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Small business paycheck protection program loan strategies: how to maximize returns

Congratulations! You’ve successfully navigated the complicated and at times contradictory PPP loan application from your bank. You are due your money any day now and the next stage of this funding is set to begin: Figuring out how it can be forgiven.

Let’s recap first: The PPP loan amount is based on 2.5 times your average monthly payroll costs for a 12-month period. Which 12-month period? That depends on your bank, your accountant and ideally which period is the best for you. And what are payroll costs? The answer to that question has been my living hell for the last 3 weeks and I won’t rehash it here.

The forgiveness of this PPP Loan (or Grant, if you’d rather consider it that way) comes with some strict guidelines that have changed a lot over the last few weeks and will likely change again before June. What we know (right now) is that only 25% of your loan amount can be used for qualified non-payroll expenses such as: 1) Rent–if you don’t own your own building (Mortgage Interest if you do); and 2) Utilities—Water, Electric, Gas, Telephone, Internet and Garbage. Believe it or not these numbers are easy to budget as they are fairly well fixed if you maintain your business and will be lower if you are temporarily closed.

The remaining 75% of that PPP loan can be forgiven based on payroll costs which, honestly, is a cost entirely determined by you right now. I want to go through a specific scenario that I believe some small business owners will be wondering as well.

I want to start with some assumptions. Some are to make my math easier and to avoid unnecessary complexities. Others are situation based because this article is only going to be about a narrow slice of business owners. After the following assumptions I’ll detail the problem and attempt to explain in my opinion what the best course of action should be using as clear language as possible.


  1. The business is an S Corp and owned by only one individual. Their combined Federal and State tax bracket is 35%. This is to make my math easier.

  2. PPP Loan amount of $1,000,000 was deposited today, which is 2.5 average monthly payroll costs. This is to make my math easier.

  3. You budget the next 8 weeks of expenses and you expect to come up short of full forgiveness by 10% (or $100,000). Also, you have at least 40 employees other than yourself. The math really doesn’t work out given the PPP Loan amount unless you have 40 full-time employees at $100k/year in salary. But the number of employees nor the amount of the forgiveness itself doesn’t matter as you’ll see as we get to the conclusion.

  4. The most important assumption of them all: You have plenty of other funding sources with any interest rate. I plan on using 10% in my calculations because it’s a round number. Plus, that is actually a very high-interest rate for many small businesses so it’s a very conservative figure.

    1. How much funding am I talking about here in proportion to the original PPP Loan? With that kind of payroll costs, revenue must be several million a year so there is probably already a chance of a Line of Credit that is untapped. The owner also could tap their home equity for more funding and could factor the receivables if there was any.

    1. You might be wondering: If the owner has this much access to financing then why is the owner applying for a PPP loan? Well, its very likely the business has been affected by COVID19—perhaps it’s closed down and not able to generate revenue. If the owner qualifies to receive the funding shouldn’t that owner apply and receive it? I don’t know—that debate is for another article and is probably best left to those who are creating the laws and not those of us trying to help our client navigate the many pitfalls along the way. Plus, I could discuss that topic for another 2000 words and not concluded the right answer so I will leave it be…. For now.

Given those assumptions, we have to figure what should you do with that $100,000? Fortunately, it turns into a loan with 1% interest, payable in 24 months with 6 months deferred payments (as with all calculations, these terms could change the day after this article is posted so please verify with a primary source aka or your banker). I’ve detailed below some of those options that you’re probably thinking about.

Option 1: Repay SBA the $100,000 immediately with remaining cash. Pro: You keep the debt off of your balance sheet and you’ll save roughly $2000 in interest expense (1% of $100,000 per year for 2 years). Con: You’re giving up the best loan terms you will probably ever receive again. You can’t use this money for anything? ANYTHING? Two years is a long time. You could throw that money in a 2-year CD paying 2% interest (I just googled what that rate is and found a couple) and double your money. Please don’t do Option 1.

Option 2: Repay SBA the $100,000 immediately by taking a higher interest rate loan. This makes even less sense than Option 1. You will pay even more in interest over the two-year period.

So alright we’ve figured out repaying that loan isn’t a good idea until the loan term has ended. I’m hoping its obvious to most people who have made it this far that that was the case but if not, I want to make sure we’re now on the same page. Let’s move on.

Option 3: Keep the money and use it for future expenses. You’re in debt to SBA of $100k. Pro: You have that extra cash on hand without seeking other debt. You’d be in debt to someone either SBA or someone else to do this so SBA is better right? Perhaps, but again remember assumption #4 about the ability to fund future expenses by other debt. I know this is a long article but I’m almost ready to explain my purpose for this article!

Option 4: You call your CPA (me) to recalculate my figures and verify that indeed you’re coming up $100,000 short in your budget for the loan forgiveness. You then pay that money out to staff over the next 8 weeks as a bonus.

Huh, bonus? You’ll be the best employer ever!!

Sure, employee morale is as good a reason as any to open those coffers but trust me, there is bonus for you too as the business owner. For starters, that $100,000 you just spent on payroll came at little cost to you because it will be forgiven by the SBA anyway. Did I mention you can pay yourself some of that money? Well if you weren’t already maxed out now is the time (annualized at $100k/year—ask your accountant to help you figure this out if necessary).

And then… you will receive even more money from the Federal and State Governments. Impossible! But it’s not and I’ll explain why soon and with math to prove it.

You might think that there is a negative to paying your staff a bonus to cover the remaining loan amount. Sure, you no longer have that $100k to use for future expenses. But, is it really a negative?

Let’s revisit assumption #4 again: You have plenty of access to capital, some cheaper than others. So, unlike many of your small business peers, you are still very fortunate to have ways of infusing cash into your business to pay for those future expenses.

In my math below I’m going to take that sweet 1% loan the SBA is giving you and replacing it with an alternative (and very sour) 11% interest on alternative financing. For the business owners, this article is about, that 11% interest rate is a non-starter—you can get a better rate from any bank (at least half, no doubt). But I’m using 11% because I want to be conservative and the difference between the two notes is very easy to calculate 10%.

More Free Money

UPDATE 05/01/2020: The IRS released Notice 2020-32 which states that expenses used for loan forgiveness are no longer deductible. That changes the conclusion of this article entirely.

Perhaps the best thing about this SBA loan forgiveness is that it will not be considered taxable income. And you can increase tax-deductible expenses with this non-taxable income. In fact, the ONLY way to increase tax-deductible expenses and have it count for SBA loan forgiveness is to pay your staff more money. In case you’re new: Paying your staff $100,000 more will reduce your taxable income by that amount.

But there are additional costs to paying your staff an extra $100,000 that you need to include in your calculations. First, you’re financing all of that money at 11% interest (but the actual cost to you is a net of 10%, since we’re comparing the 11% interest rate with the SBA’s offering of 1%). The additional costs include the employer’s portion of Social Security and Medicare Taxes (6.2% and 1.45%, respectively) which combined equal $7650. Then in order to be fair let’s finance those too for 2 full years:

Salaries: $100,000
Payroll taxes: $7650
Net Interest (11% – 1%) for two years ($100,000 + 7650) 10%/year 2 years) = $21,530

Total Cash Out Over 2 Years: $100,000 + 7650 + 21530 – 100,000 = $29,180. Yikes!

However, the increase in your tax deductions would be:

Payroll: $100,000Payroll Taxes: $7650
Interest Expense: $21,530
Total Deductions: $129,180
Tax Savings to you (at 35%): $45,213

Net Savings (Tax Savings Less Costs): $16,033 (16% of forgiveness amount)

So, there you go. By paying your staff an additional $100,000 over the next 8 weeks, you’ll see an additional $16,033 in your pocket over the next two years. Can’t wait that long? Reduce your estimated tax payments or withholding on your salary (you are an S Corp so you can do that, remember?) and get that money now. The math is even more in your favor with a lower interest rate.

How A Change of Assumptions Changes Everything

I’ve revisited the assumptions that I first outlined at the start of this article in the same numerical order:

  1. If the number of owners change, or the marginal tax rate changes or the entity type changes (Partnership vs C Corp Vs Sole Proprietor) then the math also changes. Maybe for the worse? You’d have to contact us to do the math for you to see just in case.

  2. The amount of the PPP Loan doesn’t really matter in our calculations. You can increase or decrease it as needed.

  3. The amount of forgiveness and the number of employees doesn’t really matter, either. The number of employees that make over $100k/year annualized does matter. So, you’d have to remember that additional bonus payments to these employees would not increase your potential loan forgiveness over the 8-week period. The bonuses would go to employees making less than $100k/year (and that could also include yourself).

  4. Obviously, if you have no access to additional debt or capital, and your survival depends on the receipt of these funds then you should do everything in your power to stay in business. This article doesn’t apply to your situation.

    1. Also, maybe you have some access to additional capital but only enough for 3 months or 6 months of expenses after the 8-week period. Is that enough? I don’t think anyone can answer that right now. To be conservative, if you’re worried about not being able to pay bills in 6 months and that additional loan money will make you feel better then, by all means, don’t pay the additional amount to staff.

    1. But I know there are many small business owners who 1) are affected by COVID19, 2) Qualify for the PPP Loan and 3) Are virtually guaranteed to survive through this crisis with little more than a few bruises. This article is definitely for you.


If you choose to sit on the remaining funds that the SBA will not forgive, then the total opportunity cost to you will be at least 16% of whatever that non-forgivable portion will be. The opportunity cost will be even higher with access to cheaper debt or capital.

Also, let’s not forget that the intent of the PPP Loan is to support payroll for staff (The first “P” in PPP stands for Payroll). You get the benefit of paying yourself, as the owner, some of that money too AND you also get the hefty tax benefit of being able to deduct expenses paid for by this funding on next years’ tax return.

Finally, there is the human element of you sitting on that money. Probably your staff really needs that money and needs that money now—don’t wait. They probably don’t know that you’re getting this PPP Loan and even if they do, they probably don’t know that you have the potential for extra benefits. Did you know before you read this article?

So, if you KNOW that there will be funds not-forgiven after the end of 8 weeks, and you have the ability to fund future expenses for the foreseeable future, you are hurting yourself by not paying that money to your staff. You’re also hurting your staff.

For more information on how your business can minimize the Paycheck Protection Program Loan, please contact Lipsey and Associates.

Update 05/01/2020: Please read IRS Notice 2020-32 which states that expenses are no longer deductible. I believe this now makes Option 1 the best course of action.