Update on the Paycheck Protection Program (PPP)
Last week, the SBA made a new $310 billion appropriation of funds available for loans to small businesses under the 7(a) Paycheck Protection Program, which was created by the CARES Act. Under this “tranche”, $60 billion was reserved specifically for community financial institutions, with $30 billion of the funds allocated to institutions with less than $10 billion in assets. These funds were quickly extinguished by 1 p.m. EST Tuesday, April 28, 2020, with 331,119 approved loans worth nearly $30 billion, as reported by the SBA.American Riviera Bank, along with other institutions with less than $10 billion assets, continue to have access to the $250 billion in general funds authorized for the second phase of the PPP until the remaining funds run out. Lenders between $10 billion and $50 billion in assets had only been approved for 84,000 loans worth more than $10 billion as of the same time on Tuesday, April 28, and have yet to extinguish those funds as of May 5, 2020 (see chart below).
To continue to prioritize community banks once $30 billion was extinguished, the SBA opened a window between 1 PM and 9 PM PST on Wednesday, April 29, whereby only those institutions with less than $1 billion in assets could submit their loans for approval. Community banks have certainly done more than their fair share in distributing PPP funds to small businesses, and we are now nearing the end of this second $310 billion appropriation of funds.
Source: SBA as of 5/5/2020
As of May 6, 2020, American Riviera Bank has been successful in obtaining approval for 580 loans totaling nearly $115 million. We now turn to the loan forgiveness process, which is one of the most critical elements of the program and remains wrought with uncertainty.
How do I ensure my loan is forgiven?¶
The biggest question on the minds of many small businesses who received PPP loans is, “How do I ensure my loan will be forgiven?” We are still awaiting guidance on what the formula will look like for forgiveness, and what documentation will be required to evidence the money was spent appropriately. “Interim Final” guidance and Frequently Asked Questions (FAQ’s) address this in a general sense; however, as of now we still only have the language of the CARES Act itself, along with the FAQs that are updated regularly.
Forgiveness Formula¶
The Treasury notes in their Borrower Information Sheet, “You will also owe money if you do not maintain your staff and payroll.
- Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount.
- Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
- Re-Hiring: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.”
While we can’t say there are any surefire ways to guarantee forgiveness, particularly absent any concrete formula, maintaining good records will certainly help. Many of our clients have opted to open new checking accounts to deposit the loan proceeds to enable the funds to be properly managed out of a single account.
Documentation on rehiring efforts will also be critical. Question 40 of the FAQs issued on May 3, 2020, indicate that forgiveness will not be reduced if a borrower laid off an employee, offered to rehire the same employee, and the employee declined the offer. The FAQ hints that the interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. They also caution that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
Calculating Employee Count¶
One of the other pillars for loan forgiveness was to maintain staffing levels within 25% of the previous headcount, prior to February 15, 2020. The IRS defines a full-time employee (FTE), for a calendar month, as an employee who is employed, on average, at least 30 hours of service per week, or 130 hours of service per month, and the definition under the Affordable Care Act (ACA) uses 30 hours as well. We continue to await guidance on how to calculate FTE. Employees being counted in the forgiveness calculation must also reside in the United States, and cannot include contractors. Evidence of US residency would likely include:
- Employer to confirm employment is in U.S. based upon the physical address of the location to which employee reports; and
- Copy of W2 provided by employer to employee for 2019, which would show employee and employer address.
While some presume based on the initial language of the CARES Act that businesses may have until June 30, 2020 to restore staffing levels, guidance also indicates that 75% of what is spent must be for payroll costs incurred during the 8-week period following initial loan funding. What a contradiction! Businesses may find it difficult to meet the 75% hurdle if they wait until June 30 to rehire. More guidance is necessary to understand whether there will be an “exemption” if a business is to rehire by June 30, but was unable to spend the money on payroll during those 8 weeks due to mandated state closures.
It is imperative that you consult with your professional advisors if you have any questions regarding forgiveness. If you do not feel you will be able to spend the loan on payroll in the 8 weeks after your loan is funded, you can also save those funds to pay back the loan as there are no prepayment penalties on PPP loans.
How do I Request Forgiveness?¶
We do not yet know what the process will look like, but we are working closely with the service provider we partnered with to provide online PPP loan applications and understand that a forgiveness process will soon be available. Please make sure to have your login credentials handy.
In the meantime, the Treasury initially laid out some basic guidelines, and will require a certification to be signed that the loan proceeds were used on eligible expenses. The Treasury’s Borrower Information Sheet issued with the initial $349 billion appropriation provides some general guidance on the documents that will be required:
- Documents that verify the number of full-time equivalent employees and their rate of pay. Many national payroll providers, such as ADP, have developed standardized PPP reports to assist in this regard.
- Documents on payments made for eligible mortgage, lease, and utility obligations paid over the 8 week period, beginning upon the date the loan is funded.
- We recommend keeping copies of canceled checks in addition to the mortgage and lease agreements, as well as utility bills. Keep in mind that the Treasury has stated that, due to oversubscription, it is anticipated that not more than 25% of the forgiven amount may be for “non-payroll costs”, which MUST first be deemed eligible expenses.
- If monthly or quarterly payments do not directly coincide with the 8 week period, be prepared to provide documentation of payment and pro-rate the expenses accordingly.
- The US Chamber of Commerce continues to update their Small Business Guide and Checklist, and it provides a good visual of how forgiveness works based upon the initial language in the CARES Act and updated information provided through the FAQs.
- A certification that the documents are true, and that the borrower used the forgiveness amount to keep employees on the payroll and make permissible.
We also suggest you continue to maintain records similar to what we collected during the application process:
- Detailed payroll records showing salaries for all employees, as there was a cap on the maximum loan amount for employees receiving annual pay of more than $100,000 per year.
- Copies of filed 940s and 941’s, if they weren’t already provided, as well as canceled checks proving employment taxes have been paid.
- Records of benefits, including medical or sick leave, health care benefits, and payments for retirement benefits.
The interim final rule also states if a borrower “knowingly uses the funds for unauthorized purposes,” he or she will be subject to “additional liability, such as charges for fraud.” Documentation will be critical in this regard as well.
NOTE: Nothing in this post should be construed as legal advice, and we encourage you to consult with your professional advisors for guidance until formal guidance is issued from the SBA.
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