How to receive 100% Paycheck Protection Program loan forgiveness

The Coronavirus Aid, Relief, and Economic Security (CARES) Act is now live, as are the loans and grants featured in the bill. One of the most-anticipated loans for small business owners, the Paycheck Protection Program (PPP) loan, is 100% forgivable—if you closely follow the rules laid out in the bill.

There have been many questions and quite a bit of confusion around what small business owners need to do if they are to receive 100% forgiveness on the PPP loan. Our restaurant experts have studiously combed through both the CARES Act and the updates from the Treasury Department, and relentlessly bothered our accounting and legal departments, to provide you our best take on how to receive full forgiveness of your PPP loan.

How much should I apply for?

Before you begin, please read our Restaurants’ COVID-10 Emergency Loan Guide to understand how to calculate your loan amount. A lot of businesses are struggling to decide how much to apply for, and it’s arguably even more difficult for restaurateurs to plan. With variables like short spending windows, employee layoffs, wage reductions, and an unsure landscape post-crisis—what should the responsible restaurant owner/operator do?

Our recommendation? Take the full amount you qualify for, and then maximize every penny you spend with an eye towards full loan forgiveness. This guide will help you get there.

The goal of the PPP is to get employees back to work and allow you to keep the lights on. If you create a strategy based on accomplishing these goals, you’ll be giving yourself the best shot possible of exiting this crisis with an engaged staff and a strong business footing you can build on.

Button up the books

Your first step should be keeping a close eye on how you’re spending PPP loan proceeds. The Treasury Department issued guidance on April 2, 2020, stating that 75% of all loan proceeds must be used on payroll costs. On top of that, 75% of the amount eligible for forgiveness must have been spent on payroll.

Practically speaking, for 99% of restaurants, here’s what you should do:

• Keep your PPP loan funds separate from any other working capital.
• Make sure that your spending ratio for money received from the PPP loan is always within the 75% / 25% ratio, meaning you’re spending 75% of the loan money on payroll expenses, and the other 25% on allowable expenses eligible for forgiveness. This will ensure that even if you have to furlough employees or reduce wages before June 30, 2020, your use of funds will never be in question.
• Keep records of everything you use the loan funds for.

By following these steps, you’ll have done everything you can to maximize your potential loan forgiveness.

While that may seem straightforward, we are in a crisis mode right now, and nothing is really cut-and-dried any more. Here are some possible pitfalls we identified for restaurant owners, as well as guidance on how you can avoid them.

• Spend within your time frame. Expenses should always be kept at the 75% payroll/25% other approved expenses ratio. You must use all the loan money over the eight-week period following receipt of funds, or before June 30, 2020, whichever comes first. This is an important distinction to make as there’ll be a good portion of loan recipients whose eight-week period will expire before June 30. No need to worry, we’ll get to this later.
• Keep forgiveness front of mind. The day your loan arrives, you need to start planning your strategy to be granted full forgiveness. For one, you’ll need to keep your staff employed through June 30, 2020, to qualify. If you’ve laid off employees, or you’ll need to do so before April 25, 2020,you may still qualify for full forgiveness. However, if you lay people off after April 26, 2020, you’ll only be eligible for partial forgiveness.  
• Keep staff wages consistent. You must pay your staff a minimum of 75% of their pre-crisis wages in order to qualify for full PPP loan forgiveness. For tipped employees, this presents special challenges that we’ll cover later.
• Stay nimble, but plan for the future. The point of the PPP is to keep employees on your payroll. If you use a PPP loan properly, not only will you qualify for full forgiveness, but you’ll also retain your greatest asset—your employees. You’ve got the next eight weeks to work with your staff to accomplish goals without interruption. And we’ve got suggestions for what they can do.

Hacking the eight-week restriction

As we’ve already mentioned, depending on when your loan funds, your eight-week spending window may close before June 30, 2020.Not only is this the last day of the covered period for PPP loans, but it’s also a significant date for loan forgiveness and potential waivers.

No doubt you have a lot of questions, like:

• What happens between the eight weeks after I’ve received my funds and June 30?
• Are there actions I might take that could reduce my chances of getting 100% loan forgiveness? 
• Could I be stuck paying my staff inflated wages (representing their lost tips) out of my own pocket?

We have some recommendations to both help you take advantage of the PPP loan and protect yourself as much as possible for a worst-case scenario in your final one to three weeks making payroll out of pocket.

For example, let’s assume that you are a restaurant owner who has not yet furloughed employees or reduced wages. You apply for a PPP loan, and your loan funds on April 22, 2020. This means that your eight-week “spending window” for purposes of loan forgiveness will close on June 17, 2020. What can you do?

• First, from April 15, 2020, to June 10, 2020, pay your staff at 100% of their wages as stated on your calculated payroll costs you provided when you applied for your loan. This is base wage plus tips.
• Don’t make any prepayments of wages and keep a running total of what you’ve spent.
• Take the remaining funds from your loan and use it towards rent, mortgage (interest only), and utilities. Remember, the total you spend on these expenses must stay below 25% of the total loan process you spend.
• In the final two weeks of the guaranteed employment period, pay your tipped staff their minimum wage, making sure all tips from customers, both cash and credit, are claimed. This will help raise the staff members average wage.
• With any luck, your tipped employees will earn 75% of their pre-crisis wages from June 15 to June 20, 2020, without any extra expense from you, which means you will be eligible for full loan forgiveness ¹.

In the example below, we look at a bartender named Sarah, who last year averaged $25 an hour between her salary and her tips. For the eight weeks after the crisis, you paid Sarah her full $25 an hour average wage out of loan proceeds. From June 17 through June 30, though, you’re left with a dilemma…pay Sarah $25 an hour out of your pocket (even though her standard hourly compensation is much, much less), or risk your total loan forgiveness because Sarah’s wages fall below 75% of their pre-crisis level?

Let’s take a look:

From this example, we can see that the hack works. If you pay your tipped employees their full wages for the first eight weeks after your PPP loan funds, and then you switch back to paying their base wage only and encourage your workers to declare every tip, it is highly unlikely that you will trigger the reduction in wage penalty.

Will this still work if Sarah’s average income was higher than $25 an hour?

These examples clearly show that you’ll meet the 75% minimum across the employment period, even with the heaviest of tipped earners, with little to no tips in the final weeks when the PPP loan is no longer able to be used.

What happens if there was already an employee reduction, but employees are reinstated?

There is a waiver that states that reductions in employment or wages that occur between February 15, 2020, and April 26, 2020, shall not reduce the amount of loan forgiveness a borrower is eligible for, but only IF the reduction in number of employees or wages is reversed by June 30, 2020. Any other reduction in force or wages will reduce the amount of forgiveness you are eligible for (see our hack, above, for restaurant-specific help).

You’ve retained your staff—now maximize their creative energy

You may be asking yourself exactly what your staff should be doing while you’re limited to take out and delivery orders. At first glance, there is not much for a bartender to do without people sitting down across the rail for some suds, but this is the perfect opportunity for you and your team to get creative. Along with fulfilling orders, consider offering those with cars (or bikes in more urban areas) the opportunity to deliver directly to your patrons who call their order in.* This will save you a lot of money on repeat orders, especially when compared to the costs associated with orders placed through a delivery app.

While this won’t provide your entire staff with work for the next eight weeks, you can also assign your team tasks that will improve the restaurant. Take this time to have your employees deep clean and organize your restaurant. It’s the perfect opportunity to throw a fresh coat of paint on the walls and repair any broken pieces of furniture. Your team is the lifeblood of your restaurant and often the best grassroots marketers around. Give them the opportunity to develop new menus and marketing ideas you can use now, and when we find normal again.  

If you follow the steps outlined above, you should be able to apply for a PPP loan feeling secure in the knowledge that you can use the money to get your restaurant back on its feet, and be able to receive full forgiveness of the loan.

*Before you start allowing staff to make deliveries, check your insurance policies to make sure you have the appropriate coverage, and that you are following best practices as laid out by the Centers for Disease Control (CDC) for delivery orders.

Need more information about coping with COVID-19? Check out our free resource section dedicated to advising restaurateurs on how to navigate the changing rules and regulations during the COVID-19 crisis.

¹ The CARES Act provides potential additional forgiveness for amount paid to tipped workers in excess of the 75%/25% ratio, but we think that you should not rely on this unless future guidance is issued. The fact remains that restaurants should not have to choose between paying inflated wages for unearned tips and getting full PPP loan forgiveness, and our strategy is designed to help you do this.