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Paycheck Protection Program (PPP) Frequently Asked Questions Regarding Spending Loan Proceeds

Paycheck Protection Program (PPP)

Frequently Asked Questions Regarding Spending Loan Proceeds

  1. How can my business use PPP funds?

The purpose of the PPP is to help you retain your employees, at their current base pay, and cover other essential business expenses like rent, mortgage or utility payments. You may use as much as you want to cover eligible costs however, only $100,000 per employee may be used for payroll expenses for the loan to be forgiven.

  1. Can I maximize my loan forgiveness benefit by reallocating salary in excess of $100,000 to other employees or by hiring a family member/friend?

No. Every applicant must certify under oath that the information provided in the application is accurate and a borrower must be prepared to prove their attestations when applying for loan forgiveness. Reallocating employee salaries to maximize loan forgiveness is not permissible.

  1. Must I only pay each employee a maximum of $100k for my loan to be forgiven?

You may continue to pay employees compensation in excess of $100,000, however only the portion of compensation up to $100,000 may be eligible for forgiveness.

  1. When does the 8-week “covered period” begin for loan forgiveness?

The “covered period” for purposes of loan forgiveness is a consecutive eight-week period beginning on the date on which the PPP loan was drawn down by the borrower, provided that if prior headcount reductions (as compared against an eight-week measuring period in either of two prior periods, selected by the borrower: 2-15-19 to 6-30-19 or 1-1-20 to 2-29-20) are restored by June 30, 2020, full credit for loan forgiveness will be given.  Maximum loan forgiveness would require that 100% of the borrowed amount that is allocable to payroll costs based on prior periods is spent.

  1. Must I spend all my loan money during my eight week “covered period?”

For purposes of loan forgiveness, yes.  For purposes of proper use of the loan, no. You are not required to spend the loan during any specified period post loan inception.  However, you are required to document how the loan is spent and to prove that the funds were used only for the permitted purposes: payroll costs (as defined in the CARES Act and the Interim Rule) and utilities and mortgage/rent.   Any portion of the loan that is not forgiven will be subject to repayment over two years, at a 1% interest rate and with a six-month payment deferral.

  1. Should I use the loan to “maximize” my loan forgiveness?

No. The purpose of the CARES Act is to enable employers to maintain their employees on payroll during a period that employer would otherwise be unable to do so, under an implied assumption that the employer is operating but has been financially impacted by COVID-19.  If your business is not operating, or is so impacted that practically speaking it is not operating, then paying employees for the sole purpose of obtaining loan forgiveness is a sum zero outcome – the loan proceeds will not have been put to productive use as the loan will have been spent on payroll with no return to the business. The decision on when to spend the loan should be made based on the operations of the business, not to maximize loan forgiveness.

  1. How do I prove that I spent my loan on payroll costs?

The documentation to prove your payroll costs and other permissible categories is straightforward (payroll reports, payroll tax filings, etc.), HOWEVER, the government has not yet provided clarity on how it will consider other sources of capital for a borrower. For instance, if a borrower has $10 in the bank at loan inception, generates $10 of revenue over an eight-week period, has $5 of payroll costs for the eight-week period, and borrows $5, then how does the borrower establish “which” $5 was spent on payroll costs? The answer is TBD, however, we recommend as a conservative measure that the loan proceeds be deposited into a separate bank account from the general operating account for the business and that the permitted expenditures for the loan be drawn only from that account. Segregating the loan proceeds will provide some measure of proof as to which funds were used for payroll costs and other permitted expenditures.

  1. Can I “take my chances” on using the loan proceeds for purposes that are not permitted by the CARES Act?

The PPP loan program is a borrower self-certified program, much like filing tax returns. The bank does not verify the accuracy of the information a borrower submits, and does not conduct any financial review, as a condition to approving or issuing the loan. Thus, both the bank, and the federal government, are relying on the borrower’s affidavit, made under oath, at the time the loan application is submitted. Note, however, that there will be a reckoning and documentation will need to be submitted after the fact, both in connection with applying for loan forgiveness and likely otherwise, to establish that the loan proceeds were used properly.  The affidavit, repeated below, has serious legal consequences for a borrower that makes a misrepresentation.


An authorized representative of the applicant must certify:

  1. They were in operation on February 15, 2020 and had employees for whom it paid salaries or paid IC’s.
  2. Current economic uncertainty makes the loan necessary to support ongoing operations.
  3. The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments as specified by the PPP.
  4. If the funds are knowingly used for unauthorized purposes the federal government may hold them liable, such as for fraud.
  5. They will provide the lender documentation verifying the number of employees as well as payroll costs, mortgage interest/rent payments and utilities for the 8-week period following the loan.
  6. Not more than 25% of the forgiven amount may be for non-payroll costs.
  7. During the period beginning on February 15, 2020 and ending on December 31, 2020, the Applicant has not and will not receive another loan under the Paycheck Protection Program.
  8. The information provided in the application (including supporting documents and forms) is true and accurate in all respects.
  9. False statements are punishable by up to 5 years imprisonment and/or a fine up to $250,000 and 2 years imprisonment and if submitted to a federally insured institution, imprisonment of up to 30 years and/or a fine of $1 million.