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Three Tips for Restaurants to Maximize Paycheck Protection Program Loan Forgiveness

May 14, 2020 | Omar Ali-Shamaa

No one is hurting more than small business owners right now, especially those in the restaurant industry, as the second-largest employer in the country. In response, many restaurants have turned to the Paycheck Protection Program (PPP), which just recently received an additional $310 billion in funding.

The PPP allows restaurants to borrow up to 2.5 times their average monthly payroll costs. One great benefit of the PPP is that the loan can be fully forgiven under the “75/25 Rule.” In other words, there is no repayment obligation if at least 75% of the loan is spent on payroll costs and the remaining funds on allowable non-payroll expenses such as rent, utilities, mortgage interest, and other interest for a loan made before February 15, 2020. The forgiveness amount decreases when a restaurant reduces its number of full-time equivalent employees during the 8-week covered period, which begins the date the lender disburses the PPP loan.

On April 26, 2020, however, CMS announced it is suspending the AAPP program for Part B suppliers and is “reevaluating” all pending and new Because many restaurants are not operating at full capacity, it may be difficult for many receiving the PPP loan to achieve complete forgiveness. Here are three tips for restaurants to maximize their chances of achieving full forgiveness:

  1. Segregate all PPP funds into a separate account. While this is not required by the PPP or the Small Business Association, it is advisable to open a new bank account exclusively for the PPP loan to keep track of the funds. Once the 8-week period is over, restaurants will have to submit documentation verifying how the funds were spent. Because not all lenders have the same verification requirement, designating one account exclusively for the administration of the loan proceeds simplifies the verification process.
  2. Start using the PPP loan funds the same day you receive the money (or as soon as possible). To the extent forgiveness is calculated on a cash basis, as it appears to be, accrued payroll with a pay date after the 8-week period will not count for forgiveness purposes. Thus, it is advisable to start a new payroll cycle the day funds are disbursed, so payroll also ends at end of the 8-week covered period.
  3. Use as much of the PPP funds as possible on payroll. This is likely the biggest challenge to restaurants, as they will not be operating at full capacity during the covered 8-week period. As such, restaurant operators should convert 1099 contractors to W2 employees, if possible, and rehire as many employees as possible. While dining rooms are closed or beginning to operate under capacity, capital improvements can commence using rehired employees. Capital improvement costs, however, are not forgivable under the PPP. Restaurants can also increase employee compensation during the covered period up to $3,846.00 per 2-week pay period, but any amount over $100,000 annually will not count towards forgiveness.

While the goal is to maximize loan forgiveness, restaurants should not bend over backwards to get the entire loan forgiven. The PPP offers a 1% interest rate with a two year maturity date. At the end of the covered period, having some cash on hand (with such a low-interest rate) may be better than having no cash at all – especially with all the uncertainty ahead. The last thing restaurant operators should do is sabotage the long-term health of the business in an attempt to maximize loan forgiveness.