Tip #1: Use the Covered Period for Payroll Costs

A first tip to maximize PPP forgiveness? Use the eight-week covered period that starts when you get the PPP loan. Not the alternative covered period which starts the day the next payroll period starts. (You get to choose which eight weeks you look at.)

The reason? With the normal eight-week covered period, you probably get to include more than eight weeks, or more than 56 days, of payroll in the forgiveness formula. The alternate covered period, in comparison, restricts you to just 56 days of payroll.

In a nutshell, weird bookkeeping occurs when you use the regular covered period. The formula combines both payroll paid during the eight weeks and payroll incurred during the last payroll period of the eight weeks and paid the next regular payroll.

For example, say you run semi-monthly payroll, pay on the last day of the “half month,” and get your PPP loan on May 26th.

In this case, the covered period that starts on May 26th ends 56 days later on July 21st. (I just counted out the weeks on a calendar.)

But the first payroll period in this eight-week interval? It ends May 31st. And weirdly it includes days of payroll before May 26th (from May 16th through May 25th).

You see the loophole, right? By using the covered period and the interim final rule’s “hack,” you get to count payroll from May 16th through July 21st. That’s 66 days. Not 56 days.

Those extra days may help you accumulate enough payroll.

A Word about Alternative Covered Periods

By the way, if you use the alternate covered period, you start your eight weeks of payroll cost tracking the day the next payroll period starts. The payroll period also needs to be bi-weekly or shorter.

With the alternative covered period, you still count payroll paid and then also payroll incurred and paid with the next regular payroll. But the way the formula works? Yeah, you only get eight weeks, or 56 days, of payroll.

Tip: Do double-check that the regular eight-week covered period lets you maximize forgiveness. In situations where your payroll fluctuates—perhaps you furloughed employees early in the Covid-19 pandemic—sometimes the alternate covered period pushes more payroll costs into the forgiveness formula because it starts later when you may have more people working.


Tip #2: Time any 2019 Pension Contributions

Okay, an awkward trick the interim final rules allow. If you pay an employer retirement contribution during the eight weeks, that should count as payroll.

For example, if you make your 2019 SEP-IRA contribution during the eight weeks in 2020 that you’re measuring payroll costs, that should create payroll costs for non-owner-employees and also for owner-employees of S corporations and C corporations.

Between you and me? I would not rely on this gambit as a trick for inflating your payroll costs. But if you’ve done everything else in a right and righteous way and you have the option to make the 2019 employer pension fund contribution during the eight-week covered period? Well, discuss this with your tax accountant. Let’s leave it at that…


Tip #3: Verify You Have Enough Owner Payroll

The loan forgiveness formula limits owner compensation replacement to 8/52nd of what the owner earned in 2019.

You can grumble about this tweak to the statute. But you also want to make sure, after you’re done with any grumbling, that you pay the owner at least the 8/52nd of her or his 2019 compensation. So, double-check this. You want to be sure to pay enough during the eight weeks.

The precise formulas vary slightly depending on the type of business:

  • Schedule C Sole Proprietors:8/52nd of the Schedule C profit. For example, if the sole proprietor filed a Schedule C for 2019 that shows $52,000 of net profit, so $1,000 a week, the maximum owner payroll cost equals $8,000 for the eight weeks.
  • Partners in Partnerships: 8/52ndof the 2019 net earnings from self-employment (so after things like any Section 179 expense deduction, unreimbursed partnership expenses, and oil and gas depletion, and then multiplied by .9235.)
  • Owner-employees(so business owners operating as corporations and then employed by those corporations): 8/52nd of the sum of the owner-employee’s W-2 box 1 plus any elective deferral for a 401(k) or SIMPLE-IRA shown in box 12.

Four quick notes: First, the interim final rule—or least its current language—reduces a partner’s maximum owner compensation payroll for the employer half of self-employment taxes but not a Schedule C sole proprietor’s.

Second, a partner or proprietor gets no additional forgiveness for retirement or health insurance contributions since these amounts get “paid out of their self-employment income.” (That makes total sense.) Owner-employees do, by the way.

Third, an owner’s payroll costs can’t exceed $15,385. That number limits the owner’s payroll costs to not more 8/52nd of $100,000.

Fourth, owner-employees don’t count retirement or health insurance toward the $15,385 limit. (Neither, by the way, do non-owner-employees.)


Tip #4:  Use the “Incurred and Paid Later” Gambit for Non-payroll-costs

A fourth tip…

The same bookkeeping approach you use for payroll can be used for non-payroll costs.

In other words, you count non-payroll-cost paid during the eight weeks. And you also count non-payroll-costs incurred during the eight weeks if paid at the next regular due date.

For example, say your eight-week covered period runs from May 26th through July 14th. Let’s say, further, that cash flow troubles meant you could not pay your May rent on time.

But suppose after you got the PPP loan proceeds on May 27th, you paid the May rent (say that’s $5,000). And then on June 1st, you paid the June rent (another $5,000 say). And then on July 1st, you paid the July rent (yet another $5,000).

All three month’s rent should count. Because you made all three payments during the eight weeks.

Caution: Your non-payroll-costs forgiveness gets limited to 25%. For example, to receive forgiveness for $15,000 of non-payroll-costs, you need at least $45,000 of payroll costs. With $60,000 of total forgiveness (so $45,000 of payroll plus $15,000 of non-payroll), the non-payroll forgiveness equals 25%, which is the maximum.


Tip #5: Get Thorough About Your Utility Costs

So the non-payroll-costs include rent for real and personal property if you entered into the rental or lease agreement before February 15th, 2020. And the costs include interest on business loans if you borrowed the money before the same “start” date. But these costs are pretty easy to spot.

The utility costs, however? That’s more of a grab bag. So be sure to include all the costs that the rules allow if you need more non-payroll-costs.

According to the interim final rule, utility costs include “payments for the distribution of electricity, gas, water, transportation, telephone or internet access for which service began before February 15th, 2020.”

The following items, therefore, can be counted if you need more non-payroll-costs to get full forgiveness: electric company, gas company, and water company bills (obviously), transportation costs (so gas and diesel fuel), telephone (so landlines and cell phones and also voice-over-Internet-protocol services) and then Internet access (so broadband cable Internet access and fiber-optic Internet access.)