Join CLA principals Leslie Boyd, Jack Rybicki, and Todd Sprang for a continued conversation in our series surrounding the most recent updates to guidelines and regulations surrounding the CARES Act and Paycheck Protection Program (PPP).
In case you missed it:
Questions and Answers:
We did not receive approval before the funds ran out. Do we need to resubmit our application if additional PPP loan funding is approved?
It is recommended that you check with your lender regarding the status of your application.
Should employees that make over $100K be paid $8,333 per 4 weeks or per calendar month?
The latest guidance references weeks in most cases. Adhere to that until we get the final guidance on the forgiveness piece.
Regarding loan forgiveness, does gas used driving business vehicles qualify as a business utility payment for corporations?
There is not an example in the guidance other than transportation, but we believe so.
Is forgiveness based on accrual or payment of qualifying expense?
The statute is unclear. It states that forgivable expenses include costs incurred and payments made during the covered period. There is often a timing difference between when an expense is incurred and when it is paid.
Can you choose when your loan gets funded after being approved for a PPP loan/grant?
Lenders have 10 days to close after SBA approval. That could change in the future.
Why are ER taxes not allowed as payroll costs?
The government is not giving forgiving in the money due to them.
What does transportation refer to with regard to forgiveness?
That guidance has yet to be issued.
With respect to forgiveness, does it matter if payroll is used to expand a severance agreement with an employee?
It should not matter as long as the employee is paid.
When does the eight week period start for PPP loan forgiveness purposes? Can we select the 8 weeks or is it from the date the loan proceeds are funded?
8 weeks or 56 days from when you receive the money.
How long does it typically take after an approval to receive funds?
It can take up to 10 days to receive funding, following approval.
Interest on other loan obligations dated after February 15 are an allowable expense; are they forgivable?
Yes, they are forgivable.
We applied for our loan, but aside from an acknowledgement of receipt, our application has gone nowhere. Should we try to reapply through a different bank?
We recommend following up with your bank. You can also try different banks.
Is there a $100k cap criteria on the payroll forgiveness portion of the program?
$100k is max wages per employee on forgiveness. The $100k cap still applies on an annualized basis.
Can PPP funds be used for one-time lump sum bonuses to employees?
Yes, just keep in mind the $100k annualized limits.
If we received funds through PPP, are we eligible for the next round?
Our assumption is that you will not be able to double dip and receive funds in multiple rounds.
Can a bank delay funding after approval beyond 10 days to match up with a business payroll?
The guidance says 10 days for the bank.
How should we handle the employee retention credit and deferral of employer taxes for Social Security?
You won't be able to take the retention credit simultaneously with the PPP.
Some portions of the law identify a period between February 15 and June 30. Can the $100k annualized cap per employee be spread over this four and a half month period, increasing the forgivable amount?
No, it must be spread over the eight weeks from the date of funding.
My application was tentatively pre-approved by my lender with a loan number provided. What if I haven’t heard anything further?
If they have a SBA approval number, you’re likely approved, but confirm with your bank.
Would a monthly wireless bill (cellular service & data) be considered telephone or internet under allowable/forgivable utilities?
We believe so, internet and cell phone are included, but not cable.
Can you use PPP funds to make discretionary contributions to employee 401k plans?
Yes, as long as it is a qualified IRC S401 plan.
If a bonus is paid to employees, will bonus amounts be used in the annualized calculation for 100k cap? Will the total eight week compensation including bonus be annualized?
Yes, you have to stay under the limit annualized during the eight weeks.
I was approved and received an authorization number last night and electronically signed the promissory note this morning. Will I still get the funds?
If your bank received the SBA authorization and you closed the transaction it should be fine but we recommend you confirm with your bank.
How does the 75% test work?
The 75% spend test is after you determine how much can be forgiven. You must spend a minimum of 75% of that amount on payroll related items.
Can contract employees be included?
1099 employees are not included.
If I haven’t paid myself since January, can I pay say $30k during the eight week period, since this annualizes to less than $100k from February 15-June 30?
No, the limit is 8 weeks annualized, so the maximum is $15,385 for the entire 8 weeks.
Is a profit sharing contribution forgivable?
Yes, as long as it is a qualified IRC S401 plan, it is not subject to the cap.
Can we pay out accumulated vacation and sick time during the eight weeks, and have it forgivable, so long as under the $100k annualized cap?
Do we have to begin immediately using the PPP money once it is funded? Or can we spend it over eight weeks as long as it is used by June 30?
You have eight weeks to spend the funds.
Can you withdraw your EIDL loan application?
You can decline any EIDL loan awarded. Regarding withdrawing the app, we recommend contacting the SBA Disaster Customer Service Center.
Are you allowed to use funds for bonuses for employees who are under $100k?
Yes, just keep the amount paid for these employees under $15,385 per employee in eight weeks.
If you don’t use 75% of the loan amount for payroll, is the loan forgiveness amount zero?
No, you can get 25% of other costs forgiven.
Do employer dental insurance premiums qualify as allowable uses?
Would worker's compensation insurance attributable to actual payroll be considered a payroll cost or is it an allowable use of funds?
Worker's compensation is not part of the employee benefits for forgiveness.
Who will review our documentation for loan forgiveness, SBA or our local lender?
Your lender will review first, but the SBA will also review.
Our PPP loan application was not processed in time. Should we pursue our application with the bank we submitted application to? If more money is added to program, would we retain our place in the queue or would we start all over?
We recommend you first discuss with your lender where you stand, then consider restarting with another lender.
We are holding on a couple positions that would go to new employees because of waiting on the PPP approval. Do they count in our calculation?
Yes, they will count.
Can you hire new employees and new positions?
Does the $100K limit include health insurance and other non-wage related costs?
What we talked about:
Boyd: Good afternoon to our CLA family members, clients, community partners and friends. Welcome back to our eighth livestream. We are grateful to have all of you join us and we wish you, your families, and friends health and safety during this time.
Our goal today is to provide you with an update on the latest developments on the Paycheck Protection Program, or PPP, and other potential COVID-19 relief programs. We are also going to begin a deeper dive into the loan forgiveness component of the PPP, which is starting to get quite a bit of attention now that PPP loans have been approved and funded.
As a frame of reference, banks started accepting applications under the PPP only 13 days ago, and as of this morning, the SBA announced that they have stopped accepting application because the full $349 billion allocation is fully committed. Don’t panic about that — we have some good discussions and thoughts around the status of the program. To date, CLA has helped its clients secure nearly $150 million in loans, and we expect this number to exceed $200 million once all is said and done under the current allocation.
I would like to welcome the leaders of our COVID-19 Economic Relief team at CLA: Todd Sprang from our Financial Institutions Practice and Jack Rybicki from our Real Estate Practice to share about today’s topics. Welcome, gentlemen!
So, with reports that the money for the PPP has been exhausted, Todd, please share your thoughts on the Program.
Sprang: This all moved at a lightning pace. It likely went better than expected, despite confusion and frustration on the sides of both borrowers and banks alike as they try to get it right. Treasury and the SBA are providing guidance on an almost daily basis on implementation matters, the latest of which related primarily to self-employed individuals. Almost all guidance thus far focused on the loan sizing component, with little guidance on the forgiveness mechanics.
In terms of what the future holds for the PPP, President Trump has asked for an additional $250 billion and both House and Senate agree more funding is needed. Unfortunately, there is squabbling on a variety of matters between Republicans and Democrats, which will likely delay any additional allocation, potentially into early May.
Rybicki: This delay will cause a pause by the SBA in approving loans, but will not impact the funding of loans already approved, as those are already in the hands of the banks. For those who have not completed an application, I suggest that you continue to work on it with your bank, so you will be in queue once the program does receive additional funding. On a positive note, the draft legislation we have seen is contemplating increasing the loan sizing metric from 2.5 times average monthly payroll to three times payroll, so being late to the game may work in the favor of some companies
This shortage of funds is not only hitting the PPP, but has also hit one of the other main relief programs, the Economic Injury Disaster Loan or EIDL program. The SBA recently stopped taking applications because funds are exhausted. The Emergency Grant of $10k, which was supposed to be funded in 3 days, generally has not been disbursed for applications going back to March, and is now going to be based on $1k per employee — up to a max a $10k. Because the SBA has received nearly 4 million applications for funding for loans totaling over $375 billion, SBA will be initially limiting loan funding to $15k (reported by US Small Business Chamber).
Boyd: So, let’s turn our attention with the rest of our time to address the topic that is on the minds of everyone out there that has been approved for a loan – forgiveness. Jack, can you provide a brief overview of the components of the forgiveness calculation for us?
Rybicki: Sure Leslie. Under the current guidance, there are basically four main things you need to be concerned about when calculating the forgiveness portion of the PPP loan:
- How much you spend during the eight-week period on allowable uses.
- You will also need to consider how you spend your loan proceeds. At least 75% of the loan proceeds need to be used for payroll costs. Non-payroll items are limited to 25%.
- Employee retention is another significant component.
- And last, but certainly not least, is a comparable wage component
Boyd: Why don’t we unpack these individually, starting with the allowable uses. You shared with our viewers in the past that allowable uses include payroll costs, rent, utilities, and interest on mortgage and other debts. What are some things borrowers need to know about “allowable uses” as they consider this topic?
Rybicki: As a refresher, payroll costs include wages; group health care and retirement benefits; and employer, state, and other non-federal payroll taxes. However, the cash component, like salaries and wages, is limited to a $100k annualized amount. Any amounts during any pay period above that amount measured at the individual employee level will not count as an allowable cost.
A big question we are getting relates to how these costs are measured. When will it be when incurred: more of an accrual basis, or when paid? The CARES Act itself uses the reference “incurred and paid” during the eight-week period. This obviously can cause some issues as it related to timing of deferred payments and present expenses. For example, payroll is typically paid one week in arrears. If the time incurred before the loan was funded, but was then paid in the eight-week period, will that be includable? What about utilities that are incurred during the eight-week period that you are billed in arrears for and likely will pay shortly after the eight-week period ends? Treasury will have to issue guidance on this topic.
Boyd: Todd, why don’t you share some thoughts with us on the 75% for payroll and max of 25% on non-payroll component?
Sprang: This was a controversial late add to the program by Treasury, as it was not in the CARES Act. It creates concerns on behalf of many small businesses, as they don’t have work for many of the employees that they have terminated or furloughed and likely still won’t during the eight-week period.
If employees aren’t, or in some cases can’t be, hired back and the 75% payroll threshold isn’t hit, we are hearing concerns from borrowers that the forgiveness will be significantly reduced, or even worse, that maybe some of the loan proceeds would need to be paid back sooner.
Boyd: Jack, the employee retention test seems fairly straight forward, at least as straight forward as anything under the PPP. Can you please explain how the mechanics work and let our viewers know where some of the pitfalls might be with this test?
Rybicki: Unlike the eligibility test, which is based on employee count, the retention test is based on FTE’s. FTE’s are measured using three main buckets of employees — salaried, full-time, and part-time. A full-time employee is anyone who works, on average, over 30 hours per week or 130 per month. Salaried and full-time workers each count as 1 FTE, regardless of the hours actually worked. For part-time employees (those who work less than 30 hours per week), the FTE amount is determined based on actual hours worked divided by a standard work week. For most SBA programs, the standard work week is 30 hours, so we believe this is the right factor to use here - we hope to get clarification on that topic.
A borrower will measure average Full Time Equivalent during the eight-week period following the loan and compare that to average FTE’s in one of two periods, February 15 – June 30, 2019 period and the other is January 1 – February 29, 2020. The borrower gets to choose the FTE factor used in the denominator.
There are provisions for rehires that favorably impact the FTE calculation during the eight-week period. As long as an individual is hired back before June 30 they will be treated as an FTE throughout the eight-week period. While there is some planning to do here, you must take into consideration the previous component of using 75% of the loan proceeds on payroll. While bringing your entire workforce back on June 30 won’t hurt you on this portion of the forgiveness calculation, it is unlikely you would use the funds on payroll and therefore not get forgiveness. In order to maximize forgiveness, you should consider bringing Essential Employees back around the time the loan is originated.
Boyd: The last test, the comparable wage, seems to have some potential complications. What if you can’t rehire your former employees? What if you hire new employees who weren’t previously employed by the company? Can you pay bonuses? The list of questions is potentially endless.
Rybicki: You’ve hit the nail on the head regarding the uncertainties and unanswered questions on this test. The test itself is simple in concept. If, during the eight-week period, you are paying someone less than you were paying them before the COVID crisis, the amount of forgiveness will be impacted.
The devil is in the details here. The rule states there won’t be a forgiveness adjustment in the event the eight-week wages are not decreased by more than 25% from the pre-COVID period (i.e., the last full quarter the employee worked before the loan application – generally either Q1 2020 or Q4 2019).
The questions you posed on how to handle situations where the employee base is not identical will need to be clarified. We do know that this test only needs to be applied to those individuals making less than $100,000 annually. However, employees don’t get scoped out based on annual wages, but rather if their wages “in any pay period during 2019” exceed an annualized amount over $100,000. This could cause confusion for hourly employees who worked OT, those with commissions or bonuses, etc. We will need guidance from the SBA on this matter.
The wording in the CARES Act itself causes confusion for this test. The rule says that the wages in the eight-week period can be no less than 25% lower than the pre-COVID-19 period. However, the pre-COVID-19 period is a quarter’s worth of wages, which is either 12 or 13 weeks. Inherently you will fail this test and have a reduction, even if you keep the employees pay rate at the same level. Now we think this is just hasty drafting and expect clarification this test should apply to average wages during those two periods, but at this point we just don’t know.
Boyd: Well, it is clear that we will need additional guidance from Treasury on the forgiveness topic. Thank you, gentlemen. This has been very helpful. And to our livestream viewers, a parting thought to remain calm amidst all this chaos and ever-changing landscape: if you haven’t been able to secure relief under the PP or EIDL programs, it is highly likely that opportunity will come soon. It is important to take action now to conserve working capital, and be prepared to apply once these programs are funded again. For those who have received funding, make sure you are working with your CLA representative and your lender to get in front of the requirements for determining loan forgiveness.
We hope today gave a nice overview of the forgiveness calculations. Managing your working capital during these uncertain times is critical, and we encourage you to reach out your CLA representative to learn about the tools we have available, like CLA Intuition — which provides real-time scenario modeling to assess the impact of various decision points on the financial recovery and strength of the organization. Have a wonderful afternoon, and please, stay safe and healthy.