to June 30, 2019 for Option 1 and
  • January 1, 2020 to February 29, 2020 for Option 2.

The other baseline is the total allowable payroll for the most recent quarter prior to the loan origination. You will need to gather the payroll expenses for employees during that first quarter. Track payroll expenses during the 8-week expenditure period by employee excluding employees earning over $100,000 annualized.

Because the PPP loan limits qualified payroll expenses to 75% of the loan proceeds, it is important to track and monitor this from the start.

Start by asking your payroll provider or CPA to help you gather this information. Add this information to our PPP Loan Forgiveness Calculator to manage and track any projected reduction in the PPP loan forgiveness.

Segregate PPP Proceeds

Open a new bank account to deposit and manage the PPP loan proceeds. Then pay the allowable expense from your existing bank accounts and transfer the funds from the PPP account to cover the expenses. This is important because the balance left in the PPP account should approximate the unforgivable balance at the end of the expenditure period.

Maintain an 8-Week PPP Projection and Log

Because recipients have 8 weeks from the loan origination date to make the allowable expenses, it is important to project allowable expenses. Depending on the timing of the PPP loan, businesses may need to adjust pay periods and vendor payment cycles to maximize the forgiveness of the loan.

Use our PPP Loan Forgiveness Calculator to project and track the allowable expenditures. Start by projecting the allowable expenses and update the tool as actual expenditures are made. Setup a folder to save the reports and invoices supporting payroll, group health care benefits, retirement and other allowable expenditures.


Because the PPP loans are new, it is important to communicate with your banker throughout the 8-week expenditure period. It’s also important to understand the banker’s expectations for this process. Also keep abreast of any changes or clarifications of the PPP loan process.

Taxability of the PPP Forgiveness

There is a saying – “It’s better to ask for forgiveness than permission”. When it comes to the PPP loans, forgiveness is written into the CARES Act. This forgiveness is specifically exempted from federal income taxes. Sounds like a great deal, and it really is.

It appears that someone reached out to the IRS and asked for permission. And while the IRS did not kibosh the tax free forgiveness, they clarified the deductiblity of the related expenses in Notice 2020-32. While you are not taxed on the forgiveness, you can’t deduct the expenses paid by the forgivable portion of your PPP loan.

So some think of this as bad news. It’s really a neutral event from a tax standpoint. Recipients are not taxed on the forgiveness on one side of the equation. On the other side, the related expenses are not deductible. So in the end, the tax effect of the PPP forgiveness is tax neutral.

Accounting for the PPP Forgiveness

Recipients should record the forgiveness to an easily recognizable account on the income statement. Do this to ensure that it is not taxable on your 2020 tax returns.

Discuss the forgiveness with your CPA. The forgiveness is recorded on the M-1 portion of your return (1120S, 1120C and 1065). Schedule M-1 Reconciles the Income (Loss) per Books With Income (Loss) per Return.

Follow the the section above; reduce deductible expenses by the amount of the forgiveness. This adjustment is also reported on M-1 and fully offsets the forgiveness.

Yeah, this a little technical for most of us. Here’s what you need to do.

  • Record the forgiveness in a separate “Other Income Account”
  • Work with your CPA specifically identifying the forgivable portion of the PPP loan.
  • Review the M-1 section of your return reconciling your book income to the taxable income.
    • Verify the forgiveness is removed from the book income (Line 5a Income recorded on books this year not included on Schedule K, lines 1 through 10), and
    • Verify the same amount is added back to book income (Line 3a Expenses recorded on books this year not included on Schedule K, Line 1 through 12 and 14p).

The Remaining PPP Balance

The balance of the PPP loan at the end of the 8-Week expenditure period converts to a 2-year term loan at a 1% interest rate. Payments on your PPP loan are deferred for 6 months from the loan origination date.

There is no prepayment penalty on the PPP loan. For that reason, recipients should consider how they will handle the unforgivable portion of the loan now in forecasting long-term cash flow.

Summary of the PPP Best Practices

First, understand the PPP loan forgiveness formula. Secondly, manage your expenditures during the 8-Week expenditure period to maximize the forgiveness. Then follow these steps:

  1. Gather the FTE and Payroll information for the baselines noted above.
  2. Segregate the proceeds in a separate bank account.
  3. Transfer funds to operating and payroll bank accounts as allowable expenditures are incurred.
  4. Create and maintain a projection of allowable expenditures.
  5. Update the projection as allowable expenditures are incurred.
  6. Scan and save supporting reports and invoices in a central folder to support the loan forgiveness calculation.
  7. Record the forgiveness to a separate “Other Income” account.
  8. Work with your CPA and review the 2020 M-1 Schedule ensuring the forgiveness is not taxable nor, the related expenses are not deducted.

Finally, follow these steps to maximize the loan forgiveness and create liquidity during this difficult business cycle.

Also see our COVID-19 Best Practices for Business post.

About Porterfield & Company CPA

At Porterfield & Company CPA, our mission is improving people’s lives through relationships, sound guidance and leadership; serving as accountants, auditors and advisors. We guide franchisees, pharmacists and small business owners to meet their business and financial goals.

Call us at 844-309-4930 or contact us via our website.

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