AFP Board of Editors member Jacob Weichholz, frequent contributor Daniel Mayo, Chris DeMayo and their colleagues at WithumSmith + Brown have put together a summary of information on the various Small Business Association (SBA) loans that are available under the Coronavirus Aid, Relief and Economic Security (CARES) Act.
CAVEAT: This update is as of November 2, 2020. Things are changing constantly so the information needs to be verified before acting on it.
In an effort to provide some clarity, we want to break down in plain English some information about what we know about the SBA loans and other financial incentives that are part of the latest economic stimulus bill that has been passed.
A checklist of current steps you should be taking is below and updated as needed.
Updates with respect to new forms being released by the SBA:
Loan Necessity Questionnaire: As noted in our recent article, the SBA has announced that it intends to release two new forms (form 3509 and 3510). They are designed as a “necessity questionnaire” and are being distributed to all borrowers who had loans in excess of $2M (recall loans under $2M are automatically deemed to meet eligibility requirements as a safe harbor). Importantly, the applicable form (3509 relates to for-profit entities) is required to be completed and returned to your lender within 10 days of receiving the appropriate form from them. Please be in touch with your lender if you have a loan in excess of $2M to ensure you comply with the requirements. Our article goes into depth on what the SBA is looking for.
These forms are a follow up to FAQ 31, which was a controversial FAQ that attempted to describe the concept of eligibility. The interesting nuance that borrowers will pick up on when looking at these forms is that many of the questions relating to business activities are forward looking, meaning, the SBA wants to know what happened after you received your loan. As we all know, borrowers had to complete the applications in good faith based on what was known or knowable at the time they were applying for the loan. This is a subtle but extremely important difference. If the SBA intends to use business activities that occurred after receiving proceeds, it could call into question eligibility for borrowers that wound up having stable revenues or perhaps even grew during the covered period, despite the fact that at the time of the application they were dealing with substantial business and economic uncertainty (which met the standard to be eligible at the time). So the question many are asking is, is the SBA moving the goal posts here?
It is unclear what the SBA will do with this information or how they are going to philosophically view eligibility, but clearly borrowers need to be aware that the information could be used as a starting point for inquiry from the SBA. This is an important development, borrows need to begin completing the form as soon as they receive it from their lender.
As the very public debate in Congress regarding a another stimulus bill rolls on, we wanted to share an update issued late last night by the SBA, in conjunction with the Department of Treasury. With lobbying groups, lenders, and borrowers long-since advocating for a more simple forgiveness process, specifically for smaller loans, the SBA took this into their own hands late last night, as they released a new interim final rule (IFR). Because they are required to work within the confines of the current statutes, the consequences of this interim final rule are not as far reaching as proponents for a simpler forgiveness process would like, but it’s certainly a movement in the right direction. Here are the highlights:
New Application Form and Simplification for Loans under $50,000: In the release of the IFR, the SBA granted a de minimus exemption that all borrowers who have loans under $50,000 (provided that they do not, with affiliates, exceed $2m) would be exempt from any reductions in the loan forgiveness amount based on reductions in full-time equivalents or reductions in salaries/wages. This is welcomed news to these borrowers. The SBA also released the Form 3508S, a much more simple version of the Form EZ previously issued, which just asks the borrower for the bare minimum of requirements — loan information, forgiveness amount, and for the borrower to sign the certifications. While this is welcomed news to borrowers, the statutes of the CARES Act still require that forgiveness is not to be issued unless supporting documentation supporting the expenditures is provided, and there was no change to this rule offered by the SBA. Borrowers who utilize this form are still required to submit the supporting documentation for their expenditures, ultimately supporting the amount claimed for forgiveness. Further, the IFR clarifies that lenders are required to complete the following when in receipt of such application: 1) confirm receipt of the certifications; 2) confirm receipt of the documentation required to be submitted. It clearly indicates that the borrower is responsible to provide an accurate calculation of the loan forgiveness amount.
With 3.57 million outstanding PPP loans totaling $62 billion in funds, this is set to simplify the process for about 12% of the PPP funds distributed. We expect that lending institutions will need some time to update their systems to allow for these applications, so borrowers who fit this mold will likely need to wait a couple more weeks to apply for forgiveness if they desire to use the new form.
Changes to the Lender Review Process for All Loans: In addition to the above, the IFR also amended lender responsibility with respect to reviewing documentation from submitted borrowers. In response to what appears to be an overwhelming number of borrowers submitting applications with documentation of eligible payroll and nonpayroll costs in excess of the loan amount, lenders responsibilities are now adjusted such that they are only required to confirm the borrower’s calculation and review the required documentation up to the amount of the request forgiveness amount. Although we cannot be sure how each lender will approach/implement this guidance, it stands to increase the speed with which loans are being processed if utilized.
What else is going on in Congress? Since the IRS published Notice 2020-32, disallowing deductions for expenses that were forgiven under the PPP, Congress members have spoken publicly about how this notice was not in line with the intentions of the CARES Act. On October 1, the House passed an updated Heroes Act which contained language allowing such deductions, marking the first time we have seen any legislation overturning the IRS notice make any headway. Based on what has transpired since that date, we know that the Heroes Act, in its current form, is very unlikely to be signed into law, however inclusion of language in this regard is encouraging nonetheless.
Also at the forefront of these discussions are additional appropriations for the PPP funds. At the very least, the White House has signaled that they would be amenable to redeploying the nearly $130b of unused appropriations for the PPP, and Congress members on both sides of the aisle have indicated they are favor of a PPP v2. The most solid proposal we have seen to date is within the updated Heroes Act, which includes a second round of loans, utilizing the same formula as the first round, to eligible ‘smaller businesses’ of 200 employees or less who can also demonstrate a 25% reduction in revenues in either Q1, Q2 or Q3 as compared to last year. The maximum size loan under this proposal would be $2m. Eligibility under alternative size standards and how the affiliation rules would be applied are not clear at this time.
With this update, we wanted to share some updates with respect to legislation that has been bouncing around Congress:
As you may recall, Democrats proposed a $3 trillion stimulus proposal (the HEROES Act) which was countered by the Republicans $1.1 trillion proposal (the HEALS Act). When it became clear that the parties were at an impasse, the Republicans issued a new, $650 billion “skinny” relief bill that was sharply rejected by Democrats. The back and forth has created gridlock with respect to much needed economic stimulus.
As a result, a bipartisan group of House lawmakers, calling themselves the “Problem Solvers Caucus”, released a $1.5 trillion stimulus proposal to help negotiators bridge the gap between the parties.
What Is In the Bill?
Among the provisions in this proposal is one that would add a second, $240B round of PPP loans, allowing for flexible use, full transparency, simplified forgiveness, and prioritization for distressed businesses. It would also include $50B for targeted employee retention tax credits.
What’s Not In the Bill?
The latest proposal did not address the most pressing issues for current PPP borrowers — whether existing PPP loans will be tax-free or whether there will be simplified loan forgiveness for some subset of borrowers, e.g., for those loans under $150K or $350K. We suspect these provisions, if they are to be included at all, will likely require agreement on a larger bill than the one proposed by the Problems Solvers Caucus.
Progress on a new stimulus bill continues to be slow. We have seen several bills come and go, it is unclear how much traction this bill has but we will continue to track it closely and report to you if it gets legs.
It’s been a while since our last update because things have been quiet on the PPP front. But we wanted to share some thoughts on an important concept: deductibility of PPP expenses:
PPP Loans – Disallowance of Expense Deductions
We are getting a lot of questions regarding the denial of tax deductions relating to PPP loan forgiveness. As you may recall, cancellation of debt relating to the PPP loan is not taxable income. While that is the case for the loan itself, the amount forgiven actually ends up being fully taxable because the IRS issued Notice 2020-32 to disallow the tax deductions (expenses) that gave rise to the loan forgiveness. Here is a link to our article on the Taxation of PPP Loans and Loan Forgiveness. Thus, taxpayers should expect more taxable income as they will have less deductible expenses in 2020 than are reflected on their internal books and records.
This also has caused some fiscal year-end borrowers to consider whether they can choose which deductions to disallow so they can defer the taxation of the loan forgiveness amount until a later tax year.
Consider this example: a borrower obtained a PPP loan 8 weeks before the end of its 2020 FYE. If it obtains loan forgiveness based on the first 8 weeks of covered expenses, then those expenses would be disallowed and the loan forgiveness amount would be taxable in 2020. If, however, the borrower can disregard the first 8 weeks of expenses and rely only on the last 16 weeks of covered expenses paid or incurred during the covered period, then it could defer the expense disallowance, and therefore the taxation of the loan forgiveness amount until 2021. There is no guidance on this issue from the IRS or from the SBA, and while there are reasonable arguments to be made both ways, we cannot recommend borrowers take this position because eligibility for loan forgiveness is based on “the sum of” the covered expenses paid and incurred during the covered period, according to section 1106(b) of the CARES Act.
Could deductibility of PPP expenses change? Many have speculated that denying tax deductions for PPP loan recipients was not the intent of the program. Several members of Congress have indicated that they intend to pursue legislation that would allow for all PPP related expenses to be deductible in order to avoid having small businesses deal with an unexpected tax bill after such a difficult year. Even though at least one bill to restore the deductions has been proposed, at this point no agreement has been reached, so taxpayers need to proceed assuming that no change is coming. That said, it is possible that we could see this addressed in an upcoming stimulus bill … stay tuned.
It’s been almost two weeks since our last update, but with some news surrounding proposed changes to the PPP, we wanted to share a general update.
While Congress is divided on some key issues which prevent a comprehensive stimulus package, it seems as if there is bipartisan support to pass piecemeal legislation on certain items in order to get some relief to the American taxpayers and small businesses. Here is a summary of some of the items we are hearing:
- Second Round of PPP? The Senate has been discussing a measure which would provide a second round of PPP whereby certain borrowers could get a second loan, which would include the unspent funds from the first round (approximately $100 billion) plus an additional $257 billion for a second program. Such program would have some new requirements, including:
- Employee limit of 300 or fewer workers, as compared to the current 500 threshold (appears there may be an earmark of at least $25 billion for businesses with 10 or fewer employees)
- Borrowers would need to demonstrate a 35% reduction in gross revenue in Q1 or Q2 as compared to Q1 or Q2 2019
- Additional ineligible businesses would include finance/insurance businesses, lobbying companies, think tanks and businesses who are either partially owned by Chinese businesses or that have a Chinese resident serving in a board capacity
- Expand eligibility provisions to 501(c)(6) groups and tourism bureaus that employ 150 or fewer people.
- The proposal includes borrowers to receive 250% of average monthly payroll costs or $2m, whichever is less (reducing the maximum loan to $2m).
- Changes to the Current PPP: Proposed changes to the current PPP program include the following:
- Expanded eligibility for certain expenses, including payments for personal protective equipment, expenses related to adapting work environments to conform to social distancing guidelines, software/cloud commuting services that facilitate important business functions, costs related to vandalism, looting or damage due to 2020 based protesting (provided that it is not covered by insurance). Such costs would be included as ‘nonpayroll costs’ and would be required to be less than 40% of the total requested forgiveness
- Easier forgiveness process for smaller borrowers, including submission without any required supporting documentation (no amount provided yet)
- Economic Impact Payments: A second round of stimulus checks could be coming to individuals, with indications leaning toward similar income thresholds and phase outs as the previous round. No word on if the manner in which checks were distributed will be adjusted, after noted issues with the distribution of the first round.
While these bills are being negotiated, we expect that, as always, there will be further changes, but this information gives some directional insight into what congress is thinking. We will keep you updated as we hear of new information and will provide our analysis on meaningful changes as the drafts make their way through the legislative process.
General update on some new developments:
Final PPP Statistics: As many of you know the PPP loan program is officially closed, it is certainly possible that it can be extended via the next stimulus bill, however that has been delayed and it is unclear what changes to the PPP (if any) will come as a result of the bill and when. The SBA has been consistently publishing PPP loan statistics, and this link provides what is effectively the “final” results as we know them. Some general observations:
- $133 Billion of funds allocated to the program went unused.
- NY, CA and TX were the largest recipients of loans.
- Over 87% of the total loans issued were below $150k.
- Chase, BOA and PNC were the top three lenders (by dollars).
- Healthcare, Professional Services and Tech were the top three beneficiaries (by dollars).
New clarifications/FAQs on how to calculate forgiveness: The SBA released new FAQs recently, we have written an in-depth analysis on each one within this article. The FAQs do not present major shifts in how we view the mechanics of forgiveness but do help provide further detail and clarity on topics such as how to calculate the maximum forgivable salary for owner/employees based on entity type (LLC, S-Corp, C-Corp and how to account for benefits paid within and outside of the covered period among other topics. As borrowers begin working on their applications, understanding these nuances is important
PPP and M&A: We often get questions regarding how the sale or a business or the acquisition of another entity may impact a borrowers PPP loan and ability to obtain forgiveness. Our team put together an article addressing some of the complexity that may arise from these transactions, as well as how they impact the employee retention tax credit.
General update on some new developments:
Second round of PPP Loans??: There has been a lot of news swirling online that new legislation will open the door for Borrowers to get a second PPP loan. Also there is more chatter that automatic forgiveness for certain loans is on the horizon. It appears as though early August may be the target for new legislation if it comes. Details on this are fluid to say the least, but it looks like both Republicans and Democrats are on the same page that the PPP is an effective tool that they want to use as part of upcoming stimulus programs. Stay tuned.
SBA issues procedural notice on forgiveness process: The SBA released a notice that provides clarification to lenders on how they should submit applications to the SBA for “final approval” after the lender has reviewed and approved a borrower’s forgiveness application. The highlight in this document is that the SBA indicated it will be using a third party software vendor to develop its portal, which will not be up and running until August 10th, so Lenders will need to hold any applications until that time.
The SBA further clarified that it may delay the opening of its portal further if any new legislation impacts the forgiveness process. We have long believed Congress or the SBA would choose a loan threshold (e.g., loans of $250,000 or less) and grant “automatic” forgiveness to those borrowers, requiring only a signed certification that the funds were used properly. This would drastically reduce the amount of applications that the SBA and Lenders would need to review.
We don’t have any official guidance or information on the legislative proposals reported in the press in past day or two (as noted above), but we think it may be prudent to wait to submit your application to your Lender until a legislative consensus emerges. As a reminder, lenders have 60 days to process your loan forgiveness application and submit their decision to the SBA, and the SBA has 90 days to authorize the forgiveness amount.
PPP and M&A: We often get questions regarding how the sale or a business or the acquisition of another entity may impact a borrowers PPP loan and ability to obtain forgiveness. Our team put together an article addressing some of the complexity that may arise from these transactions, as well as how they impact the employee retention tax credit.
Things have been relatively quiet. But we wanted to share a general update of where we are today:
Automatic forgiveness? Treasury Secretary Mnuchin recently suggested publicly that the SBA should consider forgiving all PPP loans and forgoing the process of the forgiveness application. This would of course be a stunning change in direction with respect to the mechanics of loan forgiveness. There has been chatter for a while that the SBA may seek to forgo applications on “small” loans as a vast majority of the loans issued were below $150k. This would substantially reduce the workload of the lenders and SBA when it comes to processing applications, and is appearing more and more likely as the days roll on, though the actual dollar threshold is a moving target. There also has been a bit of sluggishness in the release of new FAQs over the last month, but summertime is here and who can fault the SBA employees for taking some much needed R&R. Right now we know nothing more than what we are reading online, but we will of course update you as new information comes out.
EIDL Loans: As we all know, the EIDL loan program was funded and gained a lot of traction/interest at the same time as the PPP roll out. Many companies clamored to gain access to the loan product as a result of its favorable terms (30 year repayment, 4% max rate, no personal guarantee for small loans). We are starting to see clients identify onerous covenants and reporting requirements (e.g., quarterly financial reports and year-end reviewed financials). There does not appear to be uniformity among all EIDL loan agreements, if you received an EIDL loan, it is important to review your agreement to ensure you have clearly identified all reporting requirements that are connected with the loan.
General update on a variety of issues:
SBA discloses names of PPP precipitants: The SBA followed through on its statement that it would release the names of borrowers who obtained PPP loans in excess of $150k. The list is now included on the SBAs website (see list here). The amounts of the loans were disclosed within ranges (i.e., loan amounts between $2m and 5m, 5m+, etc.). The data can be downloaded in an Excel spreadsheet and sorted in several ways, for example by NAICS code (indicating industry type). It has long been suspected that the list will be used to try to identify potential abusers of the program or companies that are connected to prominent people and businesses. We will see where this goes.
Main Street Lending Program is now open: The MSLP has been “baking” for over three months and is finally ready for primetime. We have written about the program in previous daily updates (see update on 6/18), we have a new article with more details on terms and eligibility here. The program has garnered some controversy as some have taken the view that it was overly restrictive and not borrower friendly. Some banks have also indicated they will not participate in the program. That said, it is now available to borrowers and can be a new source of working capital.
New PPP Bill passed by House and Senate: The Bill that was introduced and passed by the Senate on Tuesday has now been passed by the House and is headed to the President’s desk for signature. This Bill extends the application deadline for the PPP an additional five weeks (recall that the deadline was June 30, 2020 and they still had about $130 billion in available funds). It is unclear how valuable this additional time will be since most businesses that wanted funds have already received them.
New Stimulus Package in the works? Treasury Secretary Steven Mnuchin told a House panel that the administration would support a new stimulus package if it was put forward. He also indicated that he is in discussions with the Senate about revising the PPP to provide additional support to hard hit industries such as restaurants, hotels, etc. We are not sure yet how the P4 Bill that was passed by the House (which allows businesses to obtain a second PPP loan under certain circumstances) will fare if the Senate decides to take it up, but there appears to be bipartisan support to find a solution.
Based on what we are seeing it looks like we should expect more bills to come — it will be a busy summer.
Who would have thought we’d still be providing updates into July, 2020! But here we go: A general update on a variety of issues:
New PPP Bill introduced in the Senate: On June 30, the Senate passed a bill which extends the application deadline for the PPP an additional five weeks (recall that the deadline was yesterday and they still had about $130 billion in available funds). The bill still needs to go through the House and would need to be signed by the President to be passed into law. It is unclear how valuable this additional time will be as most believe that those businesses who wanted funds have already received them.
When will banks accept applications: Several clients have inquired regarding when they can apply for forgiveness and when banks will accept applications. We have heard that one bank has reached out to its clients to inform them that if they received their PPP loan in April, the bank will accept a forgiveness application in August. If the loan was received after April, the date the bank will accept the application is TBD. This is of course just one bank, but we have generally seen that banks are not in a position to accept applications currently and few have been explicit in how they will manage the process. We also have not seen any mechanism for a borrower to “declare” that they want to keep their 8 week covered period if they want to. At this point, borrowers will just have to be patient, we do not believe that there are any proactive steps required on the borrowers side right now other than being in consistent contact with their lender on the process.
Status of the P4 Bill: The P4 bill that was introduced by the House two weeks ago has not moved since it first came into play. This bill would allow certain borrowers to obtain a second PPP loan if they meet certain criteria (less than 100 employees, 50%+ reduction in revenue). We do not have much information on the probability of this passing or how it will interplay with the PPP extension bill noted above. We will monitor and report as we get updates.
Main Street Lending Programs: We reported on the general parameters of the MSLPs in previous emails, at this point the program is still not available to the public. Anecdotally we have heard mixed reviews from banks, many of which have indicated that they do not intend to participate in the program. We will continue to monitor.
New FAQs: It has been rumored for several weeks that a multitude of new FAQs are coming out in the near future to cover current open questions and to provide clarification. We believe this is correct but do not have insight as to when they are coming, it could be as soon as this week. As they come we will update you.
Information regarding a new safe harbor for FTEs:
New Safe Harbor from the FTE reduction rule: In the latest IFR, the SBA discussed the new safe harbors to the FTE reduction rule in a manner that appears to be very borrower friendly. As you know, PPP loan forgiveness is reduced if you reduce your FTE count during your covered period (when compared to your reference period). The second of the two new safe harbors allows companies to ignore any FTE reductions after Feb. 15, 2020 if they relate to an “inability to return to the same level of business activity” before Feb. 15, 2020 as a result of guidance issued by a variety of agencies (including state and local government) that inhibits such business activity. Examples are closing non-essential businesses and reductions in businesses volume due to social distancing or sanitation guidelines, but the safe harbor can apply to a much broader set of circumstances.
We have included below both an excerpt from the IFR as well as an example provided in the IFR. This safe harbor does not require the business interruption to cover the entire covered period, meaning that borrowers just need to establish that a disruption occurred for some meaningful period of time during the covered period. It also does not narrowly define a disruption, allowing borrowers to potentially rely on a broad variety of different “disruptions” caused by the requirements established by these agencies. We therefore believe this new safe harbor has broad applicability, including in the auto, restaurant and hospitality industries, for example, as well as in a variety of professional service industries like law and medicine.
We believe the safe harbor is extremely broad, and unless it is pared back by the SBA, a large number of borrowers should be able to avail themselves of it. If you have an FTE reduction during your covered period, we recommend that you closely review this safe harbor from the PPP Flexibility Act, as interpreted by the new IFR, to see if you can fall within it. The forgiveness application requires that you maintain documentation of the business disruption that took place and what requirement or guidance created it.
Excerpt from IFR
Borrowers are also exempted from the loan forgiveness reduction arising from a reduction in the number of FTE employees during the covered period if the borrower is able to document in good faith an inability to return to the same level of business activity as the borrower was operating at before Feb. 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19 (COVID Requirements or Guidance).
The Administrator, in consultation with the Secretary, is interpreting the above statutory exemption to include both direct and indirect compliance with COVID Requirements or Guidance, because a significant amount of the reduction in business activity stemming from COVID Requirements or Guidance is the result of state and local government shutdown orders that are based in part on guidance from the three federal agencies.
Example provided in the IFR:
A PPP borrower is in the business of selling beauty products both online and at its physical store. During the covered period, the local government where the borrower’s store is located orders all non-essential businesses, including the borrower’s business, to shut down their stores, based in part on COVID-19 guidance issued by the CDC in March 2020. Because the borrower’s business activity during the covered period was reduced compared to its activity before Feb. 15, 2020 due to compliance with COVID Requirements or Guidance, the borrower satisfies the Flexibility Act’s exemption and will not have its forgiveness amount reduced because of a reduction in FTEs during the covered period, if the borrower in good faith maintains records regarding the reduction in business activity and the local government’s shutdown orders that reference a COVID Requirement or Guidance as described above.
New information regarding a new IFR that came out today regarding the covered period:
Change to forgiveness process: As we all know, the Covered Period was recently change to be either 8 weeks or 24 weeks, at the borrower’s election if the loan was issued before June 5th. This has opened the door to many companies obtaining full forgiveness of their loan. An issue that has often come up is that many borrowers are able to incur enough expenses to obtain full forgiveness within a period that is longer than 8 weeks but perhaps far shorter than 24 weeks. This has led to the question: Do I need to wait the full 24 weeks before we apply for forgiveness?
Up until now the answer was yes, however the IFR released today has clarified that a borrower can apply for forgiveness at any time after or DURING their covered period. This will allow borrowers to get the process rolling and perhaps allow them to wrap up the forgiveness process prior to the end of the year.
Update on Salary and Wage Reduction Rule: The IFR also indicates “If the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25 percent, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period.”
This is meaningful because it indicates that you will need to account for salary reductions through your full covered period even if you apply for forgiveness early. As an example, if you reduced an employee’s salary in excess of 25% for the first 12 weeks of your covered period, when applying for forgiveness you need to assume that reduction will have been in place for all 24 weeks for purposes of the forgiveness calculation. No guidance was issued about what to do if there are FTE reductions during the covered period.
The new IFR clarified many other points regarding the loan forgiveness process, and all of the salient ones are included in our webinar today on loan forgiveness. It will be posted on our website if you cannot watch it live.
New information regarding the new loan forgiveness application as well as a new Bill introduced in Congress:
Updated Loan Forgiveness Application: The SBA released two loan applications, one is an updated version and the other is a new “EZ” form. We have analyzed both in this article. The EZ form allows borrowers to ignore FTE and headcount reduction calculations and fill out a truncated form if they meet one of three criteria. True to form, some of the criteria requires meaningful clarification, specifically the third one noted in the article. There are rumors that a number of new FAQs are coming out within the next week or so — we will monitor this closely and report as they do.
With respect to the criteria below, it is unclear if the borrower needs to demonstrate an inability to operate at a point in time, or a period of time. Also the SBA calls out requirements and/or guidance issued by three specific Federal organizations, and for the most part the restrictions on commerce have been imposed by States. We assume more clarification is coming or borrowers will have to scour the websites of the three Federal organizations listed to see what restrictions or guidance have been provided.
“Borrower was unable to operate during the CP at the same level of business activity as before 2/15/20 due to compliance with requirements established or guidance issued between 3/1/20 and 12/31/20 by HHS, CDC or OSHA, relating related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.”
New Bill in congress relating to the PPP: It’s a new week, so there is of course a new Bill in the works. This one is called the Prioritized Paycheck Protection Program (P4) Act. This Bill is designed to allow small companies (less than 100 employees) to obtain a second PPP loan if they exhausted their current PPP loan and have suffered a 50%+ reduction in business as a result of COVID. This Bill was just introduced and we will see if it picks up steam in the coming weeks.
Updated Loan Forgiveness Calculation: The rules relating to loan forgiveness have evolved over time, we have updated our article on the mechanics of loan forgiveness here for those who are looking for updates and examples.
New information regarding the roll out of the MSLP:
Main Street Lending Program (MSLP): The MSLP was first introduced back in April and there was a lot of initial press around the program as an alternative to the PPP for larger companies. Actually rolling it out to the public, however, became a slow and arduous project. The program went through several changes and enhancements to make it more accessible to both the middle and upper-middle markets. Yesterday it was announced that the loan portal was open to lenders. This program, much like the PPP, will be administered through banks/lenders rather than through the SBA.
The MSLP is not yet available for potential borrowers to obtain loans, but now that it is open to lenders, we suspect it will open up to borrowers shortly. Here is a link to FAQs that are helpful as this program continues to evolve.
Below are some highlights of the MSLP:
- These loan products are NOT forgivable and do require security (assets, personal guarantee, etc.).
- Borrower Eligibility:
- Must have 15,000 or fewer employees OR less than $5 billion of revenue in 2019.
- Must not be an ineligible business and must be a US-based business established prior to March 13, 2020.
- Must not have received support pursuant to section 4003(b)(1)-(3) of the CARES Act. This is the “Mid-Sized Lending Program,” not the PPP. Thus, borrowers can obtain both a PPP loan and a MSLP loan.
- There are three different loan facilities:
- MSNLF: Loan sizes from $250,000 to $35M and the loan cannot exceed 4X the borrower’s 2019 EBITDA when added together with existing and undrawn debt. The loan cannot be subordinate to existing debt of the borrower. It is a 4-year facility, with principal and interest payments deferred for 1 year. Interest is LIBOR+ 300 basis points. The loan will have a 5 year term. For more information on the terms, click here.
- MSPLF: Loan sizes from $250,000 to $50M and the loan cannot exceed 6X the borrower’s 2019 EBITDA when added together with existing and undrawn debt. The loan must be senior or pari passu with any other existing debt facilities and can be used to pay down existing facilities. It is a 4-year facility, with principal and interest payments deferred for 1 year. Interest is LIBOR+ 300 basis points. For more information on the terms, click here.
- MSELF: Borrowers can use this facility to refinance or upsize existing debt. This is a 4-year term loan ranging in sizes from $10 million to $300 million. The maximum loan amount cannot exceed (i) 35% of the Eligible Borrower’s existing outstanding and undrawn available debt or (ii) when added to the Eligible Borrower’s existing outstanding and undrawn available debt, 6X the Eligible Borrower’s adjusted 2019 EBITDA. The loan must be senior to or pari passu with existing debt facilities. Principal and interest payments are deferred for 1 year. Interest is LIBOR+ 300 basis points. For more information on the terms, click here.
Some new information regarding a new IFR and an EIDL update:
New Interim Final Ruling:
The SBA released yet another Interim Final Ruling which provides for a variety of administrative updates/corrections, however there are a few notable clarifications as follows:
- The SBA confirms that the maximum forgivable salary for non-owner employees during a 24 week period is in fact $46,154 per FTE, exclusive of health insurance, retirement benefits and state-level employment taxes. For “Owner Employees”, that amount is inclusive of health insurance, retirement benefits and state-level employment taxes.
- For self-employed individuals (i.e., Schedule C filers), the maximum forgivable amount is $20,833, a welcome increase over prior guidance which had capped it at $15k. If you are a sole proprietor without employees, 100% forgiveness of your loan is a virtual certainty.
- The loan forgiveness amount for sole proprietors will be completely tax free. The same result will obtain for partners in partnerships who account for their allocated portion of the PPP loan as a distribution of profit (rather than guaranteed payment) because no deduction will be disallowed and the loan forgiveness amount is not includible in income.
The EIDL program (described below) is accepting applications again. Many businesses have struggled to obtain this loan, largely because the SBA was inundated with applications. Now it appears funds are available and they have caught up. A reminder that you can have both an EIDL and PPP at the same time but both cannot be used for the same purposes.
Notice: Now Accepting New Applications for Economic Injury Disaster Loans and Advance: On June 15, SBA will begin accepting new Economic Injury Disaster Loan (EIDL) and EIDL Advance applications from all eligible small businesses and U.S. agricultural businesses. To learn more about eligibility and apply, click here.
New information regarding the accounting for PPP loans:
Accounting for the PPP Loan: A question that we have consistently received is: When do we “write off” the PPP loan? This is an important question for borrowers who may have audited financial statements, where the presence of debt can have an impact on the company’s ability to borrow or meet financial covenants. Our view thus far has been that the loan should remain on the balance sheet until such time that the bank has officially forgiven it. The technical accounting guidance would be to view forgiveness as a “gain contingency”, an event that is not fully within the control of the company and not certain to occur, therefore the gain (write off of the loan and related interest) should not be recognized until such time that forgiveness has actually been confirmed.
The AICPA recently released a Technical Question and Answer (TQA) on the matter, while the TQA does indicate that gain contingency guidance is acceptable, it also opens the door to an alternate conclusion (see the link above and excerpt below). This is meaningful because the AICPA and the SEC indicates here that a borrower “may” be permitted to view the loan as a government grant, and therefore you would write it off (into other income on the income statement) as you use the proceeds from the loan based on your best estimate of what will be forgiven. This creates a very different result than the gain contingency guidance above. There is not yet authoritative guidance on this issue, however this TQA is a clear indication that borrowers may have multiple options available to account for this loan. We will continue to monitor this as it evolves.
TQA 3200.18: “How should a nongovernmental entity account for a forgivable loan received under the Small Business Administration Paycheck Protection Program (PPP)?”
Answer: “Given the unique nature of the PPP, questions have arisen relating to how a borrower under the program should account for the arrangement. Although the legal form of the PPP loan is debt, some believe that the loan is, in substance, a government grant.” In addition, the Staff of the SEC’s Office of the Chief Accountant has indicated that they “would not object to an SEC registrant accounting for a PPP loan under FASB Accounting Standards Codification (ASC) 470, Debt, or as a government grant by analogy to International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance.”
The PPP Flexibility Act was signed into law on June 5. Over the last few weeks we have covered many important components of the Bill, our latest article covers more of the salient points as well as the nuances of which all borrowers need to be aware, but we wanted to address the 60/40 rule:
- 60/40 “cliff” rule addressed: The PPP Flexibility Act changed the 75%/25% rule to a 60%/40% rule, allowing companies to realize a greater benefit from the non-payroll costs they incurred during their covered period. However, the law seemed to introduce a “cliff” effect whereby a borrower would not obtain ANY loan forgiveness if they did not spend at least 60% of their forgivable expenses on payroll. A joint statement made by Steven Mnuchin and the Treasury has clarified that this is not the intent. As noted below, it appears the intent is for the mechanics of this ratio to work in a similar way to the previous rule, meaning that non-payroll costs cannot exceed 40% of the total amount of forgiven costs, thus there is not a scenario where there will be no forgiveness on amounts spent if you do not reach a certain spend on payroll. Borrowers just need to understand that increasing spend on payroll increases the non-payroll costs that will be eligible for forgiveness. This is obviously a welcomed clarification for borrowers.
Lower the requirements that 75 percent of a borrower’s loan proceeds must be used for payroll costs and that 75 percent of the loan forgiveness amount must have been spent on payroll costs during the 24-week loan forgiveness covered period to 60 percent for each of these requirements. If a borrower uses less than 60 percent of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs.
The PPP Flexibility Act of 2020 passed the Senate on June 3. Here is some analysis on the Act:
The PPP Flexibility Act is on its way to the White House for signature. We have written extensively about what was in the legislation (see COVID Update on May 29 and our Article). A few observations that we wanted to make today that borrowers need to consider:
- Cap on forgivable Salaries: The cap on salaries has been a simple formula ($100,000/52 X 8), resulting in $15,385 of maximum forgivable cash compensation during the covered period. The bill would extend the covered period to 24 weeks, and that should mean that the maximum forgivable salary amount would be $46,153 ($100,000/52 X 24). Once the bill is passed, we believe the SBA will issue guidance to this effect to ensure clarity to Borrowers. Borrowers would need to incorporate the new cap into their calculations, but this change would be favorable and enable most borrowers to obtain full loan forgiveness.
- 8 weeks vs. 24 weeks: The bill would extend the covered period to 24 weeks; however, a borrower could elect to retain an 8-week covered period if they wish. The bill does not provide flexibility to have a covered period between 8 and 24 weeks, it appears to be one or the other.
- Timing of Forgiveness: With a 24-week covered period, borrowers would need to plan for the fact that it is highly likely that their loan will not be forgiven during 2020 based on the length of the covered period and the amount of time banks have to render a decision on forgiveness. Borrowers may need to consider if that is meaningful to them from a financial statement perspective or a loan covenant perspective.
Tax deductions for forgivable expenses: If forgiveness has not been granted to a borrower before it files its 2020 federal income tax return, then the borrower will have to decide whether to claim deductions on such return for the expenses that ultimately will give rise to loan forgiveness. The IRS has stated that the expenses relating to forgiven PPP loan amounts are not deductible, but until a borrower receives a loan forgiveness decision from its lender, it would seem appropriate to claim the deduction. This is something we will monitor closely as borrowers will need additional guidance on how to deal with this – it appears to be an unintended snafu.
Status of the PPP Flexibility Act: So far there is no news on the status of the changes to the PPP program other than the fact that Mitch McConnell confirmed that the Senate would “take up the bill.” This is significant and we expect to see movement in the next few days. It also seems there may be an effort to merge the two pieces of legislation. The PPP Flexibility Act was passed by the House and the PPP Extension Act originated in the Senate but has not come to a vote. There are subtle differences, but all of them are borrower friendly. Stay tuned.
Status of the Program: The SBA released new statistics on the status of the program via a PowerPoint as of May 30th. The document shows various statistics with respect to the type of borrowers, the average loan size, etc. Notably, it also shows that the program itself still has over $80B of funds available, and apparently negligible remaining demand.
Reminder Section: (what should I be doing):
- Call your Payroll Company about claiming the payroll tax deferrals and employee retention credits that were made available in the CARES Act – see previous emails.
- Talk to your Payroll Company about the qualified sick/family leave legislation (FFCRA, passed prior to the CAREs Act) – see previous emails.
- Consider speaking with your lender to discuss changes to terms of existing debt facilities. The banking system remains strong.
- If you have already received a PPP loan, start forecasting how you intend to spend the funds and how to qualify for the highest amount of forgiveness possible.
We want to share news regarding the Paycheck Protection Program Flexibility Act. of 2020:
PPP Flexibility Act of 2020: On May 28, the House passed the PPP Flexibility Act. with a vote of 417-1. This is clearly a bipartisan piece of legislation that now goes to the Senate for the next phase in the process. The President has indicated his support for the bill. Based on what we are seeing it appears likely this bill will pass in some form. The changes proposed in this bill were largely included in the HEROS Act, which stalled in the Senate. This bill attempts to “carve out” changes to the PPP into a standalone bill to allow it to be pushed through without delay.
Our overall first reaction to this bill is that it is extremely borrower friendly. Congress appears to be attempting to open several doors to borrowers to allow for full forgiveness of the loan. The bill is without question a game changer.
Here is what we know:
- Covered Period Extension: The covered period would be extended from 8 weeks to 24 weeks. There is some discussion that the Senate may want to shorten this to 16 weeks but that is not yet clear. This change is significant because it provides borrowers enough time to use all of the funds to obtain max forgiveness. Perhaps more importantly, if you have an FTE or wage reduction, that could be mitigated by a substantial increase in forgivable expenses incurred during the longer covered period. For example, if you had a $100k loan, spent all $100k and suffered a 50% FTE reduction, you would only have $50k of the loan forgiven. If the covered period is extended and you now have spent $200k on forgivable expenses, even with the 50% FTE reduction, you could have all $100k of the loan forgiven.
- 75% rule relaxed: The bill would change the ratio of forgivable nonpayroll costs to payroll costs from 75%/25% to 60%/40%. This will allow borrowers to get a much higher benefit for non-payroll costs like rent, utilities, interest, etc. This is a nice win for borrowers who operate with low overhead or with limited staff.
- FTE Rule Relaxed: Borrowers will have a new, fifth potential safe harbor from the FTE rule. If the borrower can demonstrate (1) they were unable to rehire individuals who were employed on 2/15 (i.e., the original safe harbor rule), (2) they could not re-hire employees of similar skill sets or (3) they are able to document that they were unable to return to a similar level of activity when compared to 2/15 as a result of social distancing guidelines or other restrictions put in place by federal or local governments (e.g., capacity restraints put on restaurants), they will be allowed to ignore FTE reductions during their covered period.
- Payroll Deferral Program extended: The IRS ruled that borrowers could take advantage of the employer payroll tax deferral provision until the date they received loan forgiveness. This bill would extend that through December 31st regardless of the status of the loan.
- Term of loan extended: The repayment term of the portion of the loan proceeds that are not forgiven would be extended from 2 years to 5 years. In addition, repayment does not need to begin until 1 year after the origination of the loan (rather than the current terms which require loan payments to begin 6 months after origination).
A news snippet from IFR (IFR 14) that could prove to be significant for borrowers:
IFR addressing “owner-employees”: The Interim Final Ruling on May 22 came with an interesting Q&A that could have a meaningful impact on borrowers.
The Q&A was as follows:
Question: Are there caps on the amount of loan forgiveness available for owner-employees and self-employed individuals’ own payroll compensation?
Answer: Yes, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation can be no more than the lesser of 8/52 of 2019 compensation (i.e., approximately 15.38 percent of 2019 compensation) or $15,385 per individual in total across all businesses. In particular, owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf.
This is significant – lets break down the issues:
- There is no formal definition of an “owner-employee” in any of the guidance that we have – for example, does it apply to C corporations, S corporations, partnerships, or all of the above. In the absence of a definition, borrowers may need to take a conservative view of this, meaning “any” ownership in a company would preclude forgiveness in excess of $15,385 for both Cash compensation and the non-cash items listed. Keep in mind, a non-owner can have up to $15,385 of cash compensation forgiven as well as employer paid health and retirement benefits. This could limit total forgiveness for a population of employees that had not been considered in the past.
- If you have an employee stock incentive plan (or Profits Interest Plan), or an employee has RSUs, profits interests or has exercised a stock option, that could potentially make them “owner-employees” and thus limit the forgiveness on their cash/non-cash compensation.
- This will present accounting issues, for example, the need to “carve out” health benefits paid to these specific employees from total benefits paid (often in one bulk check).
- This calculation also limits forgiveness to “the lesser of” 2019 compensation or $15,385, so this logic will need to be factored into the calculation.
- What if an employee only became an owner in 2020 (e.g., through exercise of an option in 2020), do we still need to look at 2019 to determine compensation amounts?
- What if they only worked for a short period in 2019 and had significantly less compensation in that period? If we have to use “the lesser of,” will the borrower be unduly penalized in the calculation?
The Q&A within this IFR certainly can create some complexities when it comes to the forgiveness calculation, and unfortunately it has created more questions than answers. Hopefully we will have more guidance soon. For now, though, we recommend adjusting calculations for all owners and hope that some sort of de minimis threshold is announced in the future.
Today we wanted to share news regarding the status of the PPP program as well as an issue one of our clients noted regarding their EIDL loan:
PPP Funds available: It has been widely reported that the demand for PPP funds is “drying up.” After the first tranche of funds ran out, there was an enormous outcry from the middle market who attempted to participate and could not do so. The second tranche funds was accompanied by a consistent narrative from several parties around evaluation of eligibility. The effort of creating doubt around eligibility combined with a large cash infusion into the PPP seems to have resulted in the overall demand being met. Over the last week, there has apparently been a net increase of PPP funds available, meaning more companies returned previously-issued funds than companies requested loan proceeds. In the end we think this is a positive as it will quell concerns that the program failed to reach the companies that needed the cash.
EIDL hiccup: Several companies have reported being approved for an EIDL loan but have not received the funds. One of our clients alerted us today that its loan was not funded because one of their partners or investors did not see (or it went into their spam folder) the DocuSign email requiring it to finalize the loan agreement. If you are in the camp of having received approval for an EIDL loan but have not received the funds, check to make sure that all parties have actually signed the loan agreements!
Today we wanted to alert borrowers to a new Interim Final Ruling (IFR) that was released on May 22:
IFR 14. On May 22, the SBA issued its 14th “final” ruling with respect to the PPP. We have written extensively about it in this article. Much of this ruling seems to support assertions made on the application itself which recently was released. The application came out before this ruling, and an application is certainly not “law,” thus this IFR was needed to cement the SBAs views on a variety of issues.
We highly recommend you read the entire article as many topics were covered, but here are some notable highlights:
- For the purpose of forgiveness, owners of Partnerships and Schedule C’s are capped at their 2019 earnings. That could be problematic for companies that had down years in 2019.
- As we know, borrowers do not have to count (as a reduction of FTEs) employees who were offered employment during the covered period and refused to come back to work, however this IFR indicates that the borrower will need to inform the applicable state unemployment insurance office of the rejected offer of reemployment within 30 days of the rejection.
- As we expected, employee hazard pay and bonuses are eligible for loan forgiveness because they are a similar form of compensation. Notably, the IFR offers no other limitations on the payment of bonuses, so the bonus payment may be able to exceed 8 weeks’ worth of the annual bonus amounts and still be eligible for forgiveness (up to the $15,385 limit).
Reminder Section: (what should I be doing):
- Call your Payroll Company about claiming the payroll tax deferrals and employee retention credits that were made available in the CARES Act (see above).
- Talk to your Payroll Company about the Sick Pay Bill (passed prior to the CARE Bill) (see above).
- Consider speaking with your bank to discuss changes to terms of existing debt facilities. The banking system remains strong.
- If you have already received the PPP, start forecasting how you intend to spend the funds and how to qualify for the highest amount of forgiveness possible.
Today we wanted to alert borrowers to a meaningful potential change to the PPP Program:
The Paycheck Protection Flexibility Act: Critics of the PPP have been vocal in outlining the flaws of the program. It was a loan product that was created for the entire middle market; however, in a complex economy, it has not been equally helpful for all businesses.
Take a restaurant for example: By its nature, a restaurant has high non-payroll costs (e.g., rent) and may have relatively low payroll costs (servers often make minimum wage). After the Pandemic hit, the CARES Act increased unemployment by $600 per week (over and above state unemployment) regardless of a recipients previous earnings. As a result, in some cases, low-wage earners are actually making more money on unemployment than they were when employed, thus giving them no reason to go back to work, especially if a business was shut down due to COVID-19 (like many restaurants were).
The PPP forces restaurants to bring back employees and put them on payroll, resulting in them actually receiving less income than they were receiving when on unemployment. At the same time, the expense the business really needs relief from is rent, and these types of non-payroll expenses are limited to 25% of the loan forgiveness amount. In the end, the employees made less money and the restaurant was unable to get most of its critical expenses paid and forgiven. This scenario happened over and over again in the middle market in ways that many could not have predicted.
Enter the proposed solution:
Changes to the PPP to correct for some of these issues were first introduced in the HEROS Act, a bill largely drafted by house Democrats and that has completely stalled in the senate. The HEROS Act is a massive $3 trillion bill (larger than the CARES Act) that introduced a wide variety of stimulus measures. The bill contained pragmatic PPP changes that would have solves the issue above, but it wound up being a victim of the political process. To combat this, the Paycheck Protection Flexibility Act was introduced, the it is a standalone piece of legislation that largely carves the PPP changes out of the HEROS Act. This Article outlines the background of the issues and many of the bipartisan proposed changes.
This bill apparently has bipartisan support (including the President) and we have heard from multiple sources that it may be voted on as early as next week. The changes would be very meaningful for all borrowers — here are some:
- Extend the covered period from 8 weeks to 24 weeks;
- Remove the “75% rule”, therefore non-payroll costs will not be limited to 25% of all costs incurred;
- Extend the repayment terms from two years to a longer term. The CARES Act allowed for “up to” 10 years to repay loan proceeds that were not forgiven;
- Enhance the payroll deferral and allow those who received the PPP to continue to benefit from the deferral all the way to the end of 2020 rather than up to the date the loan was forgiven; and
- Extend the rehiring rule to allow companies to rehire employees past June 30 and therefore obtain a greater forgiveness amount.
We are watching this closely and will report if we see changes or momentum relating to this bill.
Today we wanted to alert Borrowers to a meaningful change to the forgiveness calculation that was subtly put forward on the new application:
On April 3rd, Treasury released a PPP Borrower Information Fact Sheet that was meant to clarify key questions with respect to the application process. In particular, this document reaffirmed the definition of “Payroll Costs” (Page 2) and clarified that Salaries include bonuses and other forms of compensation subject to the $100k cap. It also clearly shows that “other compensation” such as vacation pay and severance were separate items, to be included over and above the cap. Th guidance aligned with the way the law was written.
In the newly-released loan forgiveness application, the SBA defines “payroll” to include an employee’s Cash Compensation and Non-Cash Compensation. Then it further defines Cash Compensation (see below), which is capped at $15,385 per employee during the covered period, to include any form of cash compensation such as severance and vacation payouts. This was a very subtle change that went unnoticed by many. This change is contrary to the way the law is written and will have a meaningful impact on Borrowers who were expecting these forms of compensation to be “over and above the cap.” We recommend that you review your calculations to determined what impact, if any, this change produces. We will be monitoring this issue as the SBA seems to have silently reversed its prior guidance.
Cash Compensation: Enter the sum of gross salary, gross wages, gross tips, gross commissions, paid leave (vacation, family, medical or sick leave, not including leave covered by the Families First Coronavirus Response Act), and allowances for dismissal or separation paid or incurred during the Covered Period or the Alternative Payroll Covered Period. For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the Covered Period; therefore, do not enter more than $15,385 in Table 1 or Table 2 for any individual employee.
Today we wanted to do a deep dive on the FTE rehire rule, a provision that may be meaningful for many borrowers:
FTE Safe Harbor (“Rehire Rule”): A deep dive into the FTE Safe Harbor rule. The CARES Act and subsequent Interim Final Rules/FAQs go to great lengths to describe how to reduce forgiveness if there is a reduction of FTEs. However, from the beginning, there has been a strangely drafted “rehire rule” that we candidly suspected may have been a drafting error. However, when the new application came out it became clear that this rule still exists and will be employed. With that being said, we wanted to walk through how this rule works, as the effect is a complete restoration of your FTEs within the calculation even if you don’t hire employees back during the covered period, for some borrowers, this is very meaningful. Here are the rules/steps:
Safe Harbor Rule (i.e., Rehire Rule)
- Compare average weekly # of FTEs from 2/15/20 to 4/26/20 with # of FTEs as of 2/15/20
- If there is a reduction, and it is restored as of 6/30/20, then there is no reduction in the forgiveness amount.
In what appears to be a disproportionate benefit, the SBA is allowing the borrower to completely ignore a mathematical reduction of FTEs during the covered period if: 1) it had ANY reduction of employment during the period noted above; and 2) it resolved that reduction as of a single point in time (6/30). Documentation requirements appear to require at least a single payment for pay period covering 6/30 and there is no indication how long individual must remain an employee. We remain skeptical that this will not somehow change or be update through future guidance, but this is what we have right now.
Let’s look at an example:
- Borrower has $250K in eligible expenses during the covered period
- Average weekly # of FTEs during reference period (Jan. 1 – Feb. 29, 2020) was 300
- Average weekly # of FTEs during covered period was 30 (representing a 90% reduction)
- On 2/15/20, borrower had 35 FTEs
- Between 2/15/20 and 4/26/20, there were 29 average FTEs
- Potential forgiveness amount is $25K (10% of $250K, given 90% FTE reduction)
- If borrower restores to 35 FTEs as of 6/30/20, then the forgiveness amount is $250K (and borrower can ignore the potential reduction of $225K)
Today we wanted to go over significant updates/clarifications to the forgiveness calculation that came out late on 5/15:
PPP Forgiveness Application: On May 15, new guidance regarding the calculation of forgiveness was issued in the form of a forgiveness application. Our firm has provided a detailed analysis of the document in this article. The introduction of this document is significant because it clarifies many questions with respect to how the calculation works. We suspect more guidance will come out but it is fair to assume this is the “bulk” of what we should expect to get. We highly recommend that you read the article summarizing the application, but here are some highlights:
- “Paid and incurred” clarified: This appears to be a big win for borrowers.
- For Payroll, ALL costs paid during the covered period will qualify. So if your loan was funded on May 1, and on May 2 you paid payroll relating to the pay period of April 15th to April 30th, that can be included. In addition, you can include payroll “incurred” at the end of your covered period even if it was paid outside of your covered period as long as it was paid within the next regularly scheduled pay run. This allows for more than 8 weeks of payroll to be included in the calculation. That said the $15,385 cap is still in place and the certification specifies that “owners” cannot get more than eight weeks of salary.
- For non-payroll costs, a similar result, any cost paid during the covered period will be included, and any cost incurred will also be included as long as it is paid by its “next regular due date.” This also opens the door for more than two months of rent, interest, etc. to be included.
- Introduction of “Alternative Payroll Covered Period”: The application allows for the borrower to elect to use an “alternative” covered period for payroll only. This eight-week period would align with you payroll cycle, starting on the first day of the borrowers normal payroll cycle subsequent to their PPP disbursement. This allows borrowers to cleanly align payroll during the covered period. While this makes sense, it seems that there is now a potential benefit to use a normal covered period given the updated “incurred” rules above, allowing for more than 8 weeks of payroll to be forgiven.
- “Expiration date” of forgiveness application: The application appears to include an “expiration date” of October 31st. We cannot be sure, but this seems to indicate that applications are due by no later than that date.
- FTEs Defined: FTEs are defined as 40 hours per week. There are two methods (Base Method and Simplified Method) to calculate an FTE. You can see both methods in the article linked above.
- FTE reductions: They have expanded exemptions for the FTE reduction calculation, allowing you to ignore employees who were fired for cause, resigned or requested a reduction in hours. Previously you could only ignore reductions for employees who had rejected your offer to return to work.
- FTE reduction “safe harbor”: This FTE reduction “cure” has been in place since the statute was written but has be a source of confusion. Some have thought it was a drafting error but the application clearly concludes it was not. So what does it mean? Even if the borrower reduces their head count during the covered period, they will be deemed to have restored it fully if:
- 1) the Borrower reduced its FTE employee levels in the period beginning Feb. 15, 2020, and ending April 26, 2020; and
- 2) the Borrower then restored its FTE employee levels by not later than June 30, 2020 to its FTE employee levels in the Borrower’s pay period that included Feb. 15, 2020
There is no question it is illogical, but it appears you can lower your headcount during the covered period as much as you want, as long as, on a single day, you have more FTEs than you did during your Feb. 15, 2020 payroll run.
- “75% rule” appears to be clarified: As we suspected, the 75% calculation does not appear to be binary (meaning if 75% of the loan is not spent on payroll there is no forgiveness). The application clarifies that non-payroll costs cannot exceed 25% of total forgivable costs. Therefore, you can spend as much or as little of the loan that you wish, however, the amount of non-payroll costs that are forgiven will not exceed 25% of total forgivable expenses (the remaining 75% constituting payroll costs). Example: If a borrower receives a $500k loan, and spends $250k on payroll costs, the max forgivable non-payroll costs are $83.3k ($250k/75% – $250k).
- Clarifications on how to calculate “wage reductions”: The application clarifies how the wage reduction calculation will work. It also clarifies that the wage reduction calculation will only be applied to employees who were employed during the covered period. See the article linked above for details. Importantly, the wage reduction calculation will exclude any employee who “during any pay period” made, on an annual basis, more than $100,000 per year. Presumably this would mean that if an employee received a bonus that put them over $1,923 during one week of salary, they would be excluded.
Today we wanted to discuss questions on forgiveness and a clarification on loan proceeds:
Can I Re-Apply for a loan if I returned it? This week, the SBA confirmed that a safe harbor exists for borrowers whose loan is less than $2M. The SBA will not question eligibility as all borrowers in this population will be deemed to have made the application in good faith. This was a significant development as many borrowers returned their loans because, while they believed they were eligible, they were uncomfortable with the amount of ambiguity relating to the “eligibility” standards in place and the threat of criminal action. Based on a discussion with a bank this week, we learned that borrowers could re-apply if they returned their original loan and wish to obtain a new one. We recommend discussing with your bank if this applies to you.
How do you treat furloughed employees with respect to loan forgiveness? We have been getting this question quite a bit over the last few weeks: Is a furloughed employee still an employee or considered laid off for purposes of the forgiveness calculation? Why does this matter? It matters because when you calculate forgiveness you start with determining a ratio of FTEs during the covered period to FTEs during a base period (see forgiveness calculation). If a furloughed employee is considered laid off, then they represent a reduction in FTEs which reduces overall forgiveness. If they are considered an employee, you need to consider whether they add to the FTE count (based on hours worked) and whether they also have a “salary reduction in excess of 25% of compensation” if they make less than $100,000 a year annually. The current guidance does not address this directly, but it is something we are monitoring closely because the forgiveness impact is different under each scenario. Regardless, we believe that if an employee is furloughed, and the Company is still covering benefits, then those benefits would be includable as a forgivable expense.
Partnerships can increase their PPP loans. On May 14, the SBA issued an Interim final rule that confirmed partnerships can increase their PPP loans if their initial loan amount did not include partner compensation. During the application process there was a lot of confusion regarding what constituted “payroll costs.” Partners in partnerships are technically not considered employees and many lenders excluded the income allocated to Partners from the payroll cost definition. This resulted in a significant decrease in their loan amount and also left partners out in the cold when it came to getting compensated from the PPP loan proceeds during the covered period. This clarification allows partnerships to go back to their lender and to request an increase in the loan amount, which is a welcome change for many especially since it appears that funds continue to remain available for borrowers.
In this update, we provide an analysis of one of the more meaningful FAQs that we have received in the last few weeks addressing eligibility:
Guidance on Eligibility. FAQ 46 was released yesterday (full text below) which provided additional guidance on eligibility, we have released and article on this FAQ as well given its importance. Shortly after that, FAQ 47 was released which extended the deadline for those who wish to return their PPP funds to May 18th.
So what are the highlights?
- Safe Harbor for loans below $2M: The big news is that the FAQ indicates that any borrower who received a loan that was less than $2M is“deemed to have made the required certification concerning the necessity of the loan request in good faith.” This means that there is effectively a safe harbor in place for loans under $2M and those borrowers should NOT expect to have their eligibility questioned.
- What about those who gave back proceeds? Many Company’s returned their PPP loans because they were concerned or frightened by what they were reading and hearing about eligibility. This new Safe Harbor begs the question: Can I (and if so Should I) re-apply for my PPP loan if I returned it? We recommend if you want to explore that, you should discuss with your bank. We don’t know if borrowers can re-apply but certainly this FAQ allows for borrowers to feel more comfortable with the process.
- Important clarity for companies above $2M of loans: The FAQ provides relief for loans above $2M as well by indicating that while these Borrowers may still be subject to scrutiny regarding eligibility, the recourse for being found ineligible will be repayment of the loan (the SBA will not refer the borrower for civil or criminal penalties). Of course, the DOJ could always institute criminal charges on its own initiative, but the SBA is saying they won’t refer the case if the loan is repaid within the safe harbor period. This allows borrowers to at least have the confidence that the penalty is economic (repayment of the loan) rather than punitive. That is a big win for borrowers whose officers/employees have been stressed about this decision while having limited or unclear guidance. Certainly criminal penalties can still be in play for those who did not act in good faith.
“If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request”
- Extension of repayment date: The SBA extended the date in which Borrowers can repay their PPP loan to May 18thif they have concluded that they are ineligible. The question now is, why would you? If the penalty for being ineligible is repayment in the future (and is not criminal), and the loan is not personally guaranteed, perhaps the only reason to repay it would be to not saddle the Company with debt.
- Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?
Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, 20 received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns. Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.
Some news with respect to the recently-proposed HEROES Act.
The HEROS Act. We now have new legislation that is in play, the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act. This was introduced by the House yesterday, you can find expanded text here. This is obviously a first draft of new legislation and it needs to go through the legislative process. Right now we believe this was a bill largely authored by Democrats in the House, thus it needs to get Republican support, go through the Senate and get congressional committee level support as well. So what does that mean? At a minimum, expect changes, and it is possible this never actually makes its way into law — e.g., some Republicans have announced that the bill is “dead on arrival”.
There is no way to cover everything from the bill in one update, but for now, let’s break down cover what is most impactful to the middle market:
- Massive costs: The Act is a $3 Trillion stimulus package, much larger than the CARES Act ($2.2T) which introduced the PPP to the business community.
- Proposed changes to the PPP: There are several changes suggested in Section 90004 of the Act, here are the most impactful to borrowers:
- Extends the 8-week covered period to 24 weeks.
- Eliminates the 75/25 rule on use of loan proceeds.
- Establishes a minimum maturity on PPP loans of 5 years (right now the loans have a 2 year maturity).
- Creates a safe harbor for borrowers who cannot rehire in the prescribed timeframe.
- Expands eligibility to all section 501(c) entities.
- Additional direct payments to individuals: This means a second round of economic impact payments of $1,200 per family member, up to $6,000 per household.
- Enhanced ERC and Payroll credits for first responders: The bill would provide an enhanced employee retention tax credit that encourages employers to keep employees on payroll. There is also a section that introduced tax credits for companies that employ “first responders”.
- Enhanced tax credits/deductions: Individual tax credits like the Child Tax Credit and Earned Income Credit would be enhanced. Also additional tax deductions would be introduced for “first responders”.
- More EIDL money: $10B would be set aside for the EIDL program to continue to fund businesses.
- Business interruption credit for the self-employed: The bill would provide a 90% refundable individual income tax credit for certain self-employed individuals who have experienced a significant loss of income.
- Restoration of the state tax deduction: Individuals have a cap on how much they can deduct on their personal tax returns for state taxes paid relating to income and real estate taxes — the so-called SALT limitation, which is $10k, that was introduced in the 2017 Tax Cuts and Jobs Act. This bill looks to restore individuals’ ability to take a “full” deduction for all state taxes paid on their returns.
- Extension of Unemployment Benefits: This would extend the federal unemployment benefit program to ensure the weekly $600 federal unemployment payments continue through January 2021. The CARES Act provided for 4 months of this benefit.
- Assisting in rent and mortgage payments: $175B would be set aside to assist renters and homeowners make monthly rent, mortgage and utility payments.
- Multi-Employer plans get support- Plans would receive financial assistance to keep them solvent for 30 years — with no cuts to the earned benefits of participants and beneficiaries.
Some news with respect to the Mainstreet Lending Program and other PPP news:
Mainstreet Lending Program Update. The Mainstreet Lending Program was first unveiled in April, and got a good deal of publicity as a potential source of liquidity for a wide variety of companies, especially those who could not get the PPP. The U.S. Chamber of Commerce put together probably the most clear and succinct description of the program, its requirements, limitations and eligibility. Similar to the PPP, this program will be administered through banks. For those who have asked, Yes you can have both the PPP and a loan from this program. The big question now is, when will it be available? There is no clear answer, we are monitoring closely and will certainly report when we get new information.
Tech Company sues to keep PPP funds. Eligibly has been a source of controversy for sure, navigating the Statue and subsequent Interim Final Rulings have been a daunting task. Zumasys is a software company that has filed a lawsuit to try to stop the SBA from enforcing eligibly requirements put in place as a result of the April 23rd Interim Final Ruling. We doubt this is going anywhere, but interesting none the less.
The first PPP fraud discovered. The Justice Department’s criminal division has announced the first arrests relating to PPP fraud, this article describes an elaborate scheme which took place in New England to divert PPP funds to fictitious companies.
In this update, some news with respect to the status of the PPP and some comments from the SBA’s Inspector General:
Demand for the PPP may be fading. There were a few articles that came out today (example CBS and Business Insider) indicating that the demand for PPP loans seem to be slowing, one article indicated that as much as 40% of the second tranche of funds remain available. This is likely the result of the recent surge of comments from various sources (Mnuchin, Treasury, etc.) which have led companies to question eligibility, but also an indicator that general demand is finally being met. For those who are still attempting to attain a loan, it appears there is still time.
Comments from the SBA Inspector General. The Office of Inspector General’s mission is to “provide independent, objective oversight to improve the integrity, accountability, and performance of the SBA.” This group authored an analysis of the PPP implementation process and also outlined some concerns regarding the forgiveness process and the term of the loans. There is a lot to unpack with respect to the document but here are some thoughts that were drawn from and important expert (below). We don’t yet know if this document will somehow influence changes in the program, given the nature of the covered period, there is very limited time to do so. It is possible that it will only be informational, we will see:
- Term of the loan: The CARES act allows for PPP loans to have a maturity of up to 10 years, however in practice a two year repayment term was established for all PPP loans. The Inspector General questions if a two year repayment term creates undue financial distress for borrowers. It will be interesting to see if term are extended.
- The “75% rule”: The Inspector indicates that a borrower “who do not use at least 75 percent of the loan for payroll may not be able to have all of their loan forgiven.” This is important because the language is a clear indication that the 75% threshold is not a “binary” calculation, meaning if you less than 75% of the proceeds on payroll NONE of your loan is forgiven. There has been a great deal of diversity/debate on how this language should be interpreted, this analysis aligns with our current thinking, which is that a borrower does not need to spend 75% of their loan proceeds on payroll, however, forgiveness on non-payroll costs will limited up to a maximum of 25% of forgivable expenses incurred/paid.
- Suggestion to change the 75% rule? The last sentence urges that it “may be important to consider” that many companies will have significant non-payroll costs in excess of the 25% threshold. This has certainly been a problem for industries such as retail and restaurants.
“In addition to the 75-percent payroll criteria, the maturity term established by the Administrator and the Secretary would require the borrowers to repay any amount not eligible for forgiveness within the remainder of the initial 2-year term. The Act, however, allowed for a maximum maturity of up to 10 years. SBA’s requirements could result in an unintended burden to the borrowers. For example, PPP borrowers who do not use at least 75 percent of the loan for payroll (therefore use more than 25 percent of their loan proceeds for nonpayroll expenses) may not be able to have all of their loan forgiven. It may be important to consider that many small businesses have more operational expenses than employee expenses. Our review of data from round one found that tens of thousands of borrowers would not meet the 75-percent payroll cost threshold and would therefore have to repay the amount of nonpayroll costs in excess of 25 percent in less than 2 years.”
Some news with respect to our upcoming webinar, opening offices, a new FAQ and EIDL loans:
Re-Opening Offices. While our daily updates have been centered around the PPP and other stimulus, I wanted to share an article written by our Chief Talent Officer which outlines thoughts regarding an approach for re-opening offices. It gives a glimpse into what the “new normal” might look like in the future and may provide some ideas to our clients as they start contemplating that move.
Use of EIDL Proceeds. We are starting to hear of clients receiving the EIDL loan (which they applied for long before the PPP). The question we are receiving is: Can we have both? How do they interplay?
Yes, you can have both the PPP and EIDL loan at the same time. Keep in mind that you cannot use both loans for the same purpose, meaning you cannot use the EIDL for payroll costs, then ask for forgiveness of payroll costs relating to your PPP loan. The EIDL allows for a much more broad set of expenses that are “allowable” than the PPP and has a repayment term that can be as long as 30 years at a competitive, fixed interest rate, it can serve as a nice source of liquidity if you are able to receive it.
FAQ 45. A new FAQ came out confirming if a Borrower returns their PPP loan, they will be eligible for the Employee Retention Credit. Nothing earth shattering here, but a welcomed clarification. As a reminder you ARE allowed to take advantage of the Payroll Tax Deferral if you received the PPP.
- Question: Is an employer that repays its PPP loan by the safe harbor deadline (May 14, 2020) eligible for the Employee Retention Credit?
Answer: Yes. An employer that applied for a PPP loan, received payment, and repays the loan by the safe harbor deadline (May 14, 2020) will be treated as though the employer had not received a covered loan under the PPP for purposes of the Employee Retention Credit.
Webinar on Forgiveness. On May 21st at 11am we will be hosting a webinar on how to calculate forgiveness. Feel free to RSVP if you are interested in joining. Based on recent FAQs we “suspect” new guidance will be out by Mid-May and thus we will have time to digest and discuss on the 21st. Given response rates from previous webinars, we recommend RSVPing as soon as you know you will be joining.
Also, here is a link to our PPP and the Enigma of Loan Forgiveness Update!
This update addresses rumors on changes to the PPP and FAQs complexities.
Possible changes to the PPP. An article written by the NY Times talks about possible changes to the PPP program. There has been an undercurrent of discussion around the length of the covered period and if it should be extended. We have not heard anything that leads us to believe that the notion of extending the covered period is getting serious traction, but the article clearly indicates that certain members of Congress are focusing in on some of the PPPs inherent shortcomings. If this develops, we will certainly let you know.
Inconsistencies on FAQs. As FAQs continue to come out, we are starting to see inconsistencies between old and new FAQs. As an example, FAQ 3 and FAQ 44 address eligibility. Importantly it addresses an interplay between the size standard and affiliation with foreign entities (Parents, Subs and Sibling affiliations). FAQ 44 appears to close the loop on how to deal with a foreign entity when it comes to the size standard (i.e., the 500 employee test), but FAQ 3 appears to open the door to the notion that you only look at U.S. employees when considering the size standard. Issues like this are creating confusion as Borrowers try to understand what the “final” set of rules actually are.
A possible place to look for guidance when this comes up is FAQ 17, which appears to indicate that Borrowers and lenders may rely on the laws, rules, and guidance available at the time of their relevant application if it was made prior to April 2nd. If it was made after that period and new guidance has come out that is contrary to a position you took, you should consider discussing with counsel.
Reminder of where to find updates on forgiveness calculation. On April 13th we authored an article which covered a host of questions that we need to have answered when it comes to flaws/ambiguities in the forgiveness calculation. Since that date there have been over 20 new FAQs, we have updated this article to address the FAQs and their impact, it is a single source of information for what remains unknown for those who are struggling with issues.
New FAQs that need to be considered on eligibility:
“Grace period” extended and SBA commits to new guidance on eligibility. FAQ 43 was released on May 5, indicating that the May 7th deadline for companies to return PPP funds without penalty if they have determined they are not eligible has been extended to May 14th. The big news is that the SBA committed to providing “additional guidance” on how it will review the certifications made in the application prior to May 14, 2020. This could mean that the SBA will further clarify (and possibly narrow) the scope of what they meant by the concept of “economic uncertainty.” This is something that Borrowers will need to closely consider.
Clarification on Foreign Affiliates. FAQ 44 was released last night and clarified that, for the 500 employee limit, the employees of foreign affiliates need to be included. This is important because many companies were under the impression that only U.S. employees were considered when it came to affiliation guidance. Thus, if a company had a foreign subsidiary, those employees will now need to be included for the purpose of the 500 FTE headcount limitation. Keep in mind, the 500 employee limit considers ALL employees as a full employee. So a part time employee is considered one person for the purpose of this calculation. This may require some companies to re-evaluate their eligibility.
“Grace period” extended and SBA commits to new guidance on eligibility. FAQ 31 has been a controversial communication from the SBA, casting doubt among PPP Borrowers with respect to eligibility, forcing them to re-evaluate if the loan was “meant for them” without any additional substantive guidance from the SBA. The New York Times wrote a great article outlining some of the many struggles companies are dealing with when it comes to obtaining the PPP and how to use the funds.
While many have viewed this FAQ as targeting pubic companies and companies “owned by large companies,” you should consult your counsel and advisors if you are unsure about your facts. Otherwise our recommendation remains the same, that you should document the facts as you knew them at the time of your application/loan agreement and memorialize them in board minutes if you keep them.
In the end, the FAQ is confusing to read, and some believe that this was the intent of the writers. They did not want to draw “clear and definable lines” when it comes to eligibility, but instead wanted to force borrowers to take a hard look at their application in the hopes of deterring “bad actors.” We will learn more about their intent when the time comes for forgiveness applications to be evaluated.
The debate on deductibility continues. Mnuchin was on record on May 5 re-affirming his view that he does not believe that the expenses paid with forgiven PPP funds are deductible. This is after at least one member of Congress indicated last week that they intend to ensure that businesses do in fact get the deduction. We will continue to monitor this as it has significant consequences from a tax perspective.
Some news with respect to PPP stats, a new FAQ and an update regarding deductibility of expenses funded by PPP proceeds:
- New FAQ on rehiring employees. There is a new FAQ #40 that addresses rehiring employees. The FAQ indicates that a new Interim Final Rule will be issued to address laid-off employees; if an employee was laid off and the borrower makes a good faith effort to rehire them, but the employee refuses to return, the Borrower will not need to consider that employee when completing the loan forgiveness calculation. This means employers can ignore that employee for the purpose of calculating reductions of FTEs and salary reductions during the covered period. This is significant because until now, most thought that the borrower would need to hire someone else to “replace” the headcount. However, note that amounts not spent with regard to the laid-off employees will need to be repaid unless the money is appropriately spent on other forgivable expenses. Also note that the FAQ addresses laid-off employees, and it is not clear whether the interim final rule will also apply to furloughed employees.
- Controversy regarding deductibility of PPP expenses. Last week it was widely reported that the IRS issued clarification that expenses incurred which were funded by PPP loan proceeds were not deductible. To us, this made sense, if the forgiveness of the loan was not includable in income, then the related deduction should also not be includable as an expense. At least one member of Congress has indicated that they are trying to fix this legislatively. It would be significant if the expenses were deductible because it would lead to a double tax benefit — excludible income and deductible expenses that were paid for by the government. Stay tuned.
- New stats on second round of PPP funding. PPP loans continue to fund at a rapid pace, as of 5/1 $175B of $300B have been allocated to new borrowers. The SBA has released new statistics from 4/27 to 5/1 on what loans have been funded. Clearly the goal of getting more money to small businesses have been achieved when comparing to prior statistics. Here are some observations:
- Average loan size of the second tranche of funds is $79k vs $206k in the first tranche.
- California again is the leading recipient of funds with $33B
- 70% of loans issued were for less than $50k while only 1% were for loan amounts above $1M
- Three banks issued 9.8% of all approved loans.
New Info on PPP as of May 1:
Data from the public markets. There is not a lot of data available in the private markets on who received loans, and which banks processed them. Based on the fact that public companies are required to disclose these debt facilities, we are able to get a bit more granular as to what industries received funds, and which banks handled the most volume. This link provides some interesting insights into how the process went. To be clear, we have no judgment as to whether or not public companies were eligible for the funds (obviously a topic of public debate recently) but we wanted to share the data points for those who are interested.
Confirmation on taxability of deductions. The IRS provided formal guidance on April 30 which confirms our suspicion, expenses that were funded with PPP proceeds will not be deductible, and the forgiveness of the PPP loan is not includable in income. In theory this should mean that the loan is a “push” from a tax perspective. That said, if employees whose salaries were funded with PPP money were still productive, that could result in your Company having taxable revenue and limited costs of revenue during the period, thus more taxable income than you would normally have. This is likely not a meaningful concern now, but something for companies to consider in connection with estimated tax payments.
For those who didn’t get the PPP – Reminder on Employee Retention Tax Credit. The Employee Retention Tax Credit (ERTC) is available to those who did not receive PPP loans. The IRS has issued a set of FAQs that provides some fairly clear guidance on who is eligible and how one can benefit from the credit.
The ERTC generally is available to employers who had either fully or partially suspended operations during any calendar quarter in 2020 due to COVID or experienced a significant decline in gross receipts during any calendar quarter. A significant decline is defined as gross receipts in 2020 being less than 50% of the company’s gross receipts for the same calendar quarter in 2019.
The credit equals 50% of the qualified wages (including qualified health plan expenses) that an Eligible Employer pays in a calendar quarter. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for qualified wages paid to any employee is $5,000.
For some companies this can work out to a fruitful cash flow benefit. We recommend you speak to us or your payroll provider to learn more. This also raises an interesting issue for businesses that obtained a PPP loan but ended up returning it for one reason or another. Technically, the fact that a PPP loan was obtained prevents them from claiming the ERTC, but certainly there is an equitable argument to be made that no PPP loan was obtained.
New Act passed: On April 24, the President signed into law what is effectively a replenishment of the PPP. The Act also provides financial support to certain healthcare institutions and specifically earmarks $60B of PPP funds for smaller regional banks in an effort to try to ensure that small businesses get “preferred access” to forgivable loans. Banks were permitted to start sending applications to the SBA on that day. The original funds lasted only 13 days, we expect these funds will be available for considerably less time as, unlike the original loan process, there are a slew of applications already “in the pipeline” and ready to go.
On April 27, the PPP funds began flowing again, we have heard of many clients getting approvals and an equal number of clients are waiting as banks deal with delays and crashes due to volume of applications. Today we wanted to share some news with respect to more comments from Steve Mnuchin as well as some thoughts on accounting and tax issues:
PPP audits are coming. Steve Mnuchin made headlines on April 28 when he declared that ALL companies who received over $2M of PPP funds will be audited. Mnuchin has been outspoken over the last week in the warnings he has issued regarding eligibility. Today in his latest statement to the middle market, he re-affirms the need for Companies to prepare solid documentation around both the use of funds and the companies evaluation, at the time of application, that “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant”. Critics have quipped that Mnuchin is continuing to try to “move the goalposts” when it comes to the PPP through his statements, and may be creating more confusion than clarity. In previously-analyzed FAQs regarding eligibility, companies have until May 7th to return PPP funds without penalty if they have determined they are not eligible.
Mnuchin went on to say “This was a program designed for small businesses. It was not a program that was designed for public companies that had liquidity.” The reality is that the CARES Act, as it was written, certainly did not bake-in any of the parameters in that Mnuchin is asserting into the law, enhancing a concern that the rules are being changed in real time.
Further guidance on the threat of “audits” that made headlines on April 28. As noted in the April 29 update, above, Mnuchin made it clear that all loans over $2M would be “audited.” The new FAQ appears to clarify the current thinking. What remains unclear is how they intend to evaluate a certification that was written so broadly that it allowed almost any company to consider themselves eligible.
- Question: Will SBA review individual PPP loan files?
Answer: Yes. In FAQ #31, SBA reminded all borrowers of an important certification required to obtain a PPP loan. To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming.
Four nuggets here:
- In the FAQ they use the word “review” rather than audit, which may signal a less invasive analysis.
- It is clear that this review will occur after the borrower submits an application for forgiveness and before the lender approves the request. It remains unclear “who” will be doing this review (Lender, SBA, or third party).
- The review appears to be focused on the “need” of the borrower at the time of certification.
- There is a promise of additional guidance.
Accounting for the PPP. We have received a lot of questions around the accounting for the loan proceeds. How to book the loan is fairly straightforward (debt) but what about the forgiveness? Our current point of view is that this should be viewed as a Gain Contingency (ASC-450 for the accounting fans out there). The idea would be that the loan remains on the books (in full) until such time that the bank has formally confirmed what portion (if any) of the loan is forgiven. The portion that is forgiven will be included as “other income” after operating expenses in the income statement. Interest on the full balance of the loan should accrue from the point in time the loan is received, and any forgivable portion would follow the same accounting treatment. Expenses associated with the PPP would be recognized no differently than any other expenses in the ordinary course.
What about taxes? It is clear that the forgiven portion of the loan will not be taxable based on the language of section 1106(j) of the CARES Act. With respect to the expenses relating to this tax-free income, the prevailing view is that these expenses would not be deductible (under IRC section 265), which addresses expenses relating to tax-exempt income. In relevant part, that section states that “No deduction shall be allowed for any amount otherwise allowable as a deduction which is allocable to one or more classes of income other than interest wholly exempt from the taxes imposed by this subtitle.”
New FAQ from the SBA regarding PPP eligibility: The SBA issued a new FAQ on April 23 which has a clear connection to Steve Mnuchin’s comments in a press conference on April 22. The FAQ addresses eligibility. This has been a hot topic as the media has started to report on large, prominent companies who received PPP funds while some smaller companies have struggled to participate. Mnuchin made it clear that the Fed and SBA were going to put parameters around eligibility ahead of the next tranche of PPP funds being issued since the statute was so broad. Below is the output of that statement. Candidly it might result in many more questions than answers. Our analysis follows.
- Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.11
- What did they mean when they used the term “businesses owned by large companies?” The question is odd, because it seems much of the answer invests in calling out public companies. However public companies are generally not “owned by large companies”. Is it possible the writers of this FAQ trying to pull Private Equity or Venture Capital backed companies into the fold when addressing eligibility? Perhaps the writers are trying to separate a “business activity” from the “large company” that runs it? Maybe they were targeting subsidiaries of large enterprises as ineligible? Was this just a poorly worded question (hard to believe that is possible given the scrutiny they knew this would receive)? We simply don’t know but one could conclude that they just wanted to make sure the term “large company” found its way into the lexicon of this discussion.
- “Ability to access other sources of liquidly”: What a broad term. How should we interpret having the ability to access other sources of liquidity? Does that mean if an applicant has an untapped line of credit, they are not eligible? Perhaps a well-capitalized Parent/Majority Shareholder could make a company ineligible? Is having the “ability” to ask VC or PE investors for liquidity a consideration? Is this only a consideration for “large” company’s (still undefined) or do all companies need to consider this? Was this really just meant to target public companies that can access the public market?
- What does “significantly detrimental to the business” mean? How does one define if the sources of funds are or are not “significantly detrimental.” That would seem impossible to measure, thus, remains purely the “opinion” of the person who must answer the question. As an example, if a PE backed company has the ability to ask their investors for capital, but the capital is unattractive (for a variety of reasons) would that be “significantly detrimental” to the business? If a company can access a line of credit, but the interest rate is 10%, is that significantly detrimental? If accessing capital would result in bank covenants being in peril, would that be detrimental enough to meet this standard?
- Why are public companies called out here? The question starts by talking about businesses that are owned by large companies. The answer diverts into the public market. This was clearly a focus of Mnuchin, however the example seems to lack an eloquent connection to the question.
- What is substantial market value? When pubic companies were pulled into the discussion, the writers of the FAQ describe them as companies that have substantial market value, but do not define what that means. It would appear one could conclude that a “small” public registrant “could” apply. Is it possible that raising capital from the public markets could be access that is significantly detrimental if it dilutes existing shareholders? We think the answer here would be no, because the focus is on the company itself, not the welfare of its shareholders. But one could certainly debate that point.
Conclusion: At the end of the day, the SBA drafted this to “cast a wide net” when it comes to who could be pulled into the spectrum of being ineligible. These terms are likely intentionally undefined to allow for the SBA to debate the facts with a loan recipient if they desire. Companies should carefully read this, come to their own conclusions and document them if the time comes that the SBA asks. This “feels” like a message to the public markets, but it could be interpreted in many ways.
Clarification on Maximum Loan Proceeds
On April 30, the SBA and Treasury released the 6th Interim Final Rule (yes they are up to 6) indicating that there is a maximum loan amount of $20M for any businesses that are part of a “single corporate group,” which it defined to include entities that are “majority owned” by a “common parent”. This is likely in response to the fact that certain companies had each of their subsidiaries apply for loans at the subsidiary level, multiplying the number of loans (for each subsidiary). This clarifies that the applicant needs to inform the SBA of the fact that they received excess proceeds or is required to rescind their application, however it falls short of saying the applicant needs to return the funds. Also this appears to apply only to applicants that have not yet received disbursements as of 4/30/20.
Who should be paying attention to this? FAQ uses the term “corporate group” and “common parent”. This begs the question: Do portfolio companies of VCs and PEs fall into this group? There is no clear definition of the terms used. This “feels” like it was meant for subsidiaries that are managed by a corporate parent (i.e., hotel chains, restaurant chains, etc.) but there is no clear definition provided of the terms used. This follows the pattern of ambiguity we have seen over the last few days, attempting to cast doubt amongst the public and force applicants continuously to evaluate eligibility.
Excerpt of the actual guidance:
Question: Can a single corporate group receive unlimited PPP loans?
No. To preserve the limited resources available to the PPP program, and in light of the previous lapse of PPP appropriations and the high demand for PPP loans, businesses that are part of a single corporate group shall in no event receive more than $20,000,000 of PPP loans in the aggregate.
It is the responsibility of an applicant for a PPP loan to notify the lender if the applicant has applied for or received PPP loans in excess of the amount permitted by this interim final rule and withdraw or request cancellation of any pending PPP loan application or approved PPP loan not in compliance with the limitation set forth in this rule. Failure by the applicant to do so will be regarded as a use of PPP funds for unauthorized purposes, and the loan will not be eligible for forgiveness.
For purposes of this limit, businesses are part of a single corporate group if they are majority owned, directly or indirectly, by a common parent. This limitation shall be immediately effective with respect to any loan that has not yet been fully disbursed as of April 30, 2020.
It is the responsibility of an applicant for a PPP loan to notify the lender if the applicant has applied for or received PPP loans in excess of the amount permitted by this interim final rule and withdraw or request cancellation of any pending PPP loan application or approved PPP loan not in compliance with the limitation set forth in this rule.
Main Street Lending Program
There was an update with respect to the main street lending program on April 28, and below we address some client questions and analyze a new FAQ
Whatever happened to the Main Street Lending Program? A few weeks ago the Fed unveiled its “Main Street Lending Program” which was meant to offer sources of low cost debt and liquidity to “larger” companies, especially those who could not qualify for the PPP. It was thought that the program would be available by now, however it turns out that the Fed is continuing to work with banks to solicit feedback on how to craft the program to make it most effective. For now, stay tuned, as there is no clear date that it will be available to the middle market.
“Payments made and costs incurred” during the covered period. We continue to get a lot of questions about what “counts” toward forgiveness during the eight week covered period.
For example: If my covered period starts on 4/28, and I paid payroll which was earned from 4/8 to 4/25 on 4/29, is that includable as payroll in the covered period? Alternatively, if my covered period ends on 6/28 and I incur payroll from 6/12 to 6/27 and pay it on 6/29 is that excluded from the calculation?
The statute indicates that “payments made and costs incurred” during the covered period are subject to forgiveness. We need to get further clarification from the SBA on what exactly Congress meant by this. Some are interpreting this as an “and” scenario, thus an expense must be incurred AND paid. Some view it as an “or” scenario, thus an expense can be either incurred OR paid to be included. We simply do not yet know for sure what the true intent of this language was.
That said, our current view is that companies should continue to make payments “in the ordinary course”, and not make payments that they would not have ordinarily made during the eight-week period. At the same time, we “think” the intent of the language is to give companies credit for ordinary expenses incurred. Meaning, you will get credit for 8 weeks of payroll paid, you would not however get credit for jamming 10 weeks into the calculation as a result of changing your normal payroll practices. If timing of normal (ordinary course) payments of payroll does not align with your 8-week period, as in the example above, then we expect that the SBA would allow for a calculation resulting in a reasonable outcome. This is nothing more than our expectation at this point, but it seems in line with the spirit of the CARES Act. When we get further guidance we will share it.
New FAQ on eligibility. On April 28, the SBA issued FAQ number 37. The question and answer were both very basic, but likely will sow even more confusion among applicants:
- Question: Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: See response to FAQ #31.14
FAQ 31 was a reference to the recent (and somewhat controversial) FAQ asking if companies owned by “large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?” This FAQ is interesting, because FAQ 31 didn’t specifically include or exclude private companies from its question, so it is unclear why the SBA decided that it needed to take this step and offer even further clarification. Also this FAQ does not seem to answer its own question, it just refers to another question’s answer … which doesn’t really address the question either — very strange. One could surmise that the SBA may be trying to narrow in on a point of view regarding PE/VC investors, but even that doesn’t make a lot of sense given the fact that in the 3rd Interim Final Ruling (IFR) an FAQ specifically states that portfolio companies of PE funds are in fact eligible as long as they meet the affiliation guidance. Your guess on all of this is as good as ours.
In the end, FAQs like this don’t really do much to create clarity, and certainly raise concerns from the middle market who are seeking to act in good faith. Our recommendation ultimately remains the same — document your position and the circumstances that existed at the time you applied for the loan, if you are unsure, certainly consider consulting counsel. We also recommend documenting the uncertainties that existed within your board minutes (if you keep them) so it is clear as to what the facts were, and what was known or knowable at the time you applied.
Hedge Funds and PPP Loans
Hedge funds and PE firms are confirmed as ineligible: A new FAQ from the weekend of April 25 foreclosed on the possibility that hedge funds or PE firms could take advantage of the PPP. The door is still open however for their portfolio of investments. FAQ below…
- Is a hedge fund or private equity firm eligible for a PPP loan?
No. Hedge funds and private equity firms are primarily engaged in investment or speculation, and such businesses are therefore ineligible to receive a PPP loan. The Administrator, in consultation with the Secretary, does not believe that Congress intended for these types of businesses, which are generally ineligible for section 7(a) loans under existing SBA regulations, to obtain PPP financing.
Update as of April 20:
After the PPP funds were all spoken for, the business community is currently split between groups: Those who are now working through how to spend their PPP funds (and obtain forgiveness) and those who were not fortunate enough to get funds in the “first round” of this program, waiting for relief. Here are a few reminders with respect to forgiveness and some thoughts on how to “stand ready” to participate again.
- Where did the money go: The SBA has released data showing where the $349B of funds were ultimately allocated. There is a lot to unpack here but some interesting conclusions to draw are the following:
- Average loan size: $206k
- Average loans processed per lender over the two-week period: 333
- Most loans approved: Texas
- Most dollars approved: California
- 74% of loans were under $150k
- 21% of loans were between $150k and $1M
- Construction received the most loan proceeds in terms of dollars
- Professional, “scientific” and “technical” services had the most approved loans.
- How to calculate Max Loan amounts: The SBA released clarification on how to calculate maximum loan amounts by business type on April 24, 2020. This Q&A clarified the calculations for self-employed, sole-proprietors, partners in partnerships, nonprofit organizations and religious institutions. The timing of this seems somewhat strange given how far we are into the process. Perhaps this will be a mechanism for banks to slow down the pace of loan processing over the next few days as they re-evaluate existing applications. If that is not the case, then I think the middle market would have much appreciated the SBAs time and attention being focused on clarifying out to calculate forgiveness.
- Make sure you applications are ready: If/when new funds are available, we expect the first tranche of recipients will be those whose applications are already submitted to the bank and have had all additional requests for information resolved. Given that the banks now have some experience with the process, we would suspect it will move along a lot faster, that is good for those who are prepared, and not good for those who hesitate. Contact your lender today to ensure your application is ready and complete and fully uploaded into their system. We suspect lenders will simply “hit send” and send those to the SBA when funds are replenished.
- Forgiveness calculations and calculators: As a reminder, Withum has published several articles on both how to calculate forgiveness as well as pointing out currently unexplained flaws in the calculation.
Editor’s Note: The following items refer to the PPP loan program, for which the funds have been spoken for as of April 17 (see How much money is left in the pot? below). The other items have been kept in case more funds are released for the PPP program.
- What do I need to have ready for my PPP (Forgivable Loan) application: As the ink dries on the Act, the questions that we are fielding are around what needs to be prepared for the PPP application. Guidelines from the SBA were issued on April 2; a summary is below.
- PPP loan application and timing of processing (banks may not be ready): Reminder, the SBA is supposed to be “able to” accept applications starting on April 3 but many banks have said that they have been given little to no guidance on how this program should be administered, many banks do not have “their” application ready, the one that was on the SBA website may not be the final one you actually submit. Normal SBA rules require banks to perform very precise underwriting, eligibility, and validation activities in order to complete an SBA loan. Our current situation is unprecedented and we have heard overtures that many banks may delay processing until they are able to get clear guidance on how to proceed. Please be in touch with your bank as they are the institution that is processing the loans to get updates. Also don’t panic if your bank is not ready to submit on April 3, that may be the case for many. See comments below regarding availability of funds and what we are seeing in the news.
- Solvency may be a factor: In anecdotal conversations with industry colleagues and banks, they have indicated that while the initial streamlined PPP loan application is extremely high level (requesting virtually no financial information), when the banks and/or the SBA actually evaluates the loans, the company solvency may factor into their determination of “need.” So if you are a company that has recently raised a large sum of money via a VC round of financing, that could impact your application as you may be viewed as having the capacity to operate without the loan. This is simply industry chatter, we have no basis for confirming or validating this, but wanted to share. Feel free to talk to your bank to see if you can get further insights.
- Common questions on the PPP loan calculation: Now that the application is out, the race to complete your loan application has clearly been on. Over the last 48 hours we have received an enormous number of questions on how the loan calculation is prepared. The reality is that the legislation was written in an extraordinarily short period of time (basically a week) so certainly the Bill is not going to address the myriad of different situations that the complex financial system of the middle market has to offer. Our firm has positions on each of these questions, and is ready to assist if you need help. Here are some of the common questions that have been presented to us:
- How do you calculate annual salary for employees who started or ended mid-year?
- Do the employees in a foreign subsidiary “count” as part of our 500 employee count?
- How do we treat subcontractors who receive a 1099? Are they part of the calculation?
- Are health insurance, state taxes, 401k match and other benefits added over and above the $100,000 cap?
- What happens if I terminate someone during the period in which I have the PPP loan?
- What happens if I am unable to rehire someone who was previously laid off? Do I get penalized for not hiring everyone back?
- I have a PEO, is there a difference in the calculation under that circumstance?
- What happens if one of my 20%+ shareholders is a foreign entity?
- If I am a partnership and receive income through distributions, can that count toward salary?
- How do I deal with an employee that received a Bonus in a given month when determining average compensation?
- Rumors with respect to availability of funds: There are a lot of rumors going around regarding availability of funds. Some have said that the funds will be “first come first served” and could run out by the end of the day on April 3. That has created a tremendous amount of anxiety. The truth is, there is no answer right now as to how much each company will receive, and how the banks and SBA will doll out funds. One thing we can look at is what Steven Mnuchin said on CBNC om April 1 about timing and availability. There are no promises, that is for sure, but it appears that the White House is willing to attempt to push more funds into the PPP if the demand is there. We will lean more in the coming weeks for sure.
STEVEN MNUCHIN: Well, again, let me say, the most important issue is execution on what we have. We have a lot of money. We need to get that into hard-working American’s hands. We also have facilities that we’re working closely with the fed that will inject a lot of money into the economy quickly. As I said, we need to get these things going in the next few weeks. Having money that’s sitting around and distributing in months does no good to hard-working Americans. One of the things I’ve heard is, you know, the small business program will be so popular we’ll run out of our 350 billion. If that’s the case, that will be the top of the list for me to go back to Congress on. It has huge bipartisan support and want to protect small business. But we’re also coming out with a Main Street Lending Program with the Fed that will help mid-sized businesses, we’ll be looking at programs for state and local governments. We’ve already had programs for large companies, for money markets to support money markets. So, I can assure you, Jay Powell and I are working around-the-clock at providing liquidity into the economy.
- How much money is left in the pot? All signs are indicating that new funds will flow to the PPP the week of April 20, and it appears that members of congress have been told to be ready to come to DC for a vote as early as Wednesday, April 22. Current information being circulated in news outlets indicate as much as another $310B will be allocated to replenish the program.
- Payroll Credit and Deferral in conjunction with the PPP: As a reminder there are both payroll credits and payroll deferrals that were enacted as part of the CARES Act. We have written about them in previous emails. One question we have received is: If I get a PPP loan, can I also apply for the Payroll Credit or the Payroll Deferral? Our current view is no. The IRS made it clear that you cannot benefit from these credits/deferrals if you are already benefiting from the PPP. There is ambiguity as to when exactly you would “stop” taking a payroll credit if you are applying for (but have not yet received) the PPP. Currently our view is, once you know you are receiving the PPP loan, you must stop taking the payroll credit and repay whatever payroll credits you received. This is an area of the Bill, like many others, that has not fully be resolved. See the FAQs below, released on April 12.
- Loan forgiveness and calculation: On April 10, we authored its first analysis of the “mechanics” of the PPPs forgiveness calculation. The article was a good primer to get started. However, as companies start to dig into how to best position themselves for achieving maximum loan forgiveness, they are becoming aware of some of the complexities the calculation has to offer. As the next step, our firm has authored a deep dive analysis of some of the ambiguities and uncertainties that we have noted in the calculation. We expect more guidance to come and will certainly report them quickly, but getting into the details and relating it to your company should be a high priority for those who received approval for a loan and is now on the “clock” (8 week covered period).
- Be wary of forgiveness calculators! Over the last few days we have started to see calculators circulating around which have been put out by a variety of different companies. Some are better than others, but we want to remind our clients that there are still many unanswered questions with respect to how forgiveness is calculated. We have not seen a calculator that we believe addresses all of the nuances of the calculation, and we know they cannot address some of the current holes in the formulas. Using a calculator that someone provided as a guide is fine, but don’t rely solely on it. Stay in touch with your service team, we will be assisting our clients with this once we receive clarity from the SBA on open questions.
- Question on forgiveness: We continue to get questions from clients on forgiveness and remain in search for answers ourselves. One question we received that I thought prudent to share is about what constitutes “Payroll Costs” with respect to the 100k cap. When paying employees, if you are seeking to maximize forgiveness, keep in mind that any amounts paid to an employee (on an employee by employee basis) that is in excess of $100k (annually) would not qualify as a payment that is subject to forgiveness. The definition of Payroll Costs expressly excludes amounts in excess of $100k of salary. That definition was established while companies were calculating their maximum loan amount, and was not changed for the purpose of considering what is forgivable. It is important to consider this as you think about your 8 week period, who you are paying and how much.
- Can I apply for and receive both loans? One of the big questions we have been dealing with is: can I get both loans? Or: If I get one, can I not get the other? We found an article with a quote from Congressman Graves that may provide clarity as to how Congress was thinking about this issue. Graves seems to indicate that a provision in the legislation being passed would make those who receive a current EIDL loan ineligible for a possible forgiveness under the PPP loan program. Implying you CAN get both but it would change the effectiveness of the PPP loan. Graves was apparently quoted as saying “What it says is that you can get both loans. But that you can only be forgiven for this new 7a loan. And if you, for example, get a disaster loan tomorrow, and then use it to pay payroll and mortgage and healthcare and utilities, only to come back in a month and apply for the new loan, you can’t get forgiven for those costs you’ve already covered under your disaster loan,” . This indicates that using funds under the EIDL loan product, may make reduce the amount of funds that are forgivable under the PPP loan. So basically using both loans for the same disaster will reduce the forgivable benefit. Keep in mind, this is a quote we pulled from an article, it does not mean that this is written in stone but it is supportive of our current view.
- Can I have both the EIDL and PPP loans? The general consensus is yes; however, if you have both, you cannot “double dip,” meaning if you use EIDL funds and the PPP funds to pay the same payroll costs. The interim guidance seems to indicate if you received an EIDL loan between Jan. 1, 2020 and April 3, 2020, and you received a PPP loan, then the EIDL loan must be refinanced into the PPP loan. This can create complexity when it comes to loan forgiveness, but additional guidance is expected with regard to the forgiveness calculation. There may be some issues obtaining a PPP loan if you obtain an EIDL after April 3, 2020, but this is not entirely clear. Consult your adviser on these issues.
- How do I apply for the “forgivable loan?” The Payroll Protection Program has not been put into law yet, but Secretary Mnuchin stated that these loans will be administered through the banks, and that he hopes banks will be able to qualify and disperse funds in the same day by next week. Will that happen, we cannot say for sure but we encourage you to reach out to your bank over the next few days to get information, we suspect the banks will see tremendous demand and it may pay to move quickly.
- Timing of loans: Based on discussions we have had with a few SBA lenders, it looks like disbursements under this program are going to take some time. Based on anecdotal conversations, it could be several weeks, perhaps into May before funds are disbursed under the PPP. If you need funding now, the EIDL (non-forgivable) may be a faster source as they are accepting applications online, they have been streamlined and only take between 20 min and an hour to complete based on discussions with clients.
- Wells Fargo and BOA are back in the PPP Game: The Fed announced on April 8 that it will lift Wells Fargo’s $10B cap so it can assist clients in applying for the PPP loan program. Wells had previously been limited by the Fed as a response to its fake account scandal. This will help open doors for many companies to participate rather than leave them scrambling to find an alternative bank. BOA announced today that it is opening its application process up to all clients (previously limiting it to those who had certain debt facilities.
- Am I still in line for the PPP? Many of our clients have not received PPP funds who submitted applications through their bank. The question we are getting is: Are we still in line if more funds become available? We cannot say for sure, but we have been recommending that companies remain intentional about ensuring that their application is complete, and all of the possible documents their bank “may” need or request have been provided. We think it is possible that there is a remaining queue of applications in the system, and if the program is replenished with more funds, that those applications that are complete will be first to be processed (as they continue with their first come first served philosophy).
- What is the story with the “aggregation rules” I have heard about? Eligibility for both types of loans is a highly fact-specific determination. In many cases, portfolio companies of private equity and venture capital funds (even if small in size or revenues) may not be eligible for these loans because of the SBAs aggregation rules. The aggregation rules in the SBAs “small business” size test may require a portfolio company’s size to be considered together with all other portfolio companies of its major investors (including, for private equity and venture capital funds, portfolio companies of earlier or later funds with common management). Currently, the Bill as drafted, in the case of loans under the Paycheck Protection Program, the aggregation rules are specifically waived for businesses in the accommodation and food services sector, franchises, and any business that receives financial assistance from a Small Business Investment Company. Withum will continue to monitor for more information we think it is possible that this may be waived for clients with complex capitalization tables as well, but at this point we do not know.
- Payroll credit process: For those of you who are not getting the PPP, remember there is a payroll credit (this is different from the payroll deferral). What we came to learn is, to obtain the credit, you need to work with your payroll company and fill out IRS form 7200. The oddity is, even if you are using a PEO, you need to complete this form (despite not technically having employees or otherwise filling out standard employment tax forms like a 941). The form asks that you identify your PEO in the process, presumably to cross reference to their reporting. Very few companies have taken advantage of this credit because they are pursuing the PPP (and you cannot have both). But this may become more prominent in the future when PPP funds are “fully spoken for.”
- A new wrinkle in the PPP: Now that business are being funded, a new complexity of the PPP is arising. The CARES Act included a provision which increased state unemployment benefits by $600 per week, per person, regardless of that person’s salary. Those benefits are available for the next four months. Thus, even ignoring the pre-existing state unemployment benefit a person who is not employed can receive, one can expect at least $2,400 a month of unemployment benefits as a result of the legislation. But what happens if an employer successfully obtains a PPP loan, and needs to rehire employees who are making (as an example) $9 an hour in order to obtain loan forgiveness? The Employer may be faced with the unsavory choice of forcing the employee off of unemployment to come back to work and take a significant pay cut ($9 x 40 hours a week = $360). This has left employers in an unexpectedly awkward position, especially if their business is closed and the employee has no choice but to sit home regardless of being on or off unemployment.
- Mainstreet Lending Program: With the PPP now fully subscribed, companies are looking for alternative sources of support. As we previously noted, the Mainstreet Lending Program was unveiled last week, the “comment period” ended today, which means that this program will inch closer to being available. This stimulus is designed to help companies that have less than 10,000 employees and 2.5 Billion of revenue. The loans under this program will have a minimum loan size of 1 Million (up to 25 Million) and a 4 year repayment term with all principal and interest payments deferred for the first year. The loans are not forgivable and will have a very attractive interest rate (2.5% to 4%). The loan size is based on a formula (4 X EBITDA) with adjustments for pre-existing debt instruments. If you factor in the minimum loan requirement ($1M), a company needs to have at least $250k of EBITDA to qualify.
- Where do I get more info? Withum will be updating its website regularly with provisions of the legislation, and additional information on these loans as it becomes available. See, Withum’s COVID-19 Resource Center.
FAQs: Deferral of Employment Tax Deposits and Payments
New FAQs that came out on April 12 from the IRS that may impact a vast majority of companies with respect to payroll tax deferral.
As a reminder, the CARES Act allows for an Employer payroll deferral — Employers and self-employed individuals can defer payment of the employer’s share (6.2%) of the Social Security payroll tax, but the deferred amount must be repaid in equal installments by Dec. 31, 2021 and Dec. 31, 2022.
If I get the PPP loan, can I also qualify for payroll deferral?
Up until recently, the prevailing thought was no. However this answer creates a bit of an unintended consequence, the PPP loan funds salary (which includes employee payroll taxes) but how do businesses that have cash flow constraints fund the employer portion of payroll taxes? Below is an excerpt from the April 12 IRS FAQs from the IRS yesterday which clarifies and also creates a great opportunity for clients to improve cash flow. We recommend that you reach out to your payroll provider prior to running your mid-month April payroll.
The FAQ implies that you can defer payroll taxes from now until such time that the PPP loan is “forgiven.” Forgiveness will be granted generally within 60 days of the end of the “covered period” which is the eight week period after an applicant receives a PPP loan, thus creating an opportunity to defer employer payroll taxes for up to a 16 week period.
From IRS FAQ (Question 4):
Can an employer that has applied for and received a PPP loan that is not yet forgiven defer deposit and payment of the employer’s share of social security tax without incurring failure to deposit and failure to pay penalties?
Yes. Employers who have received a PPP loan, but whose loan has not yet been forgiven, may defer deposit and payment of the employer’s share of social security tax that otherwise would be required to be made beginning on March 27, 2020, through the date the lender issues a decision to forgive the loan in accordance with paragraph (g) of section 1106 of the CARES Act, without incurring failure to deposit and failure to pay penalties. Once an employer receives a decision from its lender that its PPP loan is forgiven, the employer is no longer eligible to defer deposit and payment of the employer’s share of social security tax due after that date. However, the amount of the deposit and payment of the employer’s share of social security tax that was deferred through the date that the PPP loan is forgiven continues to be deferred and will be due on the “applicable dates,” as described in FAQs 7 and 8.
We strongly recommend you read the rest of the IRS FAQs linked above and speak to Withum or your financial adviser for interpretive guidance.
Guidelines from SBA
On April 2, the SBA produced guidance for the first time since the CARES Act passed. The guidance clarifies some significant questions we have all been grappling with, but many questions remain unanswered. Based on this document and the analysis below, we recommend you review and revise your loan calculations ASAP and communicate consistently with your bank regarding when they will accept applications.
Here are some highlights with respect to what we are seeing:
- The guidance defines the payroll period to be the “last 12 months”, which we view as a rolling 12 month average. The guidance did however obligate lenders to collect data from 1/1/19 to 12/31/19 to “confirm” payroll. Review and revise your Average Payroll Cost Calculation to accommodate this period.
- Independent contractors are confirmed to be excluded from payroll costs.
- The guidance confirms that the program is “first come, first served”, so getting your application in quickly is important, however it remains possible that Congress will appropriate additional funds if needed, per my previous email.
- Banks need to confirm information provided in the application, which presumably includes that they need to confirm that damage has occurred, we don’t know what “confirm” means.
- It is noted that the SBA intends to promptly issue additional guidance with regard to the applicability of affiliation rules. This could mean that the rules will be relaxed, or they will at least describe their point of view on how the rules should be employed.
- The document appears to confirm that the per employee salary limit is $100,000, however, health insurance, benefits and state taxes on payroll will be included over and above that amount.
- The SBA confirms that 75% of the proceeds from the PPP loan are required to be used for payroll in order to be forgivable.
- Now that it is clear that independent contractors are excluded from Company level “payroll costs” calculation, it is also clear that sole-proprietors/independent contractors can apply for the PPP based on their net income from self-employment.
- Although unclear, at this point, it seems that the employers will get a tax deduction for compensation without inclusion of loan forgiveness, we expect this will be clarified. The IRS is likely to fix this by denying the deduction on the theory that the employee did not incur an economic cost.
- Cannabis and other federally illegal businesses are excluded.
- Interest rates on the PPP loan have been increased to 1% rather than 0.5%.
New Clarity on Who Is Eligible, the “Alternative Size Standard”
As noted, the SBA issued new clarifying guidance on who is eligible for the PPP loan program. Many have traditionally looked at the most well-known eligibility factor — do you have 500 or fewer employees in the United States. Most larger middle market companies concluded that they are not eligible. However the FAQs released on April 6th highlighted an interesting method that could be used as an alternative to qualify even if you have more than 500 employees, the “alternative size method.” Within this method, you could have OVER 500 employees in the United States and still qualify if your average net income over the last two years was below $5M and as of March 27, 2020 your “tangible net worth” was below $15M. This provision may have opened up eligibility to a wide variety of companies that are over 500 U.S. employees. We recommend that if you have more than 500 employees, you review eligibility to see if this applies to you.
The American Institute of CPAs (AICPA) on Calculating Forgiveness and Base Period for Payroll Costs
The AICPA’s Take on How to Calculate Forgiveness
The AICPA has released its recommendations of how it would like to see the SBA calculate forgiveness and published it yesterday. The AICPAs view is non-authoritative, however they have indicated in the past that they have been in contact and collaborated with the SBA on PPP matters, so it is possible that their views may be a lens into what to expect.
AICPA Recommends Using 2019 Payroll As the Base Period for Calculating Payroll Costs
There has been a tremendous amount of confusion as to what period should be used in determining a Companies “Payroll Costs” for the purposes of the calculation of the “Maximum Loan Amount” (MLA). Guidance put out by the SBA has been inconsistent on this issue, for example, recent interpretive guidance issued on April 2 clearly stated that the SBA wants applicants to use the “last twelve months,” yet that same guidance urged the Banks to obtain 2019 information from clients to validate the calculation (remaining silent on the need to obtain 2020 information despite the calculation referring to “the last twelve months”). More confusion came when others compared this guidance to FAQs issued by the SBA itself on the PPP loan which indicated that “most companies” will use 2019 data to calculate the MLA.
Adding even more confusion to the mix, the SBA indicated in the April 2 guidance that the applicant needed to REDUCE the MLA any federal payroll tax withheld as well as income tax withheld from the period of 2/15/2020 to 6/30/20. Following this guidance could result in a meaningful reduction of the MLA.
This combination of facts could lead a company to ask themselves:
- If I can use 2019 data, with no requirement to reduce wages by income tax withholdings, why would I use the 12 months ended March 31st?
- What is the reason for penalizing an applicant for using more recent data and at the same time giving them an option to use other data?
- And finally, what is the right period to use?
Everyone has been scrambling to try to figure out the “right path,” reading tea leaves to guess what the authors of this guidance “meant” when they wrote these provisions. In the end, almost all applicants simply want to do the right thing, but many have felt uneasy trying to come to a conclusion, that includes their professional advisers!
To help clarify the AICPA has issued guidance as of April 4 in collaboration with the SBA. Mark Koziel, CPA, CGMA, the AICPA’s executive vice president has indicated:
“Based upon statements from members of Congress, it appears that the intent of the PPP was to base the salary calculation on gross wages with no adjustment for federal taxes. This ensures that payroll tax expenses are not passed on to the small businesses in need. In a program of this magnitude, it’s expected that guidance will evolve and terms will be clarified.”
So what does that mean?
- Talk to your service team!! Work with your advisers to make sure your application makes sense.
- If you used 2019 to calculate the MLA, and did not reduce it for any income taxes, then you appear to have calculated in line with the AICPA’s guideline.
- If you submitted an application using the 12 months ended March 31 to calculate the MLA and did not reduce it for federal withholding taxes, speak to your advisers and/or the bank to confirm if it is acceptable.
- If you used the 12 months ended March 31 and you reduced that amount by federal income tax withholdings, we would recommend revisiting the approach.
New guidance continues to come out on a daily basis, the key is to make sure you are preparing and submitting in “good faith” and are clear with your banking institution on the approach you are taking.
- Payroll Tax Credit and Deferral: The Bill includes a provision, where businesses are allowed a credit against payroll taxes for “qualified wages” (including amounts paid towards health insurance), not exceeding $10,000 per employee, paid to or for employees from March 13, 2020 to Dec. 31, 2020 when the business is suspended due to a COVID-19- related shut down order or receipts declined more than 50% when compared to the applicable period in the prior year. If a business has more than 100 full-time employees, the credit is only available if the employees were not providing services and if the business has 100 employees or less, the credit is available whether or not the business remained open. The Act provides a grace period for payment of payroll taxes owed for 2020 — 50% of the taxes are due by the end of 2021 and 50% by the end of 2022.
- The Family Care Act: In regards to the tax credit for paid sick leave, you are still entitled to the credit even if you already provide sick pay as long as the reason is one specified as part of the bill. The credit can be taken until December 31st but remember that there is a limit as to the credit amount for each person if they meet eligibility. This article highlights all the key points most people have questions with including eligibility, calculation of the credit, effective date, etc.
- The $10,000 Grant: The EIDL program offers an emergency grant to allow an eligible borrower to request an advance on the EIDL of up to $10,000 within three days of applying. The applicant would not be required to repay such an advance payment, even if it is subsequently denied an EIDL loan or if the applicant withdraws the loan application. If an applicant receives this grant, then subsequently receives a PPP loan, the $10,000 will be rolled into that loan and will “not be considered for forgiveness,” which we believe means it will need to be repaid.
- Timing of Loans: We spoke to an SBA lender and as we anticipated, we may need some patience here, “normal” SBA loans take six-plus weeks to process. These will be much faster but the demand is going to be enormous. It could still be weeks before we see funds flow.
- SBA Lenders: The best start is to work with your current banking relationships, if you are a new client to the bank, going to take longer. If you don’t have a choice, and your current banker is not assisting with SBA loans, we can refer a bank to you.
- Application suggestions from an SBA Lender: We were told that you will need a lot of information, but specifically be sure to prepare payroll reports and data for at least a year prior to the application. Also be prepared to answer “what you are doing now and in the future to stabilize the Company.”
- Prioritized loan disbursements: The Bill specifically “prioritizes” loan disbursements for companies that are:
- Small business concerns (Anything that is considered a small business by SBAs definition)
- Entities in underserved and rural markets (including veteran communities);
- Small business concerns owned by socially and economically disadvantaged individuals;
- Women owned businesses
- Businesses in operation for less than two years.
- Fintech lending: Marco Rubio tweeted on April 7 that Fintech’s can participate in the PPP process. It appears that FinTech Companies are now getting a clear path to participate as it has clarified that KYC rules do not need to be adhered to prior to working with a Borrower on the PPP loan application. This may create a nice alternative for Clients who are struggling with their banks.
- How do Partnerships deal with guaranteed payments: Based on an anecdotal conversation with a Lender this morning, the Lender indicated that a Partnership, that has partners who are not on payroll (receive allocation of profit or guaranteed payments) cannot use those payments as part of the company’s Payroll Costs for the purpose of the calculation. Thus, partners in Partnerships would need to apply for a PPP loan on an individual basis starting on April 10th. This conclusion seems counter intuitive but it is the position this Lender is taking. That does not mean all lenders are taking this position, obviously many conclusion remain up for interpretation. If this applies to you please proactively reach out to your lender.
On April 6th the treasury released a short FAQ document which addresses many common questions. We have attached them to this email and we have summarized some of the relevant areas below. We strongly recommend you read the document in full and consider how it may impact your application. We have added some other items to consider as well as new issues arise daily.
- Do lenders need to “verify” the calculation (Question 1): No, lenders can accept the application in “good faith.” This is meaningful because it allows for faster processing, however, further places the burden of analysis on the borrower.
- Eligibility further expanded (Question 2 and 3): This is a fairly meaningful clarification as it seems to indicate that companies can qualify as a small business even if they have over 500 employees provided that they meet one of 3 tests in the existing regulations. This is important because up until now, most thought that the numerical statutory test (greater of 500 employees or employee based size standard) was the exclusive one. This will open the PPP up to more companies for sure.
- Do Lenders need to verify Borrower certifications on Affiliation (Question 4): No. This further reaffirms that lenders are processing the applications, and not fully underwriting them. They are not required to make their own determination on affiliation, leaving it to the borrower to apply based on their good-faith analysis.
- Affiliation rules further clarified (Question 5): The SBA seems to be reaffirming that borrowers must analyze affiliation under section 13 C.F.R. 121.301(f), something that was confirmed in the interim final rule on affiliation late last week. It is still not clear whether affiliation applies to the numerical statutory test (as described above).
- Affiliation Minority interest rules clarified (Question 6): If a minority shareholder of the borrower irrevocably waives a right that made it an affiliate, then the affiliation rules do not apply to that shareholder.
- Confirmation of the $100k Cap (Question 7): This has been a major source of confusion and this might be the most valuable clarification in the document. Yes, your benefits are included over and above the $100k salary cap for the purpose of calculating Payroll Costs. If your bank capped you at $100k (all salaries and benefits together), then send them the FAQs so they can revise their calculation ASAP.
- Clarification on how the PPP interplays with Sick Leave (Question 8): The reduction in “payroll costs” applies only to qualified sick and family leave under the Families First Coronavirus Response Act.
- Rules for seasonal businesses clarified (Question 9): Provides simple clarifications on what period to use to determine the maximum loan amount.
- Rules related to using a PEO are clarified (Question 10): This was a minor clarification that made sense. If you use a PEO, then you cannot provide support like IRS Form 941 (a payroll form) because you technically lease employees from someone else. This merely clarifies that you need to provide an equivalent report from the PEO that allows the lender to see the support for your gross salary calculation.
- Can one person sign on behalf of the Company (Question 11): Yes. A welcomed clarification as companies were dealing with logistical issues here.
- If the applicant committed a felony, does that disqualify the application (Question 12): It may not depending on facts.
- Do banks need to use the same application (Question 13): No, as we have seen, banks are permitted to use their own applications for the purpose of the PPP as long as they request the same information as the SBA’s application. There will be no “universal” process.
- What time period should the borrower use to calculate the maximum loan amount and the number of “average employees” (Question 14): Another welcome clarification, this leaves it up to the borrower to decide what period to use, as we suspected. Although it does clarify that the average number of employees should be based on the period that you selected to calculate Payroll Costs.
- Clarifying payments to independent contractors (Question 15): As we suspected, payments made to Independent Contractors and Sole Proprietors should not be included in payroll costs; however, they can apply on their own.
- Accounting for federal taxes when determining the maximum loan amount (Question 16): This is a source of confusion and seems to have been especially troublesome for payroll companies preparing reports. This clarifies that only gross salary is considered when determining salary, there are no adjustments (positive or negative) for employer and employee federal income taxes or FICA.
- What happens if I file under the old rules prior to this clarification (Question 17): With these clarifications, some borrowers may have found that their previously-submitted application was incorrect. They are permitted to revise the application, but are not “required” to do so as long as they applied in good faith and were following the rules and guidance available at the time.
- Relaxation of KYC rules for the purpose of the PPP (Question 18): This has been a source of stress for clients whose banks are not accepting or have not yet accepted loan applications. The question: can I do this with another bank? The concern was that banks could not “onboard” new clients because of KYC rules, this clarifies that this is not the case and that the normal KYC data does not have to be collected in advance of the application.
Reminder Section: (what should I be doing): (updated September 18)
- Talk to your lender to find out when its PPP loan forgiveness application portal will be ready.
- Talk to your Payroll Company about claiming the employer payroll tax deferral and employee retention credits (ERC) that were made available in the CARES Act (see previous updates).
- Talk to your Payroll Company about claiming the qualified sick/family leave refundable tax credits (from FFCRA, passed prior to the CARES Act) (see previous updates).
Withum principal, and frequent AFP contributor, Daniel Mayo has put together a summary of the CARES Act here. Withum has also set up a COVID-19 email alert through which news is sent as the issues evolve. Sign up here.
Jacob Weichholz is a member of the Accounting and Financial Planning for Law Firms Board of Editors. He is a Principal at WithumSmith+Brown, CPA’s and Consultants in their New York office. Jake has serviced and advised law firms of all sizes for over 30 years. He co-leads the New York office Law Firm practice of Withum. He can be reached at [email protected].
Daniel Mayo is a Principal at WithumSmith+Brown. He is a member of Withum’s National Tax Services Group and has over 20 years of professional tax experience. He oversees U.S. Federal income tax research, planning and review and is frequently an author and speaker on U.S. Federal and International Income Tax topics. Daniel has experience in federal, international and financial products taxation as well as in capital markets, M&A and cross-border transactions. Daniel received his BS in Accounting from Rutgers College, his JD, cum laude from Seton Hall University School of Law, and his LLM in Tax from New York University School of Law. He is a member of the New York and New Jersey Bars and is an adjunct faculty member at the Georgetown University Law Center.
Chris DeMayo is a partner at Withum and serves as the firm’s Practice leader for the Technology and Emerging Growth Services Group. In addition to servicing his clients, his responsibilities include representing the firm in the marketplace, developing marketplace strategies, leading the growth and success of the firm’s technology and emerging growth practice. Beyond accounting, he has developed a deeply focused skill set within the sector as a strategic adviser and consultant. His expertise spans a variety of industry verticals within the technology and emerging growth community including but not limited to Ad-Tech, E-Commerce, Ed-Tech, Digital Media, Social Media, AR/VR, AI and Crypto based companies. Chris has authored numerous articles on a variety of topics and is frequently scheduled on speaking engagements at industry events.
Withum’s Brian Lovett and Sal Falzone, Jr. have also contributed to this article.
The views expressed in the article are those of the authors and not necessarily the views of their clients or other attorneys in their firm.