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Florida: (850) 878-6404
North Carolina: (919) 847-8632

Paycheck Protection Program Loan Eligibility and Forgiveness Considerations – Reposted from the SBA

Now that many motor vehicle dealerships have successfully received their PPP loan proceeds, there are a number of considerations which should be weighed before spending loan proceeds, including whether your business continues to qualify for the loan and, if so, how best to maximize the loan forgiveness amount.  Please note that the information provided below is subject to change upon the issuance of additional guidance from the Department of Treasury and/or Small Business Administration.

Eligibility for the PPP LoanIn revised guidance issued this week, the SBA reminded borrowers that at the time of the loan application a certification was required to be provided that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  The guidance goes on to suggest that companies, whether publicly-traded or private, which have access to other sources of liquidity to assist in the ongoing operations of the business would likely not be able to provide this certification.  The SBA .provides borrowers a “safe harbor” by stating that anyone who returns the loan proceeds by May 7, 2020, will be deemed to have provided an accurate certification.  This new guidance appears to indicate that no penalty will be assessed against a borrower who returns the loan proceeds by May 7, 2020, after determining the loan was not necessary to support ongoing operations.  Finally, the SBA and U.S. Treasury Secretary, Steven Mnuchin, have confirmed that all businesses receiving in excess of $2,000,000 in loan proceeds, along with any other business at the SBA’s discretion, will be audited for compliance.

Dealers who have applied for and received PPP loan proceeds should consider reviewing again the certification that was required as part of the initial loan application to insure that it is accurate so as to not subject the dealership to potential future adverse action by the Department of Treasury or SBA. 

Maximizing Loan Forgiveness For those companies that have received their PPP loan proceeds and are confident they have met the required certification discussed above, the eight (8) week clock is ticking on the loan forgiveness period and, thus, it is important to weigh the following considerations for attempting to maximize your loan forgiveness amount.

 I. Start with Maximum Beginning Balance of Forgivable Loan AmountLoan Proceeds used to pay Qualifying Payroll Costs and Qualifying Non-Payroll Costs during the 8 week period beginning when the loan is funded.

  A. Qualifying Payroll Costs:

  1. All employee compensation up to $100k including salary, wages and tips (including commissions); and
  2. Payments required for providing health benefits, retirement benefits, sick and family leave pay, payment to employees associated with a dismissal or separation, and employee payroll taxes.

Note that neither employer-side payroll taxes nor the cost of sick and family leave pay the employer has paid which is eligible for tax credits under the FFRCA portion of the CARES Act are to be included in calculating qualifying payroll costs.

  B. Qualifying Non-Payroll Costs:

  1. Interest payments on mortgage obligations on real or personal property incurred before 2/15/20;
  2. Rent payments on lease agreements in force before 2/15/20; and
  3. Utility payments under service agreements in place before 2/15/20.


Caution – Further SBA guidance required in order to properly account for floor plan interest and rent payments on non-real estate such as signs and equipment.


II. Potential Reductions for Revised Forgivable Loan Amount – 3 Tests

  A. Employee Headcount Test:

  1. Calculate the Average Full-Time Equivalent (“AFTE”) positions at the dealership for each pay period over the course of the 8 week test period and then divide that number by one of the following base periods:

a. AFTEs for each pay period within the months during the period 2/15/19 thru 6/30/19; or

b. AFTEs for each pay period within the months during 1/1/20 thru 2/29/20.

  1. The goal is for the resulting percentage to be at least 100%, in other words, having at least as many AFTEs during the 8 week test period as you had during one of the two base period.

Recommendation – Choose the base period with the lowest number of AFTEs.

  1. If the resulting percentage is less than 100% then the Beginning Forgivable Loan Amount will be reduced by the percentage difference between 100% and the percentage resulting from the AFTE test.

Caution – Further SBA guidance may be issued which more clearly defines the term “AFTE.”


  B. Employee Payroll Test:

  1. Compare each individual employee’s total salary and wages during the 1st quarter of 2020 against that employee’s total salary and wages during the 8 week test period.
  2. Any individual employee whose highest pay period during the 1st quarter of 2020 would be annualized to salary and wages of greater than $100,000 is excluded from Payroll Test.
  3. The Forgivable Loan Amount is reduced by the dollar amount of salary and wages for any employee that has a reduction in salary and wages of more than 25%.

Caution – Further SBA guidance needed to address the situation where an employee resigned from   his or her position prior to or during the 8 week test period.


  CPercentage of Use of Funds Test (75%/25% Calculation):

  1. At least 75% of Forgivable Loan Amount must be expended on Qualifying Payroll Costs and no more than 25% expended on Qualifying Non-Payroll Costs.
  2. If the amount of Qualifying Payroll Costs was less than 75% of the Forgivable Loan Amount then the Qualifying Non-Payroll Costs must be reduced until those costs are no more than 25% of the total.


III.  Exceptions to Reductions in Beginning Balance of Forgivable Loan Amount

A. If the number of AFTEs as of 2/15/20 is reduced during the period between 2/15/20 and 4/26/20 (30 days after enactment of the CARES Act), so long as the number of AFTEs is restored to the 2/15/20 level by 6/30/20, there will be no reduction under the Employee Headcount Test.

B. If any employee has his or her wages reduced from 2/15/20 as compared to their wages paid between 2/15/20 and 4/26/20, there will be no reduction under the Employee Payroll Test provided that the reduction in pay is eliminated by 6/30/20.

Caution – The base period and test period are different for these exceptions than the dates used for the Employee Headcount and Payroll Tests.  Accordingly, the SBA may issue additional guidance on this item.


IV. Summary and Recommendations

A. Consider placing the loan proceeds in a segregated bank account after consultation with the dealership’s accountants.

B. Either make payments directly from that account to cover Qualifying Payroll Costs and Qualifying Non-Payroll Costs or transfer the exact amount of the particular  expense from the segregated account to the operating account from which you make the payment.

C. Use a spreadsheet to carefully track all expenditures of Loan Proceeds.

D. Run pro formas on your expected expenses for the 8 week period following receipt of the loan proceeds. Use as much of the loan proceeds as possible for Qualifying Payroll Costs during the 8 week period.

E. Schedule 2 full months of payroll during the 8-week period to maximize loan proceeds which can be forgiven. Payroll payments must made in due course and not for advancement of unearned wages, future bonuses, etc.

F. Be prepared to run a detailed payroll spreadsheet for the period January 1, 2019 thru June 30, 2020 and retain documentation reflecting the exact hire date and   termination date (if applicable) for each employee during that period.

G. Attempt to avoid reducing the number of positions or payroll amounts of more than 25% for any employee during the 8 weeks following receipt of the loan proceeds in comparison to the base periods in the legislation, even if it means paying some employees to sit at home.

H. If you eliminated positions or reduced pay of one or more employees by more than 25% between 2/15/20 and 4/26/20, then make plans to restore those positions  and the prior pay amounts, preferably for the same employee if he or she is available, no later than 6/30/20.

I. Make Qualifying Non-Payroll Cost payments based strictly upon the terms of any lease agreement, mortgage agreements and other loan documentation as those  agreements existed on 2/15/20. Do not artificially increase rent payments under a lease or alter the terms of other loan documents.

J. Begin applying for loan forgiveness as early as you are able to gather the necessary supporting documentation following the conclusion of the 8-week period and after you have rectified any headcount or salary reductions.


Again, the legal considerations provided above are subject to change with additional guidance from the SBA on eligibility for the PPP loan, use of PPP loan proceeds and forgiveness of PPP loan proceeds.


Please contact Richard Sox, Esq., at or (850) 878-6404 with any questions related to Paycheck Protection Program loan use and forgiveness.


The foregoing information is provided for educational purposes only and is not to be construed or interpreted as legal advice.