By Alan R. Sasserath, CPA, MS
Over the last week, we have received further guidance on the Paycheck Protection Program (“PPP”) regarding:
1. Certification including clarity on safe harbor provisions,
2. An extension of time to May 18, 2020 to return PPP loan proceeds under the certification safe harbor provisions,
3. Clarification of partnership loan calculation rules including the ability to increase PPP loan proceeds to partnership borrowers under such rules, and
4. PPP Loan forgiveness guidance.
Our original intention was to send an update today discussing the first three issues mentioned above; however, those issues seem to be old news considering the information regarding loan forgiveness that was released yesterday. While we are available to discuss the issues mentioned above on an individual basis, we will use this opportunity to discuss the information released yesterday regarding PPP loan forgiveness below.
Yesterday, the SBA in conjunction with the Treasury released the PPP Loan Forgiveness Application (the “Application”). While there is a lot to digest in the Application itself, some of the more critical items are the following:
1. The CARES Act defined forgivable costs as those “incurred AND paid.” The Application defines forgivable costs as those “incurred OR paid” and gives further guidance on when an expense is forgivable.
2. Full Time Equivalent (“FTE”) definition. While previously thought to use the SBA definition of FTE which is 30 hours per week, the Application clarifies the definition to be 40 hours per week.
3. With regard to loan forgiveness reductions related to either reductions in FTE’s or wages, the Application gives guidance as to how to calculate such eliminations.
We are planning to have a webinar later this week to discuss these and other items in the Application. We will also update our excel workbook to be released in conjunction with the webinar. Be on the lookout for the webinar announcement.
Additionally, as per the SBA website, the Application form and instructions include several measures to reduce compliance burdens and simplify the process for borrowers, including:
• Options for borrowers to calculate payroll costs using an “alternative payroll covered period” that aligns with borrowers’ regular payroll cycles
• Flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving their PPP loan
• Step-by-step instructions on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness
• Borrower-friendly implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30
• Addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that was declined
The Application is accessible here: 3245-0407 SBA Form 3508 PPP Forgiveness Application (1).
In addition to the release of the Application as discussed above, the House of Representatives passed the HEROES Act yesterday as well. While several Republican Senators have made statements that this bill is dead on arrival to the Senate, the HEROES Act has several interesting provisions related to the PPP that may not be DOA. Here are some of the key PPP provisions:
• Extension of the covered period from June 30 to December 31 allowing the current 8-week period from the date of PPP loan funding to be permitted to extend past June 30.
• Repeal of the requirement that 75% of the loans be spent on payroll.
• Clarification that expenses paid or incurred with proceeds from PPP loans that are forgiven are also deductible for federal income tax purposes.
• Extends the 8-week period to pay forgivable expenses to 24 weeks.
• Establishes a minimum maturity on PPP loans of 5 years to enable borrowers to amortize loans over a longer timeframe.
• Extension of the eligibility to all nonprofits.
• Allows payroll tax deferrals for recipients of forgiven PPP loans.
As with the CARES Act, there are many provisions in the HEROES Act other than those related to the PPP; however, these are some that are pertinent to the PPP. Please note that if some of the provisions in the HEROES Act discussed above pass, there will be revisions to the Application.
As seems to be the case all too frequently, this was another big week of news regarding the PPP. We will continue to keep you informed so please stay close.
As always, please feel free to reach out if we can be of assistance.
Thank you for joining us for this morning’s webinar, “Loan Forgiveness Under the Paycheck Protection Program (PPP).” Below are links to our workbook, PowerPoint and webinar recording.
Download our PPP Forgiveness Workbook here.
Download the PowerPoint presentation here.
View the webinar replay here.
Presented by Alan Sasserath, CPA, MS – Partner, Sasserath & Zoraian, LLP
Sponsored by Campolo, Middleton & McCormick, LLP and CMM Strategies
The Paycheck Protection Program (PPP) application process has been one of the most fraught experiences for the business community – reminiscent of the saying, “Ready, Fire, Aim!” For those businesses fortunate enough to have received a PPP loan, managing the forgiveness aspect is just as challenging. Fortunately, the team at Sasserath & Zoraian dove in headfirst to break down the PPP’s forgiveness provisions and has developed a workbook to help entrepreneurs and business owners calculate their loan forgiveness and plan accordingly.
Join us for a webinar introducing this critical tool and a primer on how to use it. Any business that has received or is still awaiting PPP funds must understand how to maximize their loan forgiveness so they can chart their next steps. With this personalized workbook and guidance, business owners can deepen their understanding of the PPP’s forgiveness provisions and put their business on the right path to maximize forgiveness of the loan.
Date: Friday, May 8
Time: 10 a.m.
Registration is limited to the first 100 participants.
By Alan R. Sasserath, CPA, MS
As I have said before, this whole Payroll Protection Program (“PPP”) process is one of the most frustrating processes I have gone through in my career. It reminds me of the saying, “Ready, Fire, Aim.” Fortunately, our practice is focused on working with entrepreneurs, so the saying is familiar to us.
The unusual part of the PPP is that there are tremendous stakes for a widespread audience. Because of that, it was clear that every other tax or cash flow benefit of the CARES Act paled in comparison to the benefits of the PPP, which is why we dove headfirst into helping our clients and contacts with it.
While there are many that have not yet received the PPP loan, many have and are thinking about working through the loan forgiveness calculation. Below we discuss the general calculation related to loan forgiveness and some of the issues related to it. We also reference an article (linked below) that unpacks some of the issues in more detail. This is meant to be a practical document to assist you in calculating an estimate of the amount of PPP loan forgiveness and will evolve as more guidance is issued. This article is a little longer than usual because there are so many moving parts.
Be very wary of any person or webinar that gives you absolutes regarding the loan forgiveness calculation. We are waiting for full guidance on many issues. As poorly as the law was written related to the calculation of the PPP loan, the forgiveness provisions of the law were written that much worse. Unfortunately, we don’t expect to have what we hope will be final guidance until mid to late May at the earliest. However, since many already have the PPP loan proceeds, have a plan for loan forgiveness and adjust as needed.
As we said in an earlier article, forgiveness is not a god given right. The banks will have more say in the determination of the amount of loan forgiveness than they had about the loan amount. Once required support is submitted to the bank, they will have 60 days to determine the amount of loan forgiveness.
To calculate forgiveness, we must first understand what we do not know about the subject. The final sentences of the article we linked below are: “We don’t know what costs are forgiven. We don’t know what will determine which costs are allowed – is it incurred, paid or both? We don’t understand the time frames. We don’t know if we can deduct the expenses paid with forgiven dollars. We have no idea how to compute the reduction in forgiveness related to lost employees or reduced salaries, or how to restore that reduction if it occurs. And lastly, NONE of it may matter, because the banks are going to make the rules, and they don’t know what the hell they’re doing. Other than that, we’ve got this all figured out.”
Just like the loan calculation, we all had an initial opinion about how the loan amount should be calculated. As more guidance was released, we had to pivot. Once we had sufficient guidance as to how to calculate the amount of the PPP loan (new guidance has come out as recently as April 24th), the general feeling was that this was a one-time opportunity to calculate the amount of the loan, so take an aggressive position and if guidance is subsequently issued contrary to a position included in the calculation, then adjust. Because there are so many unknowns, we are going to have to do the same with regard to loan forgiveness.
From a high level, here is our interpretation of how the PPP loan forgiveness calculation is supposed to work:
1. Once you receive the PPP funds, the following “costs incurred and payments made” that occur in the subsequent 8-week period will be eligible for forgiveness:
a. Payroll costs using the same method to determine payroll costs included in the calculation of the PPP loan (salary, wages and other cash compensation limited to $100,000 on an annualized basis per employee; group health insurance premiums; retirement benefits…)
b. Any payment of interest on any mortgage obligation that was incurred before February 15, 2020,
c. Any payment of rent under a leasing agreement in force before February 15, 2020,
d. Any utility payment, including payment for the distribution of electricity, gas, water, transportation, telephone or internet access for service that began before February 15, 2020.
2. No more than 25% of the amount paid used for forgiveness may be for items 1.b., 1.c. and 1.d. above.
3. There are two possible reductions to the forgiveness amounts above:
a. If there is a reduction in full-time equivalent employees when comparing the period 2/15/2020 – 6/30/2020 to either the period 2/15/2019 – 6/30/2019 or 1/1/2020 – 2/29/2020. The period chosen to compare the 2/15/2020 – 6/30/2020 period to be determined at the borrower’s choice, and
b. If there is a reduction in the salaries of employees that earn less than $100,000 by more than 25%.
Please note that if you restore the reduction in either of 3.a. or 3.b. above that occurred during the period 2/15/2020 – 4/27/2020 by 6/30/2020, then you don’t have to include that as a reduction when calculating the amount of forgiveness.
There are several questions related to the calculations above raised in the article linked below. We have also linked a list of questions both from the article and our own additional questions. We hope to be able to answer them as further guidance is issued. We expect other issues to arise as well and will continue to update this list of questions and resolutions as time progresses.
To keep clean records, we recommend that the loan proceeds be kept in a separate bank account and forgiveness-eligible expenses paid out of such account. That may not be feasible for payroll since there will be both forgivable and non-forgivable payroll costs in each payroll run. For payroll costs, we recommend that you calculate the amount of expected forgivable costs in each payroll run and transfer that amount to the bank account used for payroll.
Click here for the Forbes article mentioned above.
Click here for the many questions that need to be answered in the article above.
As always, please let us know if we can be of any further assistance.
By Alan R. Sasserath, CPA, MS
Last week, the Treasury issued further guidance relating to the eligibility to qualify for the Paycheck Protection Program (“PPP”) loan. In fashion true to form, the guidance issued was sufficiently vague to have many wondering whether or not they are eligible for the PPP loan and can sign off on the certification, “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
Why do we care about this? Without eligibility for the PPP and a good faith sign off on the statement, at best, you cannot have PPP loan forgiveness and at worst you cannot have loan forgiveness and will have additional penalties for making a false statement.
Below is the specific guidance:
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.
First and foremost, the question is aimed at businesses owned by large companies. Let’s face it, this is fallout from the PPP loans issued to Shake Shack, Ruth Chris Steakhouse, and others. However, the sentence in italics above has many second guessing themselves as to whether they are eligible for the loan or not.
One troubling phrase in the italics sentence above is “ability to access other sources of liquidity.” What does that mean? Does that mean that if you have built reserves or have access to a credit line, that you should be ineligible for the PPP loan? Taking this a step further, what if your competitor spent recklessly while you were conservative? Should they be eligible for the PPP while you are not? What if you were able to pivot your business to be able to maintain your business at some level, does that work against you in determining your eligibility for the PPP loan?
Ultimately, what are you certifying? Are you certifying that: (a) you are currently able to show economic harm? (b) you are ready to close your doors without this loan? (c) you are ready to lay-off employees without this loan? Or, are you certifying that the current economic uncertainty could adversely impact your business more than the usual business risks and the loan is necessary to support the ongoing operations of your company?
There are more questions than answers. You should understand that these questions exist. In essence, loan forgiveness is not a god given right. There are many potential business risks that are more prevalent/concerning now than just two months ago. If you are going to obtain the PPP loan, you should be able to present your case as to what the current business risks are that create the economic uncertainty/conditions specific to you and your need for the PPP loan. Even if you can do that, a risk of repayment still exists depending on the final rules. Additionally, if you did not sign off on the statement mentioned in the first paragraph above in good faith, penalties could result.
Once again, the PPP eligibility question from the Treasury stated above is posed to businesses owned by large companies. However, the question of PPP eligibility seems to be evolving into a hot topic and is worthy of attention and monitoring.
Please note that the above analysis is our opinion and like most of the significant questions related to the PPP currently, there is little guidance. If you have concerns as to whether you are eligible for the loan you should speak with an attorney.
This is the first of what we expect to be many PPP loan forgiveness posts.
As always, thank you for your time and please let us know if we can be of further assistance.