Your Q&A — PPP, Main Street Lending, and Economic Relief Options

Woman Gesturing by Laptop
  • 6/30/2020
  • Virtual

In this session, we'll be covering PPP Updates and other economic relief options

Speakers:

In case you missed it: 

 

Questions and Answers:

Our loan documents state that we must start servicing the loan 7 months from the loan date. If we choose the 24 weeks as the covered period, do we need to ask the lender to amend the loan documents to reflect the new loan repayment terms or do the new IFRs supersede that clause? According to the recent IFR loan repayment starts once SBA pays the lender for forgiveness.

It’s my understanding, based on discussions with various lenders, that the new deferral period is a modification to the CARES Act and as such, may not require the lender to amend the loan document because the law (CARES Act) supersedes that clause.  That said, it doesn’t hurt to ask your lender how they intend to address that clause since they can’t enforce it.

Is there any downside to me taking EIDL or PPP money, since I do not have a business registered and I have only 1099-MISC income?

There are some considerations on each of the programs however there is nothing that says that you cannot take both of them together.

I got $1000 for EIDL. Can I do both EIDL and PPP? How will forgiveness work in that case?

Yes, you can take both.  PPP forgiveness will be limited by the EILD grant you received ($1,000).

Can a company apply for a Main Street Lending Program loan yet?  If so, is there a specific application required by the Fed?

Yes.  Applications are being taken by lenders but there are only a limited number of lenders participating at this time. We’ve heard that only 300 lenders have registered to date. The application, underwriting, note terms and note agreement all come from the lender, not the Fed. The Fed’s role is just to buy 95% of the loan from the lender.

There was an indication that PPP loans under $50,000 may have blanket forgiveness. Has there been any update on that?

Not at this point.

What happens if you cannot spend all the PPP during the covered 24 month period, but can still use it by the end of the year on qualified expenses?

You can spend it on qualifying expenses and should maintain the documentation to support that you did so.  That way, you can support your “material compliance”.

Can we obtain forgiveness exclusively on payroll related items…60% or more…at 100% and forget about doing anything with the other categories up to 40%?

Yes.

What you missed:

Leslie Boyd: Good afternoon to our CLA Family members, clients, community partners, and friends. Welcome back to our Livestream! We sincerely hope that you are continuing to stay safe and healthy at this time. June is the month of gratitude at CLA. As we close on this month we want to take a moment to say that we are grateful for all of you.

Today, we are going to be answering your frequently asked questions and fielding live questions from the inbox. Jack and I are going to spend the whole time together to dialogue about these questions. Before we jump into that, it wouldn’t be a normal livestream if we did not bring to you one piece of breaking news! Today was supposed to be a major deadline related to net operating loss carrybacks for 2018 for individuals and C corporations under the quick refund procedures, where the returns were allowed to be faxed to the IRS. The quick refund claim process is a significant benefit because rather than filing an amended return, where the mail is backlogged, the IRS has allowed the refunds claimed to be faxed in and under these procedures, refunds are to be issued within 90 days. The deadline was extended yesterday from June 30 to July 15 for 2018 carrybacks. We recommend consulting your advisor related to 2018 loss carrybacks and 2019 and 2020 tax planning matters. Now let’s pivot to PPP.

Jack, welcome back and thank you so much for your time today!! I think you’re probably very used to this format from the audience and the chat – I’ve got a few questions that came in earlier today so we’ll start with those, and then we can move into the live questions.

Let’s start with this question from Beth. Her question is: does a company need to meet a requirement of lack of business or decreased payroll costs in order to have the option to move from the 8-week covered period to the 24-week covered period? Can it be just by choice to ease the loan forgiveness documentation (ie. payroll/rent/utilities vs just payroll)?

Jack Rybicki: We are getting a lot of questions regarding the 24 week covered period. Under the Flexibility Act, all Paycheck Protection Program (PPP) loans now have a 24 week covered period. There is no need to do anything to elect the 24 week period; there is nothing a borrower needs to do to qualify to use the 24 week period. However, for those borrowers that had loans originated before June 5th, they can elect to use the originally provided eight week covered period if they want to. The election to use the eight week period will be made on the application for forgiveness, either the Form 3508 or Form 3508EZ.

Boyd: Beth also asked: We obtained our PPP loan on Apr 8th under the eight-week covered period rule; as the rules stand today, we are unable to use all of the PPP funds – we are at 94% use of funds which includes use of rent and utilities payments.

I am wondering if we can make the decision to switch to the 24-week covered period rule and use only payroll until all of our PPP funds are used (which takes us to 6 pay periods vs 4 pay periods plus rent/utilities)? This allows for a much simpler Loan Forgiveness Application (payroll only) with the ability to apply for forgiveness fairly soon.

Is there a different basis in which we compare payroll figures against by switching to the 24-week period? And applying for forgiveness sooner than the 24-week period is up?

Rybicki: A borrower can choose the covered period that they want to use, either the 8 week or 24 week period. With the IFR that was released on 6/22, the SBA provided borrowers the flexibility to request forgiveness before the end of the 24 week period, stating:

A borrower may submit a loan forgiveness application any time on or before the maturity date of the loan—including before the end of the covered period—if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness.

The main issue that remains unaddressed is how a borrower should request forgiveness before the end of the 24 week period and what rules will apply. The interim final rule (IFR) only provided guidance on how to apply the wage reduction test in the event that a borrower reduced wages in excess of 25 percent, but did not address the FTE reduction or any other implementation matters.

If the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25 percent, the borrower must account for the excess salary reduction for the full eight-week or 24-week covered period, as described in Part III.5.

With respect to one other matter in this question, a borrower only needs to include costs on the loan forgiveness application that it is asking for forgiveness for. So, we believe it is acceptable to use a longer covered period (up to 24 weeks) and only report payroll costs as costs eligible for forgiveness. A borrower does not need to include all costs paid or incurred during the covered period that are eligible for forgiveness.

Boyd: Deanna asked: Has the Small Business Administration (SBA) released any specifics on how financial institutions are to request loan forgiveness from SBA?

1502 reporting is now supposed to be monthly – does this need to occur by any particular day of the month?

Rybicki: At this point there has been minimal guidance provided by SBA to lenders with respect to forgiveness. There was an interim final rule released on June 22nd that discussed the loan review procedures to be performed by the lenders once loan forgiveness applications have been received. However, there has been no guidance with respect to how lenders will submit loan forgiveness application packages that have been through the lenders’ review procedures. The SBA has signaled that there will likely be a relaxing of the 60 day time limitation that lenders have to review loan forgiveness applications due to the delay in the release of guidance to lenders by the SBA. I would expect that the 60 day time limitation will be waived until guidance is released.

With respect to the form 1502 reporting, there is not set date for reporting information to the SBA. The guidance states that “Lenders may batch multiple PPP loans in a single 1502 report, or Lenders may complete a 1502 report on an individual PPP loan basis. There is no limit on how frequently Lenders can submit 1502 reports.”

Boyd: Connie asked a good question related to the sale of a business: What happens if a client applies for PPP then uses it for expenses, and enters into a sale agreement before the loan is forgiven?

Rybicki: There are a number of issues with respect to mergers and acquisitions that need to be considered when any of the parties involved have an outstanding PPP loan. Items that require consideration include, among others:

  • How the existence of an LOI or other purchase document would impact the affiliate rules when determining PPP eligibility
  • How does a purchase agreement impact the borrower’s consideration around its ability to access other sources of capital in determining eligibility
  • Approval requirements by the lender and the SBA for a change in control or asset sale. May need to pay off PPP loan at the closing of transaction because the typical 7(a) program note terms provide that a borrower is in default under the note if it “reorganizes, mergers, consolidates or otherwise changes ownership or business structure without Lender’s prior written consent.
  • How to handle expected forgiveness when the acquisition will occur prior to the date that forgiveness will be requested or that forgiveness amounts will be determined by the SBA. Use of escrows, holdbacks, etc.

Extremely important to consider whether you are the buyer or the seller. Consultation with an attorney familiar with the SBA’s rules regarding M&A is highly advisable. I would also suggest discussing with your lender as soon as possible, as it may take time for the lender to work its way through the process it will need to consider due to uncertainties.

Boyd: Sarah asked about FTE count: I am confused as to how you come up with FTE counts. Do you count them for each pay period that occurred that month and then take the average for the month? Or do you do each payroll over the test period and average them all? I assume the same method would stand for your covered period.

How do you count an employee that was a salaried full time person andquits in the middle of a pay period? Let’s say they only work three days of that pay period.

Rybicki: FTE counts can be confusing. The first thing we urge borrowers to consider is whether or not any of the safe harbors with respect to the FTE test apply. Specifically, if there was a reduction in workforce, will the reduction be eliminated by the time the borrower files its application for forgiveness. Or, has the borrower’s ability to conduct business activity at pre-COVID levels been impacted by regulations or guidance from HHS, CDC or OSHA or indirect state, county or city rules derived from the federal guidance. If either of these safe harbors apply, then borrowers are exempt from applying the FTE reduction test.

Assuming the borrower must move forward with the FTE testing, let’s first review the periods that are important for all non-seasonal borrowers.

  • The numerator for the FTE retention quotient is the FTE count during the covered period.
  • The denominator for the FTE retention quotient is the FTE count during either the period from 1/1 – 2/29/2020 or 2/15 – 6/30/2019. The borrower gets to choose the denominator period.

In terms of the mechanics of the FTE calculation, the FTE count should be determined on a pay period by pay period basis and then the averaged across the relevant period.

FTE count is determined on the following basis:

  • Salaried employees count as 1 FTE
  • A full time hourly employee, which is an employee that works on average over 40 hours per week, counts as 1 FTE regardless of the hours worked.
  • The FTE for a part time hourly employee can be determined either based on actual hours worked (sum all P/T employees and divide by 40) or using a simplified method of assigned each P/T employee .5 FTE.
  • Apply the same method (actual hours or simplified method) across all periods for both the numerator and denominator.

Boyd: John asked: Can you advise how to accumulate FTE for hourly and salaried people for the covered period for a biweekly payroll?

I assume that we can do it using 80 hours as the basis for a full time equivalent since it is biweekly payroll, however I only see reference in the law about 40 hours per week. Do we have to show 40 hours per week or can we do it biweekly using 80 hours and if so what is the source saying that we can do it that way.

Rybicki: We believe that you would just use the relevant number of full time hours. For bi-weekly that would be 80 hours.

Boyd: Alisa had three questions:

  1. We use temp workers who are employed by a staffing agency. Do we count them in our FTE count? Or are they considered independent contractors? The SBA stated independent contractors cannot be included in payroll costs. Also, we do not know if the staffing agency has applied for the PPP.
  2. The interest expense that can be included as non-payroll costs, is this just mortgage Interest expense or can we include other interest for debt
  3. Has there been a clear definition for health insurance? Can employer paid dental and vision be included?

Jack: Regarding temp workers, we don’t believe that workers employed by a staffing agency can be included in either the payroll costs eligible for forgiveness or in the FTE counts.

For interest expense, the wording is a bit vague but currently only provides that interest on covered mortgage obligations is eligible for forgiveness. This appears to exclude interest on “other debt obligations,” which is another allowable use of PPP funds, but seems to not be eligible for forgiveness.

With respect to health insurance, we believe health insurance includes dental and vision, as well as mental health and other health related premiums. We do not believe premiums for items that are more “income continuation,” like short-term or long-term disability or life insurance, are eligible for forgiveness. Also, one more thing to note is that the costs eligible for forgiveness are not the gross premiums paid, but only the employer portion of the premium. So you must reduce the premium paid by the amount that employees are contributing. This also applies to contributions to retirement plans.

Boyd: Jan has a payroll timing question: My payroll date is every Friday; in my 8 week covered period there were 9 Fridays so am I allowed to claim all 9 pay periods for forgiveness in this 8 week period.

If the above isn’t allowed, if I file for forgiveness in week 10, am I still required to keep my FTE count for 24 weeks?

Rybicki: The rules around payroll state that payroll is eligible for forgiveness if it is paid or incurred during the covered period. Thus, we believe that it is possible for more than 8 weeks of payroll to be included in the covered period based on the timing of payroll periods. For instance, on the front end a borrower will likely pay for a payroll after the loan funding for a period of time before the loan originated. Conversely, on the back end the rules allow that as long as time incurred during the covered period is paid during the next regular payroll cycle it is eligible for forgiveness as well.

Boyd: Unfortunately, that’s all we have time for today. Thank you to Jack for the great discussion, to you for your questions, and to our moderators for all the support and great information and answers.

We will be taking a break for the Independence Day holiday and will be back on Thursdays starting July 9.

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