Paycheck Protection Program and Loan Forgiveness

If you are one of the fortunate businesses to receive a Paycheck Protection loan from the SBA in the first round of CARES Act funding, you have cleared a major hurdle in sustaining your business during an uncertain time. Now, the task of securing loan forgiveness begins. The guidance on this is sparse and sometimes contradictory, but the SBA has promised more in the future. Here is a summary of what we know:

The CARES Act spelled out acceptable ways to use the loan proceeds. However, acceptable does not necessarily mean forgivable. The allowable uses for PPP loan funds include:

• Salaries, wages, commissions or similar compensation (up to $100,000 per year per employee, prorated)
• Cash tips or equivalent
• Employee leave, including parental, family, medical or sick (not covered under the Families First Coronavirus Response Act)
• Allowances for separation or dismissal
• Group healthcare benefits, including insurance benefits
• Retirement benefits
• State or local employer taxes on employee compensation
• Mortgage interest for debt originated prior to February 15, 202
• Rent and utility payments services originated prior to February 15, 2020
• Interest on other debt obligations incurred prior to February 15, 2020
• Compensation and income of up to $100,000 per year (prorated) for sole proprietors and independent contractors

Most expenditures for allowable purposes may also qualify for forgiveness, but there are two notable omissions. Excluded from forgiveness are healthcare benefits during periods of paid sick, medical or family leave and interest on other debt obligations (not mortgages). It is not clear why these were excluded, but the distinction is important for forgiveness planning purposes.

Another important requirement in the forgiveness process is that costs must be incurred and paid during the 8-week loan period. The statute is unclear about the application of this concept. Loan applications were calculated on a monthly basis, but forgiveness seems to be computed on a weekly basis. In the absence of specific guidance, our best recommendation would be to divide annual salaries and compensation by 52 weeks, so that the 8 weeks of salaries and benefits are accrued and paid within the loan period. This logic would hold for other allowable expenses as well.

The SBA has provided for 3 ways that loan forgiveness can be reduced, and each comes with its own degree of uncertainty.

• Headcount Reduction – Borrowers must show that the full-time equivalents (FTE) during their 8-week loan period did not decline from the FTEs per month using either 2/15/2019 to 6/30/19 or 1/1/2020 to 2/29/2020. The statute does not define FTE, but practitioners believe the SBA will use 30 hours per week to define a full-time employee, much like the Affordable Care Act did. Part-time employees can be combined to produce the equivalent of a full-time employee. The headcount reduction calculation will not include any reductions between February 15 and April 27, 2020 if the business restores the headcount before June 30, 2020.

• Wage Reduction – Borrowers must show that an individual’s salary or wages during the eight-week loan period did not decline more that 25% from the most recent full-quarter. Employees making over $100,000 a year are excluded from this calculation. It’s unclear how this calculation would work because borrowers are comparing 8 weeks of wages with 3 months of wages. Presumably, borrowers will look at average wages for these time periods, but the SBA will need to issue further guidance. The wage reduction calculation will not include any reductions between February 15 and April 27, 2020 if the business remedies the reduction before June 30, 2020.

• Overhead Limitation – Non-payroll expenses cannot exceed 25% of the loan forgiveness amount.
The SBA has not spelled out the order for calculating these forgiveness reductions, and the order can affect the forgiveness amount. We wait for further guidance on this as well.

As we wait for additional guidance on loan forgiveness from the SBA, business owners must bear the responsibility of documenting and reporting how the loan proceeds are used. We recommend placing loan proceeds in a separate bank account and transferring funds to cover allowable expenses as they are incurred. In the event that you have loan proceeds that are not forgiven, the unforgiven portion is due within 24 months of the loan date. Any payments on the outstanding indebtedness are deferred for 6 months.

GranthamPoole is watching closely for new direction from the SBA which will help us advise you on achieving loan forgiveness. If you have specific questions, please contact your GP advisor. Our COVID-19 team is actively looking for answers.