COVID-19 > PPP Loans

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    LOAN APPLICATION

    1. How do I apply for a PPP loan?

    The final borrower application that came out April 3 is linked here: Paycheck-Protection-Program-Application-3-30-2020 <https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf>

     

    1. What additional information might the bank request as part of the application process?

    Banks have a lot of leeway about what they can request. However, according to the most recent SBA guidance that came out April 3, lenders will need to collect “know your customer” information from new customers only and are permitted to rely on existing documentation for current customers unless the institution’s risk-based approach to BSA compliance requires.

    We will help you where we can. Please know, however, it’s possible that we may not be able to provide some information that banks may request.

     

    1. Can payments to independent contractors be counted toward the loan?

    Guidance from the SBA has stipulated payments to independent contractors (1099s) cannot be included in the calculation for your loan nor are they considered eligible expenses that can be forgiven.

     

    1. Which businesses are eligible to apply for a loan?

    Eligible entities are generally those with less than 500 employees, including the following:

    • Private businesses;
    • Nonprofit organizations;
    • Veterans organizations;
    • Certain tribal business concerns;
    • Eligible self-employed individuals;
    • Independent contractors;
    • Sole proprietorships;
    • Businesses in the “Accommodation and Food Services” industry (NAICS 72) that have less than 500 employees per physical location;
    • Have been in operation on February 15, 2020;
    • Had employees for whom the borrower paid salaries and payroll taxes; or
    • Paid independent contractors, as reported on a Form 1099-MISC.

     

    For the purposes of determining the 500-employee threshold, applicants should include full-time, part-time and other basis employees. Generally, SBA affiliations apply except such rules are waived with respect to:

    • Businesses in the “Accommodation and Food Services” industry (NAICS 72)
    • Franchises assigned a franchise identifier code
    • Any business concern that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958

     

    1. What is the maximum loan amount?

    The maximum loan amount will be equal to the average monthly payroll expenses for the previous year preceding the date of the loan times 2 ½. If any Emergency Disaster loan is in place or in process since January 31, these can potentially be added and refinanced. The maximum total loan size is $10 million.

    For seasonal employers, they may choose to calculate the average monthly payroll costs based on the 12-week period starting February 15, 2019 or the period starting March 1, 2019 through June 30, 2019.

    For employers not in business between February 15, 2019 and July 30, 2019, the average monthly payroll cost is calculated based on the period beginning January 1, 2020 through February 29, 2020.

    Payroll costs as defined in the Small Business Act include:

    • Employee compensation (e.g., salary, wages, commissions, cash or equivalents);
    • Cash tips;
    • Payment for vacation, parental, family, medical or sick leave;
    • Allowance for dismissal or separation (severance);
    • Payment for group health benefits, including insurance premiums (presumably including all COBRA benefits);
    • Payment for any retirement benefit;
    • Any state or local taxes assessed on the compensation of employees; and, 
    • The sum of any compensation paid to a sole proprietor or independent contractor (i) that is a wage, commission, income net earnings from self-employment or similar compensation and (ii) that does not exceed $100,000 in one year, prorated for the covered period.

     

    Payroll costs exclude:

    • Compensation of an individual person in excess of $100,000 (as prorated for the period);
    • Federal employment taxes imposed or withheld taxes;
    • Compensation to an employee whose principal residence is outside of the U.S.; and,
    • Qualified sick leave for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act.

     

    1. What process do you recommend for applying for a PPP loan?
      1. Contact your local SBA Lender and let them know you are interested. If you don’t have a current banking relationship, please let us know and we can make an introduction;
      2. Pull your affected financial records. You will want a summary of compensation, rent and utilities;
        • 12-month historical compensation summary from probably March 30, 2020, back to April 1, 2019.
        • Current compensation summary of most recent month.
        • These summaries would include a summary of the following:
          • Employee compensation (e.g., salary, wages, commissions, cash or equivalents);
          • Cash tips;
          • Payment for vacation, parental, family, medical or sick leave;
          • Allowance for dismissal or separation (severance);
          • Payment for group health benefits, including insurance premiums (presumably including all COBRA benefits);
          • Payment for any retirement benefit;
          • Any state or local taxes assessed on the compensation of employees; and, 
          • The sum of any compensation paid to a sole proprietor or independent contractor (i) that is a wage, commission, income net earnings from self-employment or similar compensation and (ii) that does not exceed $100,000 in one year, prorated for the covered period.
        • Payroll costs exclude:
          • Compensation of an individual person in excess of $100,000 (as prorated for the period);
          • Federal employment taxes imposed or withheld taxes;
          • Compensation to an employee whose principal residence is outside of the U.S.
      3. Create your personal certification to include the following;
        • The uncertainty of current economic conditions makes necessary the loan request to support our ongoing operations;
        • Funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
        • We do not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan; and,
        • During the period beginning on February 15, 2020 and ending on December 31, 2020, we have not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan.

    Our suggestion is to put these on letterhead and have the principals sign the letter.

    1. Review your staffing plan and identify any changes that have been made to date, such as reduced hours, reduced pay, layoffs, furlough, and so on. Part of the incentive in the law was to promote remaining at full staff. Reductions in staffing or pay versus the previous 12 months, could result in a deduction in the full forgiveness of the loan. Once you have this information, we can help you with a formula. With that, you will be able to then determine your strategy for staffing moving forward.
    2. Analyze your loan strategy based on all the information above.
    3. If you have additional questions or would like help in thinking through this unprecedented process, please let us know, and we will work to help you.

    LOAN FORGIVENESS

    1. How does loan forgiveness work?

    Your loan will be forgiven conditioned on the following taking place over the 8-week covered period, which begins on the day of loan funding:

    • 75% or more of the loan proceeds must be spent on compensation to employees.
    • No more than 25% can be spent on non-compensation qualified expenses (rent, utilities and mortgage interest).
    • Number of Staff: With some exceptions, your loan forgiveness will be reduced if your average total full time equivalent (FTE) employees is less than the average was during one of two look-back periods: either 2/15/19-6/30/19 or 1/1/20-2/29/20.
    • Level of Payroll: Your loan forgiveness will also be reduced if compensation decreased by more than 25% for any employee who made less than $100,000 annualized in 2019 between the 8-week period and 1/1/20-3/31/20.
    • 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.

    Note: Remember that “total salary or wages” would include overtime, tips, allowances, commissions, bonuses, shift premiums, and so on, that were paid.

     

    1. Is there any flexibility with the 8-week covered period?

    The instructions included in the Loan Forgiveness Application indicate that you are permitted to choose an “Alternative Payroll Covered Period” (ACP). The Covered Period (CP) had been previously designated as the 8-week period beginning on the date of loan funding. Now, borrowers will have the option to select instead that the first day of the ACP be the date of the first pay period following the loan disbursement date. This would allow for more symmetry to match the payrolls within the 8-week period. (This does not apply to non-payroll related expenses.)

     

    1. What reports can BFG provide to payroll clients to help with tracking loan forgiveness?

    For our Payroll Clients, we now have a report to pull compensation data and employee FTE counts out of our Payroll system. We will be able to then calculate your compensation regularly during the 8-week period in relation to the primary forgiveness factors.

    The first two will compare the current weekly totals to the appropriate look-back periods for:

    1. full time equivalent employees,
    2. compensation for each employee

    Additionally, we will track your total compensation against the total loan to verify it represents 75% or more.

     

    1. How do I apply for loan forgiveness?

    On Friday, 5/15/2020, the Small Business Administration (SBA), in consultation with the Department of the Treasury, released the Paycheck Protection Program (PPP) Loan Forgiveness Application and detailed instructions for the application.

    The link to the announcement and the form is here:  https://www.sba.gov/sites/default/files/2020-05/3245-0407%20SBA%20Form%203508%20PPP%20Forgiveness%20Application.pdf

    The form and instructions inform borrowers how to apply for forgiveness of their PPP loans.  The Application is an 11-page document that contains 4 pages of forms (Application, Schedule A, Worksheet for Schedule A and Borrower Certifications) plus 7 pages of instructions.

     

    1. The phrase “costs incurred and payments made” is unclear.  What does it mean?

    Payroll (and non-payroll) related expenses that may have been incurred prior to the 8-week Covered Period (CP) and paid within the CP will be eligible. Payroll (and non-payroll) related expenses incurred within the CP but paid after the CP will be eligible, as long as they are paid no later than the next regular payroll date.

     

    1. How are “full time equivalent employees” (FTEs) computed?

    Per the Loan Forgiveness Application, Full Time Equivalent Employee (FTE) has now been defined as follows:

    • Employees who average 40 or more hours per week count as 1.0,
    • For employees who work on average less than 40 hours per week, you can either:
      • Divide the total hours by 40, or
      • Count each part time employee (less than 40 hours) as .5 FTEs (Simplified Method).

    Note:  For employers who have been using the ACA definition with 30 hours instead of 40 for both your look back periods and the 8-week Covered Period (CP), we don’t expect that your results will look significantly different in terms of a percentage comparison between the CP and the look backs.

    Now that FTE has been defined, recalculate your FTE counts for both the 8-week CP (or Alternative Payroll Covered Period or “ACP”) and for the look back periods. We recommend caution on using the Simplified Method of assigning .5 to all employees who average less than 40 hours per week if you have substantial part-time hours. Doing so could skew your actual counts depending on whether your average part-time worker earns over 20 hours per week versus less than 20 hours per week.

     

    1. What is the process for submitting a request for loan forgiveness?

    In an Interim Final Rule issued April 14, the SBA provided its process for submitting a request for forgiveness. The rule indicates that the request could be submitted as early as the end of the week seven of the 8-week covered period.

    To submit a request, the borrower needs to provide the following to the lender who, in turn, submits this to the SBA Administrator:

    • the Paycheck Protection Program Application Form (SBA Form 2483) and any supporting documentation submitted with such application;
    • the Paycheck Protection Program Lender’s Application for 7(a) Loan Guaranty (SBA Form 2484) and any supporting documentation;
    • a detailed narrative explaining the assumptions used in determining the expected forgiveness amount, the basis for those assumptions, alternative assumptions considered, and why alternative assumptions were not used;
    • any information obtained from the borrower since the loan was disbursed that the lender used to determine the expected forgiveness amount, which should include the same documentation required to apply for loan forgiveness such as payroll tax filings, cancelled checks, and other payment documentation;
    • and any additional information the Administrator may require to determine whether the expected forgiveness amount is reasonable.

     

    Once the lender has submitted the request, the Administrator will “purchase the expected forgiveness amount of the PPP loan(s) within 15 days of the date on which the Administrator receives a complete report that demonstrates that the expected forgiveness amount is indeed reasonable.”

    See III.4.e (page 26) at the following link for documentation: https://www.sba.gov/sites/default/files/2020-04/PPP--IFRN%20FINAL.pdf

     

    1. What happens if I ask my employees to come back to work, and they refuse?  How does that affect my loan forgiveness?

    The SBA’s FAQ resource, which they published on May 3, addresses this question as follows:

    40. Question: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?

    Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. 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. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.

    The Loan Forgiveness Application instructions have also added a new exemption from the loan forgiveness reduction related to FTE. Previously, there was an exception provided that applied to laid off employees to whom the borrower had made a “good faith, written offer to rehire… which was rejected by the employee.” This has been extended to now include employees who “(a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours. In all of these cases, include these FTEs… only if the position was not filled by a new employee. Any FTE reductions in these cases do not reduce the Borrower’s loan forgiveness.”

     

    1. Are we allowed to give raises or bonuses during the 8-week period?

    Yes, and doing so may help you spend 75% of the loan on payroll expenses if you would otherwise have trouble doing so.  You might consider changing the timing of your annual bonuses (if you normally bonus at yearend) or think about providing bonuses as an incentive for employees to come back work.  If you are trying to maximize forgiveness, be aware of the rules regarding employees making over/under $100,000.

     

    1. I have a payroll date that falls just outside of my 8-week period.  What can I do?

    With the Loan Forgiveness Application, the SBA has clarified that payroll (and non-payroll) related expenses that may have been incurred prior to the 8-week Covered Period (CP) and paid within the CP will be eligible. Payroll (and non-payroll) related expenses incurred within the CP but paid after the CP will be eligible, as long as they are paid no later than the next regular payroll date.

    Even so, we believe that it would be acceptable to adjust the timing of your pay date so that it falls within the 8-week period.

     

    1. Am I able to convert 1099 workers to employees?

    This strategy may work based on the situation and is not specifically addressed in the CARES Act or SBA guidance.  You should consider why they were a 1099 contractor and if there is a valid reason to convert them to an employee.

    That said, if it is possible and plausible for these individuals to become W-2 employees, and you can hire them within the 8-week period, they would certainly count as part of the FTE calculation. And any W-2 compensation paid to them during this period would count toward your overall payroll costs and toward your compensation per employee as compared to the lookback.

     

    1. Do profit sharing contributions qualify for payroll expense?

    Yes, when paid during the 8-week period.

     

    1. If not forgiven, is there an early payment penalty?

    No, there is not an early payment penalty.

     

    1. How will the SBA determine if my certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of” my business?

    Originally, the Treasury gave borrowers until May 14, 2020 and since extended the deadline to May 18, 2020, to return funds if they believe that the certification was not made in “good faith.”

    The SBA and Treasury have updated their FAQs to explain how they would review this certification. Under question 46, the Treasury states, “Any borrower that, together with its affiliates, 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.”

    For those with loans over $2 million, the Treasury states that these applications may be reviewed to determine if they believe the good faith certification was met. If they determine the loan is not eligible for loan forgiveness, they will inform the lender. If the borrower pays back the loan, the “SBA will not pursue administrative enforcement or referrals to other agencies.” Additionally, for the lenders the determination “will not affect SBA’s loan guarantee.”

     

    1. Allocation of at Least 75% of Loan Proceeds to Payroll Costs: does this mean I won’t be forgiven if I don’t spend 75% of the loan on payroll costs?

    According to an Interim Final Rule by the SBA, “…at least 75 percent of the PPP loan proceeds shall be used for payroll costs.” To justify this statement, the Rule goes on to say “the Administrator believes that finite appropriations and the structure of the Act warrant a requirement that borrowers use a substantial portion of the loan proceeds for payroll costs, consistent with Congress’ overarching goal of keeping workers paid and employed.”

    There is also the requirement that no more than 25% of the proceeds can be used for non-payroll expenses.

    While the requirement that no less than 75% of forgivable funds must be attributed to payroll costs remains in the Loan Forgiveness Application, the Application appears to make clear that total payroll costs that are less than 75% of the actual loan funds will still be forgivable. This means that, if an employer were to spend 50% of the loan funds on allowable payroll costs, there can still be forgiveness so long as no more than 25% of the forgivable amount is for non-payroll costs.

     

    1. Can owners be paid from the loan?  Would owner pay be included in forgiveness?

    Per the Loan Forgiveness Application, “forgiveness includes any amounts paid to owners (owner-employees, a self-employed individual, or general partners)…capped at $15,385 (the eight-week equivalent of $100,000 per year) for each individual or the eight-week equivalent of their applicable compensation in 2019, whichever is lower.” This means that owners cannot increase their compensation during the Covered Period (CP) or Alternative Payroll Covered Period (ACP) to be higher than their average was in 2019.

    The statement, “forgiveness includes any amounts paid to owners…” stands alone. There is no other description about the nature or type of owner compensation, whether it be by draw or compensation through the payroll system. Unless and until guidance to the contrary comes out, this would appear to mean, if you take it literally, “any amounts paid.”

     

    1. Explain how rehiring and the June 30 deadline works.

    The Loan Forgiveness Application makes no change to the Safe Harbor protection if an employer restores either or both the FTE count or the salary/wage deficit by June 30 as compared to February 15. In fact, the instructions have expanded the language to include an additional look back period for compensation of employees whose salaries or hourly wages was reduced by more than 25% during the Covered Period (CP) or Alternative Payroll Covered Period (ACP).

     

    WHAT WE STILL DON'T KNOW

    The following are some of the questions that remain. They may or may not get resolved with further guidance, but we felt it might be helpful for you to have a summary in case you want to discuss them with your lender. We believe the lenders will be the final decision makers. Therefore, understanding how they may interpret something like the 75% rule would be very important from a strategic planning standpoint.

     

    1. Is the compensation deduction formula measured on an average frequency or over the whole period?

    The actual language in the Act says: “The amount of loan forgiveness…shall be reduced by the amount of any reduction in salary or wages for any employee…that is in excess of 25% of the total salary or wages that occurred in the most recent full quarter (first quarter 2020), during which the employee was employed before the covered period.

    Because the reference is to the “full quarter,” one could interpret this to mean that what is paid during the full 8 weeks is being compared to what was paid during the whole first quarter: 8 weeks versus 13 weeks. We are interpreting that it is reasonable to use an average monthly or weekly comparison; however, we don’t how banks will interpret this language.

     

    1. For the compensation deduction formula, which employee’s compensation are we comparing to?

    For the salary/wage reduction, the most significant indication is that the reporting will, in fact, look at each separate employee on an individual basis. There are a number of questions related to this which we will be studying carefully.

    The question remains: how do we assess the compensation for employees who may have been employed during the first quarter of 2020 but are no longer employed and whose position has been filled by a new employee? Or for employees who have become employed but were not employed during the first quarter of 2020?

    In our tracking report, we compare the compensation for each employee who is still employed to their compensation in the first quarter; however, we are also showing a comparison of the total payroll costs and the average compensation per FTE to the lookback period in anticipation that some turnover took place in most companies. Even though the emphasis in the Act is to provide incentive for employers to be at full staffing relative to recent lookback periods, we believe that if an employer who has had turnover for any reason makes a good faith effort to retain the same relative number of employees at the same relative compensation, they would meet the test.

     

    1. What if a subsidiary that is in operation in Q1 is sold?

    Do you back out those affected employees for determining deductions?

     

    1. The CARES Act and current guidance do not define rent.  Can expenses that are included in my rent (CAM, property taxes and insurance) be include as “rent costs”?

    Are items such as common area maintenance (CAM) charges, insurance and taxes that are often defined as “additional rent” in a lease agreement included? Are rental agreements limited to leases of real property or could they include equipment and vehicles? The answers are not clear.

    The CARES Act lists rent as an allowable cost for leases in place prior to February 15, 2020.  If these costs are lumped into your rent payment, you may be able to include them.  You will want to talk with your lender to see what they will accept.

    We are advising clients that they might include any rental/lease agreements for legitimated business-related real estate and equipment or vehicles that had a rental agreement in place on February 15, 2020 or earlier. On the final report to the bank, these should be itemized and documentation for the agreements provided. Without further guidance, it will be the bank’s decision whether or not to allow them.

     

    1. The CARES Act requires that the lender make a decision on loan forgiveness not later than 60 days after the date the lender receives the application.  Will your lender have their own forms that must be completed?

    We encourage you to reach out to your lender and find out. There is reference to a narrative that might be prepared for the lender to able to report to the SBA providing a summary of what took place any assumptions that were made by the borrower.

     

    1. What interest am I allowed to pay with PPP loan funds?

    While mortgage interest is most commonly listed, we believe that interest on any business-related debt incurred prior to February 15, 2020, can be paid with loan funds and is allowable for forgiveness. While the Act is not clear on this subject, until further guidance emerges, this might be a question to your lender if you need to verify the forgiveness.

    You should also remember the 75% rule (75% of the loan must go to payroll costs in order to be forgiven).

     

    1. Can the loan cover the rental of equipment?

    At this point, we believe the rent expense for rental of equipment would be an allowable expense, but you may want to confirm with your lender to see what they will accept.

     

    1. I pay SUTA quarterly.  Would it still be counted toward forgiveness if my payment date falls outside of the 8-week period?

    This is an unclear area, and we may hear some additional guidance.  With the Loan Forgiveness Application, the SBA has so far clarified that payroll (and non-payroll) related expenses that may have been incurred prior to the 8-week Covered Period (CP) and paid within the CP will be eligible. Payroll (and non-payroll) related expenses incurred within the CP but paid after the CP will be eligible, as long as they are paid no later than the next regular payroll date.

     

     

     

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