PPP Loans – Forgiveness Items Pending Further Guidance

Anglin Reichmann Armstrong has developed a process to help you model potential forgiveness scenarios for PPP loan forgiveness. This is a critical process to pursue now because it will support your decisions for timely staffing/rehiring as well as proper use of PPP loan funds during the eight-week covered period. Contact us to learn more.

What is required for PPP loan forgiveness? In addition to properly using funding, this question is one of the most important for small businesses to consider once approved for a Paycheck Protection Program (PPP) loan.

Anglin Reichmann Armstrong offers several key points here to help you envision what may be required in the PPP forgiveness calculation — supporting your future for partial or 100% loan forgiveness. This article is just the beginning of our updates for you. Consider the following unknowns:

Exemption for Rehires

Under the PPP forgiveness calculation, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) outlines an exemption to the forgiveness reduction if the employer eliminates reductions that occurred between February 15, 2020, and April 26, 2020, in full-time equivalent (FTE) employees or reduction in their salary or wages by June 30, 2020.  At this time, the following is unclear, and we await further guidance.

  1. What is the compliance test for June 30th deadline?  Do they have to physically appear on a payroll before that date or can their hire date be June 30th?  What documentation will substantiate this?
  2. Is this exemption proportionate to rehires/reinstatement or wages or is it an all or nothing calculation?

FTE Calculation

The PPP section of the CARES Act refers to reduction calculations as FTE. The SBA has a traditional way of calculating FTEs and which mirrors how they are calculated under the Affordable Cares Act (ACA). The SBA has referenced some communications that the ACA approach would likely be used for the PPP forgiveness calculation. At this time, the following is unclear, and we await further guidance.

PPP Loan Forgiveness – Cash, Accrual, or Both?

This is a critical area where we are also waiting for additional guidance, as the interpretation may alter management decisions. The forgiveness outlined in the CARES Act states the following related to forgiveness:

“…An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period…”.

We are interpreting the phrase “costs incurred and payments made” in the strictest reading interpreted and would mean that for any amount to be forgiven, the cost must be paid in the eight-week period (i.e., payments made). The cost incurred mirrors the intent of the CARES Act, as Congress would intend that costs relevant to the covered period are included.

This gets tricky as normal accrual accounting practices can capture this, but payments made can conflict with this. For planning purposes, and until further guidance is issued, we are approaching this in the strictest sense as written and guiding clients to ensure costs are paid during the covered period and supported by invoices matching expenses incurred in the covered period.

Defining Payment Terms

This is less of a clarification in the CARES Act, but related to ensuring client banks will initiate a loan adjustment triggering a new amortization schedule for PPP loans after forgiveness is awarded. Most of the PPP loans we have seen amortize the original balance over 18 months. Some banks expect that a loan adjustment will be made, but others were unclear. Clients should ensure their lender has this in the loan agreement.

What Utilities are Included in PPP?

Most of the utilities are self-explanatory: electricity, water, gas, Internet, but we have questions on “telephone” and “transportation.” On telephone, does that include cell phones or only landlines?  What exactly does transportation include?

75% Rule on Payroll

The interim SBA guidance outlines that the intent of PPP is that at least 75% of the forgiven amount must be used on payroll. This differs from the language in the CARES Act, but as outlined in the SBA Interim Guidance the rule fulfills the PPP program.

There are a few different interpretations of this item, which we will clear up upon further guidance. The approach we have taken is to gross up the payroll to 75%, thus ensuring that payroll represents 75% of the final forgiven amount.

25% Reduction “Most Recent Period”

The 25% reduction in salary or wages compares earnings in the eight-week Covered Period to the most recent full quarter during which the employee was employed before the covered period. Based on current loan approval dates, for most recipients of PPP loans, this would refer to Q1 of 2020.

Further guidance is needed, as the 25% reduction is comparing the 8-week Covered Period to a full quarter, which in almost every situation would lead to a greater than 25% earnings reduction. We are looking for guidance if it is in fact a full quarter to eight-week comparison or if it will look for the average 8-week earnings in Q1 of 2020.

Economic Uncertainty

As companies apply for the PPP loan, they certify in good faith that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.” This exact definition and benchmark of this certification has been concerning for many clients. Treasury issued guidance on April 23, 2020, however, we feel additional guidance is needed. Also note the May 7th date outlined in the response below.

[FAQ] 31. 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. 

Allowable Expenses

While the overall expenses are clearly outlined, there is some uncertainty about the inclusion of certain expenses. For example, payments to related parties and types of rent payments are examples of items that need additional guidance.

As you can see, there is a lot of uncertainty with the current guidance supplied by the SBA to support a comprehensive approach to future loan forgiveness. Contact us for a consultation once your loan is approved.