Join our multipart livestream series to engage in the latest changes related to these uncertain times. You’ll hear strategies for navigating what these developments mean for you. Topics include issues related to legislation, liquidity, workforce, and other relevant topics.
In case you missed it:
- Leslie Boyd, CLA Principal
What we talked about:
Boyd: Good afternoon to our CLA family members, clients, community partners, and friends. Welcome back to our sixth 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 an update on the latest developments on the Paycheck Protection Program (PPP), under the CARES Act. For those of you that were not able to join our previous livestreams, the PPP is a focal point for small businesses under the CARES Act, which was signed into law by President Trump just 13 days ago. The CARES Act includes several provisions totaling over $2 trillion in stimulus intended to help organizations, individuals, states, and municipalities. The bill is 880 pages and provides various small business lending, emergency funding for hospitals and health care providers, tax incentives, and unemployment provisions. Since its release, there have been multiple updates and guidance released to help with interpretation and implementation of its provisions, which is why we have dedicated several of these livestreams to this topic.
Banks have been accepting applications under the PPP since Friday, April 3 and we have heard reports that nearly $70 billion of loans have already been approved by the Small Business Administration (SBA). This is quite a feat to happen in less than two weeks. Because of the speed and volume of loans, we are seeing much confusion — and at times — more questions than answers.
Today, I would like to welcome the leaders of our COVID Economic Relief team at CLA: Todd Sprang from our Financial Institution Group and Jack Rybicki from our Real Estate Group. They will walk through the latest developments on the PPP and start to touch on the all-important loan forgiveness component of the program. Welcome gentlemen!
So, Todd, with nearly $70 billion in loans already funded, and hundreds of thousands, if not millions, of applications flooding banks across the country as a backdrop, give us your thoughts on how the program is going.
Sprang: The program is likely going better than expected. There is still confusion and frustration on the both sides: borrowers and banks alike as they try to get it right. The Department of Treasury and the SBA are providing almost daily guidance on implementation matters. Almost all guidance thus far is focused on the loan-sizing component, with little guidance on the forgiveness mechanics.
Boyd: Jack, what are you hearing?
Rybicki: I echo Todd’s comments regarding borrowers and banks trying to get it right. We are seeing the banks repeatedly change their applications and loan-sizing tools in response to guidance provided, but things have seemed to calm down a bit on that front now as banks have settled into their interpretations and are now working through applications.
Boyd: There were concerns raised that this money was going to run out soon, leading to the frenzy of activity we’ve seen over the last week, or so. Todd, what are your current thoughts on this potential issue?
Sprang: While that was, and still is, a real concern, we have heard that there is bipartisan support for an additional allocation of funds related to the PPP. In fact, a fourth piece of Covid-19 legislation is making its way through Congress as we speak. That draft bill has some interesting features:
- Expands the loan program by an additional $185 billion, which should provide some relief on the concerns we had about limited funding.
- Brings certain agricultural businesses into the scope of the PPP
- Eases limitations that excluded some organizations on the grounds of an owner having recent legal matters, providing exemptions for various minor, low risk offenses
- Contemplates increasing the loan sizing factor from 2.5 times to 3 times monthly payroll costs
- Forbids the SBA from imposing limits on the forgivable portion of the loan that can be used for non-payroll purposes. This refers to the new 25% cap on non-payroll and requirement to spend 75% on payroll that the SBA introduced last week that was not in the original CARES legislation
Boyd: Sounds like some potentially significant developments are still coming with this program. Jack, the last of Todd’s points hits on the topic of the forgiveness portion of the PPP, which is where I’d like to go next for our viewers. Can you explain the basic mechanics of the forgiveness provisions?
Rybicki: Under the current guidance, there are four main things you need to be concerned about when projecting out the forgiveness portion of the PPP loan:
- You need to quantify how much you spent during the eight-week period following the origination of the loan on allowable uses. As a refresher, allowable uses are payroll costs, which include wages, health care, and retirement benefits, but not federal taxes, rent, utilities, and interest on mortgage and other debt obligations. The forgiveness amount is limited to the amount spent on allowable uses.
- Employee retention is another significant component. This will be measured using full time equivalents (FTEs) outstanding during the eight-week period compared to one of two pre-COVID-19 periods. So, if you had 20 FTE’s in the 8-week period and 25 FTE’s in the pre-COVID19 period, you would have 80% retention and therefore only 80% of the amounts spent would be subject to forgiveness.
- There is also a component that looks at the amount of pay. This one only applies to employees making less than $100,000 and needs to be measured on an employee by employee basis. To the extent an employee is paid less than 25% of a comparable pre-COVID-19 wage, any reduction above 25% will cause a further reduction in the amount of the loan forgiven.
- The newest factor that was introduced by the SBA last week is the requirement for at least 75% of the loan proceeds to be used for payroll costs and limiting the use of loan proceeds for non-payroll items to 25%. We are still working through how this test gets inserted into the forgiveness formula, but it may be a moot point if the new legislation passes, which would remove this provision.
Boyd: That is certainly a complicated process to determine the forgiveness amount. What do our listeners need to be doing to prepare for this calculation?
Rybicki: The important thing is to maintain good payroll information and aggregate supporting documentation for all expenses: payroll and non-payroll. The borrower will need to provide documentation supporting all the components for amounts spent on allowable uses. Invoices, check copies, bank statements, payroll records, payroll tax filings, you name it.
I tried to explain the components as simple, concise calculations, but the underlying mechanics of each calculation have a number of current uncertainties. It is our expectation that the guidance that the SBA and Treasury will need to issue to assist banks and borrowers with the forgiveness calculation will greatly exceed the amount that has come out related to loan sizing.
Boyd: Can you give us an idea of some of the areas where CLA is seeking clarity for its clients?
Rybicki: Each of the calculations has underlying questions, but the two with the most questions are those regarding allowable uses and the “no more than 25% wage reduction” components.
For allowable uses, there is clarity needed about the definition. At the beginning of the CARES Act, allowable uses are defined as the costs we noted previously, that are incurred during “the covered period”, which for most of the PPP is the period from February 15 through June 30, 2020. This would seem to indicate that the money needs to be spent by June 30, 2020. However, the forgiveness clause in the legislation has its own definition of “the covered period”, which is the eight-week period following the origination (think funding) of the loan. As long as the loan is originated in April there will be no issues. But given the pending expansion of the program, if there are still loans being funded in mid-May or later, these two periods will not overlap, and potentially, some of the costs might not be includable in the forgiveness calculation. We think this should be an easy fix and was just a drafting error.
We also need guidance on the basis to measure allowable uses — is it based on amounts actually paid during the eight-week period, or just incurred? Most references are to “expenses paid,” so we think that will largely be the measure, as the bill is meant to support workers and the economy — so accruing, but not paying. Your rent won’t help the system. However, this could be an issue related to payroll, which is typically paid a week in arrears in many organizations with hourly workers. If the last pay period that falls in the eight-week period doesn’t get paid until a week later, should it be included?
For the wage reduction test there are a host of questions, ranging from seemingly simple questions like: How should you consider new employees? What about employees that are not rehired or leave during the eight-week period? However, the big question is in the mechanics of the measurement. Without getting too accounting geek on you, the current rule requires you to compare the wages of an employee during the eight week period to the wages of the same employee during the last full quarter they worked before the loan (either Q1 2020 or, for those that had been let go and rehired, Q4 2019). 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 employee’s pay rate at the same level. Now we think this is just hasty drafting and expect clarification that what they really meant was this test should apply to average wages during those two periods. At this point we just don’t know.
Sprang: I think there is also some confusion out there related to the requirement to spend at least 75% of the loan on payroll. If that provision stands, what happens to the shortfall? Does it not get forgiven and then convert to a loan? Does it need to be returned? This could really impact decisions about the size of the loan a borrower should be requesting.
Boyd: So, it sounds like a deeper dive into what we know on the mechanics of the forgiveness component will be in order for a future livestream. Jack, any parting thoughts?
Rybicki: There are still some areas where we are looking for guidance on related to loan sizing, most notably around self-employed individuals and independent contractors, who can start filing their own applications on April 10. The self-employed issue gets back to the reporting for an owner or owners of a partnership that are active in the business but do not receive W-2 wages. Should some amount up to $100k be included in the company’s application, or does the owner just need to file their own application? For independent contractors, the question is whether they should use payments received in 2019 to determine average monthly payroll, or something different — like net earnings. We think it is payments received (think 1099). There is also concern about how to report the allowable uses for self-employed and independent contractors, but that is a completely different discussion.
Boyd: Thank you, gentlemen. This has been very helpful. We recommend you contact your lender and your CLA professional from more information about the PPP. We can help you gather information to complete your applications and size your PPP loan request and begin to consider the expected forgiveness of the loan using our lending tools and CLA Intuition.
We hope today gave a comprehensive overview of where things stand with the PPP and an introduction to the forgiveness component of the program. Todd and Jack will be back with us to dive into forgiveness mechanics in greater detail once some guidance emerges from the SBA and Treasury. Have a wonderful afternoon, and please, stay safe and healthy.