Tag: PPP

Most Recent Highlights From The SBA Regarding PPP Loans

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By Brian Deutsch

The U.S. Small Business Administration released guidance answering 23 frequently asked questions regarding the forgiveness of Paycheck Protection Program loans.  Following are highlights from the guidance provided:

  • Eligible costs incurred before the Covered Period but paid during the Covered Period are eligible for loan forgiveness. Further, eligible costs incurred during the Covered Period but paid after the Covered Period could also be eligible for forgiveness if they are paid on or before the entity’s next regular payroll or billing date.
  • The employer portion of group healthcare benefits and employer contributions for retirement benefits paid or incurred during the Covered Period or “Alternative Payroll Covered Period” are eligible for forgiveness. Forgiveness will not be granted for amounts accelerated from periods outside the Covered Period or Alternative Payroll Covered Period.
  • Owner compensation is capped at $15,385 per owner for the 8-week period or $20,833 per owner for the 24-week period. The limitation applies across all businesses in which the owner has an ownership stake.
  • Health insurance contributions for S Corporation owners with at least a 2 percent stake in the business are not eligible for forgiveness, nor are the contributions for family members. Instead, these amounts are considered part of the owners’ cash compensation.
  • If an eligible organization has a rent or interest payment for a mortgage loan that existed prior to February 15, 2020 but is renewed or refinanced after that date, the lease payments under the renewed lease or interest payments on the refinanced mortgage are eligible for forgiveness.
  • Transportation, which is included as a utility eligible for forgiveness, is defined as ‘transportation utility fees assessed by state or local governments.”
  • When considering the full-time equivalent (FTE) employee reduction related to forgiveness, borrowers may exclude reductions that occur due to, “(1) an inability to rehire individuals who were employees of the borrower on February 15, 2020 and (2) an inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020.” Within 30 days of the employee’s rejection of the offer to rehire, borrowers must inform the applicable state unemployment insurance office. In addition, borrowers must maintain documentation, which could include a written offer to rehire the individual, a written record of the employee’s rejection of that offer, and a written record of efforts to hire a similarly qualified individual.
  • Seasonal employers should use the same 12-week period they used for calculating the maximum loan for the reference period for calculating any loan forgiveness reduction.
  • When calculating the forgiveness reduction related to salary/hourly wages, borrowers should only consider decreases in salaries or wages (not all forms of compensation).

What PPP Borrowers Need To Know

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For small and midsize businesses struggling because of the coronavirus, the Paycheck Protection Program (PPP), included as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, provided much-needed funding to cover necessary expenses. One of the chief benefits of the loans made through this program is the potential for the loans to be completely forgiven if borrowers meet certain criteria.

The Paycheck Protection Plan Flexibility Act of 2020, enacted on June 5, further enhances the opportunity for loan forgiveness by expanding requirements on how the loans are spent and extending the period to use the funds to 24 weeks, with the ability to elect the 8-week period if funds were received prior to June 5, 2020.

Borrowers of PPP loans should consider taking the following steps to maximize the amount and accelerate the timing of loan forgiveness:
 

1. Decide how much time you need to spend the funds

One of the key provisions in the Paycheck Protection Program Flexibility Act is more time to use PPP funds. In the CARES Act, employers were limited to only an 8-week period to use the funds, but now they have up to 24 weeks, provided the covered period does not extend beyond Dec. 31, 2020. When choosing the covered period for the loan, borrowers should consider the changes that apply to both the 8- and 24- week periods and the benefits of each:

  • The extended 24-week period will allow businesses to incur more eligible payroll costs. Many businesses were struggling to meet this minimum during the 8-week period, typically because of reduced staffing levels.
  • Additionally, more funds spent on non-payroll costs are now eligible for forgiveness under both the 8- and 24-week period. Only 60% of the loan must be spent on payroll costs to achieve the maximum forgiveness, (lowered from the original 75% minimum). This change alone will allow many borrowers to achieve 100% forgiveness in the allowable 8-week period.  
  • The ability to count more weeks of payroll costs will reduce the need to spend funds on non-payroll costs and ultimately reduce the documentation borrowers need to provide to their banks.
  • Businesses that choose the 8-week period will likely want to apply for forgiveness as soon as possible so they can make business decisions, such as any necessary payroll or staffing cuts, without impacting loan forgiveness.


2. Talk to your lenders

Regardless of the covered period a borrower chooses, it is critical to begin conversations about loan forgiveness procedures with lenders as soon as possible, particularly since lenders will be making the initial review before it goes to the Small Business Administration (SBA) for final approval. Borrowers should get clarity from their lender on the forgiveness process, including:

  • Will applications be accepted on the SBA’s paper forms or will an online submission be required? 
  • Is the lender requiring borrowers to submit documentation via email, an online portal, or in some other way?  
  • What formats are acceptable when submitting supporting documentation?
  • Will the lender provide a calculator that borrowers can use to analyze their expenditures and project the expected forgiveness amount?

3. Get your FTE counts and salary reduction amounts in order

Borrowers of PPP funds need to compile several counts of their full-time equivalent (FTEs) employees. This includes historical FTE counts that are not dependent on the covered period of the loan, and can thus be calculated and documented at any time, including before a loan is awarded. These historical FTE counts will be compared to a borrower’s average FTE count for the covered period.
 
Businesses will need to wait until their covered period ends to finalize their FTE determination for that time. Projection of the average number of FTEs for the covered period is useful for analysis purposes, but may be a difficult task for businesses like restaurants that are likely uncertain about when they can put employees back to work. However, a new safe harbor has been added that will take into account situations where compliance with COVID-19 precautions prevented business from reaching their average pre-COVID FTE count. Additionally, employers now have more time to reduce or eliminate their calculated FTE reduction by re-hiring laid off employees by the earlier of the loan forgiveness application date or December 31, 2020, instead of June 30, 2020.
 
If borrowers reduced employees’ hourly rates or annual salaries during the covered period, they must document that the reduction did not exceed 25% of the wages/salary of the quarter preceding the loan date. If borrowers did not reduce the rate of pay, they do not need to perform this calculation, even if payments to employees decreased due to reduced hours.  Reductions in wage payments due to reduced hours are not a part of this calculation because the reduced hours generate a reduction in the number of FTEs.
 
Any reduction in pay rates or salaries that exceeds 25% will be treated as a decrease of the amount spent on expenses eligible for forgiveness. However, the 24-week covered period allows more time to recover from temporary wage or salary reductions. For example, if a full-time employee’s hourly rate was reduced from $20/hour in Q1 to $10/hour for an 8-week covered period, the reduction at the end of the 8 weeks in excess of 25% would be $5/hour, which for a typical 40-hour work week would equate to $1,600. But, if the business restores the wage rate to $20/hour for weeks 9-24, the new average rate for the covered period is over $15/hour, meaning the pay reduction does not exceed 25%, preventing any adjustment on account of wage and salary reduction.  
 

4. Gather your documentation to submit to your lender

In addition to FTE counts, borrowers will need to supply supporting documentation for any other expenses that are being submitted on the loan forgiveness application. This includes payroll registers and payroll tax reports that provide cash payroll paid during the covered period and the first payroll paid after the covered period, if this includes pay for days worked during the covered period.  Your payroll vendor may have reports designed specifically to document PPP loan forgiveness amounts.

If additional payroll costs are needed to achieve 100% forgiveness, borrowers must include the receipts showing payment of health insurance premiums or claims paid for self-insured plans. If the entire loan proceeds are not accounted for with these documented payroll costs, then borrows should submit documentation showing the payment of non-payroll costs. Larger expenses like rent and interest on mortgages might achieve total forgiveness, eliminating the need for any additional documentation. If there are remaining funds that have not yet been documented as forgivable, then borrowers should continue to submit utility payments.

To minimize the back and forth with lenders, borrows should confirm if they need document submitted in a specific format.
 

5. Don’t forget about documents you need to maintain, but not submit to the lender

In addition to the documents that must be submitted with the application for forgiveness to the bank, borrowers must maintain certain additional documentation for six years after the date the loan is forgiven or repaid in full. This is required should the SBA chose to audit the loan forgiveness. These documents include:

  • PPP Schedule A Worksheet or its equivalent and documentation supporting:
    1. The listing of cash paid to each employee who worked during the covered period, including the “Salary/Hourly Wage Reduction” calculation, if necessary.
    2. Which employees received compensation at an annualized rate of more than $100,000 during any single pay period in 2019.
    3. FTE calculations for each employee including written offers of reemployments, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule.
    4. FTE Reduction Safe Harbor calculations if applied to cure an FTE shortfall.
    5. Written explanation regarding the inability to return to pre-COVID-19 operation levels due to compliance with COVID-19 guidelines.
  • Identity of owner-employees and self-employed owners and how their maximum loan forgiveness was determined.
  • Copies of all records relating to the borrower’s PPP loan, including:
    1. Documentation submitted with the PPP loan application and documentation supporting the borrower’s certification as to the necessity of the loan request and its eligibility for a PPP loan.
    2. Documentation necessary to support the borrower’s loan forgiveness application, and documentation demonstrating the borrower’s compliance with PPP loan requirements.

PPP loans provide many businesses with a critical influx of cash needed to survive the ongoing pandemic, and recent changes to the loan program have increased flexibility for borrowers. However, loan forgiveness is a key element in maximizing the benefit of this loan program. Approved borrowers should act quickly to ensure their ability to have these loans forgiven. 

PPP Loan Forgiveness and Payroll Tax Deferral Has More Flexibility

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The Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010) (PPP Flexibility Act), enacted on June 5, 2020, makes welcome changes to the forgiveness rules for Paycheck Protection Program (PPP) loans made to small businesses in response to the novel coronavirus global pandemic (COVID-19). The PPP Flexibility Act greatly increases the likelihood that a large percentage of a borrower’s PPP loan will be forgiven. PPP loans (and related forgiveness) were created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Public Law 116-136), which was enacted on March 27, 2020. The PPP Flexibility Act also eliminates a provision that made recipients of PPP loan forgiveness ineligible to defer certain payroll tax deposits.

Insight:

The PPP Flexibility Act does not address whether employers can deduct the expenses underlying their PPP loan forgiveness. In Notice 2020-32, the IRS announced that employers could not deduct such expenses, but congressional leaders vowed to reverse the IRS’s position in future legislation. On June 3, Chairman of the House Ways and Means Committee, Richard Neal (D-MA), said that in the next COVID-19 stimulus bill he intends to clarify that the loan forgiveness expenses are tax deductible. But negotiations on that bill are still in the early stages.

PPP Loan Forgiveness Expanded

The PPP Flexibility Act makes the following changes:

1. Extends the “covered period” for PPP loan forgiveness from eight weeks after loan origination to the earlier of (i) 24 weeks after loan origination or (ii) December 31, 2020. Borrowers who received their loans before this change can elect to use their original or alternative payroll eight-week covered period.

Insight:

In connection with passing the PPP Flexibility Act, a Statement for the Record was issued by several Democrats and Republicans in the House and Senate, clarifying that the Small Business Administration (SBA) will not accept applications for PPP loans after June 30, 2020. The statement says: “Our intent and understanding of the law is that, consistent with the CARES Act as amended by H.R. 7010, when the authorization of funds to guarantee new PPP loans expires on June 30, 2020, the SBA and participating lenders will stop accepting and approving applications for PPP loans, regardless of whether the commitment level enacted by the Paycheck Protection Program and Health Care Enhancement Act has been reached.” Given this affirmation, very few loans will have fewer than 24 weeks as a covered period.

2. Replaces the June 30, 2020, date for the rehire safe harbor with December 31, 2020. 

Insight:

Additional guidance is needed to determine if a borrower who elects their original or alternative payroll eight-week covered period would also retain the June 30, 2020, date for the rehire safe harbor.

3. Expands the rehire exception based on the non-availability of former employees and applies that exception when the need for workers is reduced to comply with COVID-19 standards. Specifically, PPP loan forgiveness would not be reduced due to a lower number of full-time equivalent (FTE) employees if:

  • The employer is unable to rehire individuals who were employed by the employer on February 15, 2020, and the employer shows the inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020, or
  • The employer documents its inability to return to the same level of business activity as it had before February 15, 2020, due to having to comply new COVID-19 standards for sanitation, social distancing or other safety requirements during the period of March 1 through December 31, 2020.


4. Allows up to 40% of the loan proceeds to be used on mortgage interest, rent or utilities (previously such expenses were capped at 25% of the loan proceeds), while at least 60% of the PPP funds must be used for payroll costs (down from the 75% that was noted in SBA guidance). This applies even if the borrower elects to use the eight-week covered or alternative payroll covered period. If the borrower does not use at least 60% of the loan on payroll costs, then it appears that no forgiveness would be available (i.e., the 60% would be a “cliff,” even though it was previously unclear whether the 75% limit would allow for partial loan forgiveness for payroll costs of less than 75% of loan proceeds).

Insight:

Some members of Congress are considering a “technical correction” that would provide that the new 60% limit is not a “cliff” (thereby allowing partial loan forgiveness if less than 60% of PPP loan proceeds are used for payroll costs).

5. Provides a five-year term for all new PPP loans disbursed after June 5, 2020. Loans disbursed before that date would retain their original two-year term unless the lender and borrower renegotiate the loan into a five-year term.

6. Changes the six-month deferral period for loan repayments and interest accrual so that payments on any unforgiven amounts will begin on either (i) the date on which loan forgiveness is determined or (ii) 10 months after the end of the borrower’s covered period if forgiveness is not requested.

Insight:

Although the PPP Flexibility Act doesn’t clearly say as much, it appears that the $100,000 maximum on cash compensation paid to any one employee that is eligible for PPP loan forgiveness would continue to apply, such that the $15,385 cap (for eight weeks) would now be $46,153 (for 24 weeks).

The PPP Flexibility Act does not address whether the loan forgiveness cap for “owner-employees” (i.e., 8/52 of their 2019 compensation) would change to 24/52 of their 2019 compensation.

Notwithstanding some commentary that has been released, the statute does not appear to allow borrowers to request PPP loan forgiveness as soon as they spend all of their PPP funds in the ninth to 24th weeks following receipt of their PPP funds. That is because the CARES Act has been amended to substitute “24 weeks” for “eight weeks,” so absent additional guidance, it seems that borrowers must wait until the end of the 24-week period to request PPP loan forgiveness, unless they elect to use the original eight-week period (regular or alternative payroll covered period).

These changes garnered nearly unanimous, bipartisan support in both the House and Senate because the CARES Act assumed that most businesses would be up and running in a matter of weeks. But more time is needed to incur forgivable costs, because many businesses are at or near the end of their initial eight-week loan forgiveness period, yet they remain partially or fully suspended by governmental orders.
 

Payroll Tax Deferral Expanded

In addition to PPP loan changes, the bill allows all employers, even those with forgiven PPP loans, to defer the payment of 2020 employer’s Social Security taxes, with 50% of the deferred amount being payable by December 31, 2021, and the balance due by December 31, 2022. Previously, the CARES Act prohibited such payroll tax deferral after a borrower’s PPP loan was forgiven.