COVID-19

Paycheck Protection Program (PPP) Loan Updates

June 18, 2020

This page contains a wealth of information surrounding business loans with the Paycheck Protection Program (PPP) and is updated regularly. Please continue to check this page often to ensure that you receive the latest news.

 

PPP Update — New Rules, New Application

[Published June 18] On Tuesday, June 16, the SBA released new rules for self-employed PPP borrowers, new applications for forgiveness (including an ‘EZ’ form for some borrowers) and new instructions for the applications. We cover all the highlights in this blog post.

 

Paycheck Protection Flexibility Act

[Published June 12, 2020] In a new video, Shareholder Dave Porter answers the top 10 questions we’ve received about the Paycheck Protection Program Flexibility Act. Watch the video here.

[Published June 4, 2020] The Paycheck Protection Flexibility Act, a bill previously passed by the U.S. House of Representatives, was passed by the U.S. Senate last night. President Trump is expected to sign it, according to the Journal of Accountancy (JOA). Below are some highlights from JOA’s piece.

  • PPP borrowers can choose to extend the 8-week period to 24 weeks. This flexibility is designed to make it easier for more borrowers to reach full (or nearly full) forgiveness.
  • Currently, a borrower’s forgiveness is reduced if less than 75% of eligible funds are spent on payroll, but forgiveness is not eliminated altogether. Under the new guidance, the payroll expenditure requirement drops from 75% to 60%, but it is now what’s called a “cliff.” Borrowers must spend at least 60% on payroll, or none of the loan proceeds will be forgiven.
  • Borrowers can use the extended 24-week period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. This must be done by December 31, a change from the previous June 30 deadline.
  • The legislation includes two new exceptions that allow borrowers to achieve full loan forgivness, even if they don’t fully restore their workforce. Previous guidance already allowed borrowers to exclude from their forgivness calculations those employees who turned down good-faith rehiring offers at the same hours and wages. The new bill allows borrowers to adjust calculations if they couldn’t find qualified employees, or were unable to restore business operations to February 15 levels due to pandemic-related operating restrictions.
  • Borrowers now have 5 years to repay the loan instead of 2. The interest rate remains at 1 percent.
  • Borrowers can now defer the employer’s share of FICA payroll taxes for 2 years. Half of the payroll taxes will be due in 2021, and the other half will be due 2022.

 

Additional Interim Final Rulings

[Published May 28, 2020] On Saturday, May 23, the SBA released two additional interim rules. We cover these updates in this blog post.

 

Updated Forgiveness Guidance

[Published May 18, 2020] The SBA has released a wealth of guidance around loan forgivness. The information is quite comprehensive, so we’ve published it in a separate blog post. Click here to read more.

 

Partnerships + PPP

[Published May 14, 2020] In an interim final rule released today, the SBA is allowing financial institutions to increase the amount of PPP loans issued to partnerships where the original loans excluded the equivalent of partner salaries (up to $100K) under the belief that partners were required to file for a PPP loan as self-employed individuals. Read the full rule here.

 

Safe Harbor for Loan Certification

[Published May 13, 2020] In order to qualify for loan forgiveness, recipients of PPP loans will need to prove that the loan proceeds were an economic necessity for their business. The U.S. Treasury has published guidance around this good-faith certification, as well as safe harbor qualifications.

  • Borrowers with loans under $2 million are granted a safe harbor as to the economic necessity of the loan
  • Borrowers with loans over $2 million will be audited by the SBA. If the economic necessity of the loan cannot be justified by the SBA, the borrower can repay the loan without facing administrative consequences.
  • Borrowers with loans of exactly $2 million may need to hang tight, as the guidance remains unclear.

Click here to read the full guidance (FAQ #46) provided by the U.S. Treasury.

 

Defining “Payroll Costs”

[Published May 7, 2020] Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage; including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wage, comissions, income, or net earnings from self-employmemt or similar compensation.

 

Returning Your Loan Proceeds

[Published May 6, 2020] IRS FAQ #31 reminded borrowers to review carefully the required certification on the Borrower Application Form that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA guidance and regulations provide that any borrower who applied for a PPP loan prior to April 24, 2020 and repaid the loan in full by May 7, 2020 would be deemed by the SBA to have made the required certification in good faith.

Many have asked about the possibility of obtaining an extension on the May 7 deadline. The SBA has decided to extend the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.

 

If You’re Self-Employed

[Published April 22, 2020] On April 15, the government released additional interim final regulations that address issues related to the self-employed. These regulations were meant to supplement the original final regulations. Today we’ll focus specifically on the loan forgiveness calculations for self-employed workers.

The loan forgiveness can be up to the full amount of the loan. Here is an overview of the forgiveness requirements (refer to the regulations for the full requirements):

  • Proceeds of the PPP loan need to be spent within the 8 weeks following loan funding.
  • At least 75% of the loan proceeds need to be spent on payroll costs. One unresolved issue in these regulations is whether owner compensation replacement (see below) is considered payroll for purposes of the 75% requirement.
  • Employee payroll costs include salary, wages, and tips up to $100,000 annualized per employee (but not owners!), as well as covered benefits, including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer.
  • Owner compensation replacement is calculated based on your 2019 net profit (your IRS form 1040, schedule C, line 3) for 8 weeks (8/52).
  • Payments of interest on mortgage obligations (not all interest). The second interim final regulations indicate that other interest paid, although an allowable use of the PPP loan proceeds, will not be included in the forgiveness calculations. That is, these costs will become part of the loan to be repaid over two years.
  • Rent payments on lease agreements in force before February 15, 2020
  • Utility payments under service agreements dated before February 15, 2020.

So what did we learn from these interim final regulations? Some good things, and perhaps some not-so-good things. The good news is that self-employed individuals (those filing forms 1040 with a schedule C) are eligible for PPP loans and potential forgiveness thereof. The calculation of the loan is based solely on 2019 tax filings; there is not an option to calculate the loan on 2020 operating results. We learned that not all interest is forgivable, only mortgage interest. Rather than base the loan and the forgiveness on payments to the self-employed individual, the calculations are based on the Form schedule C, which may be a lesser amount.

A final thought: if you’re in a partnership that did not include its partners’ compensation in its PPP loan application because you believed the partners needed to apply as self-employed individuals, and if your loan application was not funded, consider resubmitting your application with the partners’ compensation included.

 

Loan Forgiveness

[Published April 17, 2020] This article will deal with some of the gray areas regarding loan forgiveness.

We recommend that you deposit the funds into a checking account dedicated to the PPP loan proceeds (no other receipts or disbursements in this account). A dedicated account used to hold and disburse the funds should make tracking easier and provide documentation for the forgiveness calculation.

A key component of the PPP is the “covered period” that dictates the timing of loan forgiveness. There has been some confusion around the covered period, as it has different definitions within the Act for different purposes. For the purpose of disbursing loan funds during the forgiveness period, the covered period is the 8 weeks following the origination of the PPP loan (generally, the funding date). It’s unclear what happens to any funds remaining undisbursed at the end of the 8 weeks — whether they should be repaid by the maturity date, repaid immediately, or repaid at all — but two things are certain:

  • Excess loan funds will not be forgiven, but will rather become a loan payable
  • If not repaid immediately, funds must be spent on “allowable costs” as defined in the Act (generally, payroll, rent, utilities, and interest) with at least 75% of the funds spent on payroll costs

Speaking of confusion, what does the following language from the Act mean?

  • “…forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period:”

We know the covered period is the 8 weeks following the loan origination, but what is meant by “costs incurred and payments made?” Does this mean “costs incurred and payments made?” That is, both must occur? Or, does it mean “costs incurred” and “payments made?” That is, either can occur? Unless clarifying guidance becomes available, you may want to assume that the expenses must be both incurred and paid during the 8-week covered period. For example, if your loan origination date is April 15 and you paid your payroll for the periods ending on April 10 on April 17, exclude it from the allowable costs for forgiveness. Likewise, cut off and pay your payroll on the last day of the 8-week period.

A requirement included in the PPP interim final regulations is that borrowers use at least 75% of the loan proceeds on payroll costs. Borrowers should adhere to this requirement whether the funds are spent within the 8-week covered period or beyond it.

There are also questions regarding what interest payments are allowable. The Act allows for interest on “covered mortgage obligation,” which refers to any debt incurred before February 15, 2020 that is a liability of the borrower and a mortgage on real or personal property. The interim final regulations further state that the proceeds of a PPP loan can be used for “interest payments on any other debt obligations that were incurred before February 15, 2020.” The term “mortgage” appears to apply to all types of secured notes. But it’s unclear what interest is eligible for forgiveness. Payments of principal are not an allowable cost.

As no surprise, the Act requires borrowers to keep employees on the payroll to qualify for loan forgiveness. So not only do borrowers need to spend at least 75% of the proceeds on payroll costs (both in total and for each employee earning up to $100,000 annually), they also need to maintain their full time equivalent (FTE) headcount. However, FTE is not defined in the Act. What we do know is that the loan forgiveness will be reduced if the average monthly FTE count during the 8-week covered period is less than the average monthly FTE count during either of the below periods:

  • February 15, 2019 to June 30, 2019
  • January 1, 2020 to February 29, 2020

The borrower decides which period to measure by, and there are separate rules for seasonal employees. What is not known is how to calculate the FTEs. Does an employee count for more than 1 FTE if they work more than 40 hours per week? Other guidance from the SBA indicates that an FTE is an employee working at least 30 hours per week. There are also provisions to restore any forgiveness lost in these calculations if the borrower “rehires” employees by June 30. We’ll skip the rehire provisions for now because there are more questions than answers. (Do you need to rehire the same employees who were let go? Or perhaps you can rehire different employees but for the same jobs? Or perhaps you can rehire more employees for any jobs? And what if your 8-week covered period extends beyond June 30?)  We need further guidance.

Stay in touch with your banker. When the time comes to request forgiveness of all or some of your PPP loan, your banker will need to sign off on the request. Your banker’s interpretations of the regulations are just as important as the regulations themselves.

 

Moving Forward with your PPP Loan

[Published April 15, 2020] What happens if you’ve applied for a Paycheck Protection Program (PPP) loan and have been accepted? How do you move forward? We summarize our key action items below.

  • Stay organized and be proactive
    • We already know that loan forgiveness is possible for eligible expenses incurred in the first 8 weeks of the loan period — but you’ve got to be able to prove that you used the loan proceeds properly (for instance, at least 75% of loan proceeds must go towards eligible payroll costs). The best way to ensure your loan is forgiven is to start organized and stay organized:
      • If possible, consider opening or dedicating a separate account for the loan proceeds and payments of qualifying expenses. This will make it easier for you to calculate the request for forgiveness.
      • Retain all documentation surrounding the loan, your payroll costs, and overhead costs — and keep it organized and accessible.
      • Consider applying for loan forgiveness as soon as your eight-week period ends.
  • Make sure you (or someone on your team) understands the ins and outs of the loan parameters
    • There are a lot of guidelines surrounding the PPP, and you don’t want to get your wires crossed and end up misappropriating funds. If you’re participating in the program, be sure that one of your immediate team members has a solid grasp of the regulations:
      • What exactly constitutes an eligible expense? Payroll costs, some interest, rent, some utilities?
      • How much of the loan proceeds can we use for non-payroll expenses?
      • How do we get our loan proceeds forgiven?
      • What is the calculation for loan forgiveness?
  • Don’t forget about how the PPP fits into the bigger picture of the CARES Act
    • Keep in mind the various ways that the PPP might interact (and overlap) with other provisions of the CARES Act, like the Employee Retention Credit and the Families First Coronavirus Response Act
      • Your loan forgiveness amount may be reduced if you reduce the wages of certain employees, or if you’ve furloughed or laid off employees.
      • A business cannot receive both a PPP loan and an Employee Retention Credit
      • Be careful about any other debt obligations you may have outstanding
      • PPP participants may also be eligible for the Main Street Lending Program

The PPP will provide much-needed relief for countless business owners in the United States, but you’ll want to stay on top of all the complexities and parameters.

 

PPP Loans: The Basics

[Published April 2, 2020] Last weekend, President Trump signed into law the CARES Act, a $2 trillion federal stimulus package. A key provision of the relief bill is a new loan program called the Paycheck Protection Loan, under the umbrella of Section 7(a) of the Small Business Act (SBA). Here’s what you need to know:

Eligibility:

  • U.S. businesses with 500 or fewer employees (for businesses like hotels, restaurants, or any other multi-location business, the employee threshold generally applies to one specific location of the business)
  • Sole proprietors & independent contractors who operated within the window of February 15, 2020 through June 30, 2020
  • Loan applicants must certify in good faith the following:
    • Current economic conditions make the loan necessary to support ongoing operations
    • Funds will be used to retain workers and maintain payroll or overhead costs (like mortgage payments, lease payments, and utility payments)
    • No other pending applications are duplicative of the new loan request
    • Applicant has not received funding for the same purpose or duplicative amounts during the window of February 15, 2020 through December 31, 2020.

Loan Parameters:

  • Application must be received by June 30, 2020
  • SBA has no recourse against any business owner and there are no personal guarantees or collateral required
  • Interest is capped at 4%
  • No debt service payments for at least 6 months and up to 1 year
  • Loan amount is capped at $10 million and is the lesser of:
    • 250% of the trailing 12-month average monthly payroll plus amount outstanding under SBA’s disaster loan program
    • (for businesses that didn’t exist between February 15, 2019 and June 30, 2019) 250% of the average monthly payroll cost during the period from January 1, 2020 through February 29, 2020 plus amount outstanding under SBA’s disaster loan program (a separate loan program accessed directly through the SBA)
  • Maximum maturity date is 10 years from the application date
  • 100% of the SBA loans are guaranteed by the federal government
  • Costs incurred by the borrower during the 8-week loan period are eligible for loan forgiveness if the borrower maintains their payroll during the crisis or restores their payroll afterward

What counts as a payroll cost?

  • Employee compensation:
    • Salary, wage, commission, or similar compensation
    • Payment of cash tips or equivalent
    • Payment for vacation, parental, family, medical, or sick leave
    • Allowance for dismissal or separation
    • Payment required for the provision of group health care benefits (including insurance premiums)
    • Payment of any retirement benefit
    • Payment of state or local tax assessed on employee compensation
  • Sole proprietor or independent contractor compensation:
    • Wages, commissions, income, net earnings from self-employment, or similar compensation
    • No more than $100,000 in one year, as prorated for the covered period

What does not count as a payroll cost?

  • Certain federal taxes
  • Compensation of non-U.S.-resident employees
  • Individual compensation in excess of $100,000 (annualized)
  • Sick leave & family leave credited under the Families First Coronavirus Response Act

Applications:

  • Due by August 8, 2020
  • Reach out to an SBA lender (here’s a list of the 100 most active lenders) to get started
  • SBA is accepting applications now! Click here to get started.
  • Ask your Geffen Mesher professional if you have any questions whatsoever