Our CLA professionals share details on the Economic Injury Disaster Loan and PPP Updates.
- Leslie Boyd, CLA Principal, Manufacturing
- Samantha Metcalf, CLA Managing Principal of Industry, Manufacturing and Distribution
- Jennifer Rohen, CLA Principal, WOTC Practice Leader
- Jack Rybicki, CLA Principal, Managing Principal of Industry, Real Estate
In case you missed it:
Questions and Answers:
If I have customer with a Schedule C and employees, and a Schedule F with no employees, is the PPP loan based on adding wages and net C and F?
You would include the Schedule C employees and 2.5x the net income of the Schedule C, up to the $15,385 for the self-employed.
Has the definition of "Transportation" utilities been addressed yet? Is that fuel?
Do you know if we can include any PPE or janitorial cleaning services in the PPP forgiveness?
The guidance does not mention cleaning services as allowable costs.
Can we prepay an extra rent?
Forgiveness is for amounts ‘incurred and paid.’ Prepayments are not advised.
Has there been any guidance on related party rent being allowed?
No additional guidance; nothing that says it is not allowed so far.
Our loan was dated May 8. Can we use May, June, and July rent and utilities?
You get to include ‘incurred and paid’ – basically two months’ worth
What's the scoop on floor plan interest?
No specifics on floor plan interest
Please confirm - the option to use the beginning of the next pay period instead of the funding date is NOT available to those with a semi-monthly payroll period.
You can elect the alternative period with bi-weekly payroll.
Our loan is dated April 16. Can we include our April 22 payroll (covers workdays 4/1-4/15)?
You should be okay. The payroll must have been earned: "Payroll costs are considered incurred on the day that the employee’s pay is earned."
Is the entire EIDL loan amount taken off the PPP forgiveness - so you can't really have both?
Only the EIDL grant or advance is reduced against the forgiveness.
I have heard for the payroll forgiveness portion of the calculation; we can use cash basis at the start of the period and accrual at the end of the period. Is this consistent with the CLA interpretation?
That is consistent if you do not exceed the 56 days of 'costs' incurred, you can't extend the amounts you are including.
Are Simplified Employee Pension Plan (SEP) contributions included in the $100K annual salary cap?
$100k cap is for wages. However self-employed individuals are capped at $100K, including health premiums and retirement plans.
Utilities - PPP - are those for the alternate period if that option is chosen?
If common area maintenance charges are, per the Lease, "Additional Rent" wouldn't they be able to be included?
Lacking other guidance, this would be subject to lender review.
It's my understanding that you can give bonuses to whomever using the PPP, correct?
That is correct on a bonus with PPP – just watch out for the $100K limit.
Is it 56 or 168 days now?
It can be either 8 weeks or 24 weeks.
Does the extension of time to 24 weeks affect a self-employed person’s forgivable amount or are you still just able to take 8/52 of your net profit to calculate the amount forgiven?
We interpret the guidance to include the updated amounts from 8/52 to 24/52.
If May rent was paid in April, BEFORE the April funding date of the loan, will May rent still qualify for forgiveness?
You can't count expense paid before the funding date.
Can you pay consultants with the EIDL Loan?
Yes, but you will need to disclose it during the application process.
Is there a pre-payment fee, and/or penalty for paying the SBA EIDL early?
No prepayment penalty.
So, if I received the PPP and used it for payroll, and then received the EIDL for 2.5x more than the PPP, am I not able to get the PPP forgiven?
You can get forgiveness on your PPP loan - however it will be reduced by the EIDL grant you received.
Any news on if we can apply for forgiveness after the eight weeks, but before the 24 weeks?
If you are using the eight weeks, you would be able to apply for forgiveness when your period is over
On health and welfare and retirement costs, do payments made during the 8- or 24-week period need to be related to the payroll periods used?
Yes, they would.
Ideas on how to determine what our terms are?
There should be one more step for you. They should reach out to you to confirm the loan and DocuSign the term sheet.
What if you didn't get the EIDL Grant portion but only the loan? Does it reduce the PPP Loan forgiveness?
Yes, it will still impact your forgiveness.
What you missed:
Rohen: Hello CLA family, friends, colleagues, and community partners. Welcome back to our livestream. We hope you are healthy and staying safe as we continue to work through these uncertain times for you, your organization, and your people. We also remain committed to providing support to reach the common goal of equity and inclusiveness.
In very recent news, the Federal Reserve Board on Monday expanded its Main Street Lending Program (MSLP) to allow more small- and medium-sized businesses to be able to receive support. The board expects the MSLP to be open for lender registration soon and The program isn’t buying loans, the Fed is. The changes include:
- Lowering the minimum loan size for certain loans to $250,000 from $500,000;
- Increasing the maximum loan size for all facilities;
- Increasing the term of each loan option to five years, from four years;
- Extending the repayment period for all loans by delaying principal payments for two years, rather than one; and
- Raising the Fed participation to 95% for all loans.
We have Todd in the chat today to answer your questions with what we know related to these changes, and he will be back for the livestream on Thursday to take a deeper dive into this program with Leslie.
Today, we are going to cover three topics in what promises to be another jam-packed session
(timestamps of topic discussions included in parentheses):
- EIDL program (2:15 – 10:00)
- International components of the economic relief provisions (10:20 – 16:00)
- New law signed by President Trump (16:20 – 23:10)
Our guests today are Samantha Metcalf, Leslie Boyd, and Jack Rybicki. Welcome back, friends.
I’d like to start today talking with Sam about the EIDL program and some important items that we’re seeing coming through our COVID-19 landing page as it relates to the structure and forgiveness of those grants and loans. Sam, can you please kick us off with an overview of the program and where things stand at this point?
Metcalf: Thanks Jen. No major changes to the program at this point. The SBA is still taking care of their backlog on non-agricultural organizations, and only accepting new applications for agricultural organizations for up to $150,000. As of June 6, there was almost $80 billion in loans approved for EIDL. You are able to qualify for both the EIDL and PPP loan, however remember that if taking both – you cannot take them for the same expenses, and remember the EIDL grant will reduce the amount of PPP forgiveness. We are still unclear on if the grant is taxable – but at this point, to be conservative, I would assume yes. We will update you on a livestream if we get clarity on this.
Rohen: Thanks for that update Sam. Now that organizations are having an opportunity to review the term sheet what questions and concerns are you seeing from the applicants?
Metcalf: Right now the topic of conversation is the term sheet and the expectations that go along with the loan program. I would categorize the expectations from the SBA to be in three buckets: use of proceeds, requirements, and restrictions that go along with accepting the loan.
Jen: Ok, let’s get into the details. Where would you like to start?
Metcalf: Let’s start with the use of proceeds. We know that the use of proceeds is different than the PPP program in that the proceeds are to be used solely on working capital – which is defined as current assets and current liabilities: inventory, accounts payable, and things needed to operate your organization. What we learned by reviewing the term sheet is that in addition to use for working capital, as much as possible you are required to only purchase American-made products or equipment, and cannot use proceeds to relocate without the permission of the SBA. I have had a few organizations call and ask if the proceeds can be used on a building expansion or move. Based on the term sheet – that answer is no, unless you have permissions from the SBA.
Rohen: What about restrictions?
Metcalf: There are a handful of restrictions within the term sheet. Make sure to review them to make sure you understand, but there is one that I would like to touch on as it has been the number one question I have been receiving. When you accept the loan proceeds you will be restricted on making distributions or, make any advance, loan, gift, or bonus to any owner or employees or to any company directly or indirectly affiliated with the borrower. For organizations that pay distributions to owners — this is a big deal and must be a consideration. Right now, if the organization needs cash flow — taking distributions are probably not in the plan. However once the organization is back on track, the SBA will need to be repaid before being able to take distributions, make gifts or bonuses to employees, or advance funds to related parties.
Rohen: I can understand how those restrictions could make the organization question whether they should be taking the loan or not, and we have not covered the additional requirements that may be in place.
Metcalf: We knew that there would be requirements to retain receipts and contracts for funds spent in the term sheet. The timeframe that this information needs to be retained is three years. Certain financial information is required to be maintained for a period of time after the loan matures. Much of this information should already be prepared by your organization but review the term sheet to make sure you are tracking all of this financial information. The two requirements that you need to be aware of in addition to the financial records is that the SBA could require a reviewed financial statement at an additional cost to you. In addition, you must maintain hazard insurance while you have the loan. So again, many of our clients have reviewed and audited statements as a result of a loan requirement. I only wanted to point it out because it could be an additional cost to the organization.
Rohen: This is helpful Sam. I am sure that organizations need to take time to evaluate and decide if they are going to accept the loan. How long does an organization have before they have to make a decision to accept or decline the loan?
Metcalf: Based on the term sheets that I have reviewed for clients it appears as though they have to return the document to the SBA within two months of the loan authorization.
Rohen: Thanks, Sam final question: Any advice that you would give organizations that are hesitant to accept the loan proceeds?
Metcalf: I think organizations have been a bit surprised and then hesitant to accept the funds due to these restrictions. If your organization is in need of capital to support ongoing operations, this program should definitely be considered. However, make sure that you understand other alternatives, and the pros and cons that go along with them. I know Craig Arends was on a recent livestream talking about those options. For organizations in need of cash flow just make sure that you understand how these restrictions could impact the plans that you have for the future and remember you have the ability to pay the loan proceeds early. As we know there is no such thing as free money, there is always a cost — you as an organization has to decide if it is worth it.
Rohen: Thank you, Sam. It’s great that we have you here to cover this, and I think that’s a perfect entry for Leslie into the conversation to close some gaps on the international component of this program. Hi, Leslie, and welcome back!
Boyd: Thanks, Jen!
Rohen: Thanks for bringing your expertise in the international arena to the discussion. We have talked about several economic relief programs over the last several weeks. One complicated area has been how global companies do or don’t qualify for the program, and any special issues these companies face. Let’s discuss how global companies fit into these lending packages, starting with the EIDL.
Boyd: Participation in economic relief by global companies has several challenges. Each program has different eligibility rules, and these nuances can get especially tricky for global organizations.
For the EIDL program, in general businesses are eligible if they have 500 or fewer employees or they have more than 500 employees but are considered small under SBA size standards. Where this can get messy for qualification for global organizations is when the affiliation rules come into play. EIDL employee count eligibility counts employees of all affiliated companies, whether U.S. or non U.S. toward this general cap. Within the EIDL program there are also limitations for certain joint ventures when over 49% of the participation in the joint venture is foreign business concerns.
Rohen: Thanks for that information to close the loop on EIDL. What about the PPP Program?
Boyd: The PPP has also had significant confusion related to whether global companies are eligible. And I think it’s important to understand a little bit of this history and confusion as the Main Street Lending Program relies on many of these definitions, which have been fleshed out in the PPP program. Early on, the application was updated to indicate that U.S.-based companies with foreign parent entities are eligible to apply. That was good news. There also seemed to be a deviation from the other SBA programs as to how total employees should be counted. Early interim final rules and FAQs indicated when counting employees for eligibility (based on the 500 employee threshold), the guidance indicated that you count “employees whose principal place of residence is in the U.S.” Therefore, if I had 600 employees worldwide, but only 300 of those employees had a principal place of residence in the U.S., many came to the determination that such an entity would qualify because it was under 500 employees in the U.S.
This got murky when the SBA issued an interim final rule on May 5 that stated, “For purposes of the PPP’s 500 or fewer employee size standard, an applicant must count all of its employees and the employees of its U.S. and foreign affiliates, absent a waiver of or an exception to the affiliation rules”. Although that language confirms that the SBA’s affiliation rules at 13 C.F.R. 121.301(f) encompass both U.S. and foreign affiliates, it creates ambiguity as to which employees are included in the headcount for purposes of the applicable size standard. Specifically, by omitting any reference to “employees whose principal place of residence is in the U.S.,” FAQ #44 seemingly contradicts prior FAQs and interim final rule statements that indicated that the size standard for PPP loan purposes only counts employees whose principal place of residence is in the U.S.
This topic was finally clarified May 18 with an interim final rule on global affiliation. In this ruling, the SBA confirmed that the reference to the principal place of residence in the United States may have been misinterpreted by many borrowers. The purpose of the definition was to provide rules for which payroll was eligible in determining the loan amount and also which costs qualified for forgiveness. However, this definition was not meant to deviate from normal SBA affiliation rules.
- Therefore, go back to the example I gave where I have 600 employees worldwide, 300 of whom work in the U.S.
- For purposes of determining whether the borrower has 500 or fewer employees, I have to include all the employees worldwide. In this case, I would be ineligible.
- What is great though, is that anyone who applied for a PPP loan prior to May 5, and excluded non-U.S. employees from the headcount, is deemed to have made an accurate certification of eligibility if under 500, given this confusion.
Rohen: Thanks, Leslie – that’s so helpful to have some comprehensive coverage in this area. Of course, we can’t talk about PPP without talking more about the new Paycheck Protection Program Flexibility Act (PPPFA) and answering some hot topic questions that have arisen even since last Thursday’s livestream. Jack, welcome back and thanks again for joining us. I think it’s helpful to talk a little bit by way of introduction about what is in that new law?
Rybicki: Little has developed since the PPPFA Act was passed by the Senate and signed into law by the President on June 5. However, a joint statement was released by Treasury and the SBA about what to expect. The press release indicated that the SBA will “promptly” issue rules and guidance, a modified borrower application form and a modified loan forgiveness application implementing the legislative changes.
The release reinforced much of what we already knew:
- Extension of covered period to 24 months, borrowers that have already received PPP loans retain the option to use the eight-week covered period.
- New loans have a minimum term of five years rather than the two-year term set by Treasury, lenders and borrowers can modify terms of existing loans (but that is not likely)
- Provide safe harbors from reductions in loan forgiveness based on FTE reductions if a borrower is unable to:
- Rehire previously terminated employees, and unable to hire similarly qualified employees for unfilled positions by December 31, 2020 or;
- Return to the same level of business activity as they were operating before February 15 due to compliance with requirements of HHS, CDC and OSHA during the period from March 1 – December 31, 2020
- Extends deferral period until loan forgiveness remitted to the lender or, if the borrow does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period.
There is one area where we did get some new insight though, and that has to do with the implementation of the new 60% payroll test.
Rohen: That was definitely an area in the new PPPFA Act that caught everyone’s attention. So, tell us what we learned about how the SBA intends to implement this provision.
Rybicki: As you may recall from our presentation on Thursday, the literal reading of the language around “60% of the loan proceeds must be used on payroll” in the PPPFA Act seemed to indicate that this could be interpreted as a “cliff”, meaning that if you didn’t use 60% or more of the loan proceeds on payroll costs, then you would not be eligible for any forgiveness. The statement clarified that this test will be implemented in a manner similar to the 75/25 forgiveness test introduced by the SBA. The 75/25 forgiveness test will be replaced with 60 payroll/40 cap on non-payroll, and provide for partial forgiveness if a borrower uses less than 60% of the loan proceeds on payroll costs.
By way of example, let’s take a borrower with a $1 million PPP loan who uses 100% of the loan proceeds during the 24-week period, but $500,000, or 50%, is used for payroll and $500,000 is used for non-payroll. When requesting forgiveness, the maximum forgiveness the borrower will be able to ask for is $833,333 ($500,000 payroll divided by 60%).
Rohen: Has there been any developments on the deductibility of the expenses paid with PPP loans that are subject to forgiveness?
Rybicki: Unfortunately not. As we mentioned last week, the PPPFA does not address the deductibility of expenses paid using forgiven loan proceeds. This will take an “Act of Congress” to overturn the ruling by the IRS, but you can be rest assured that there will be additional legislation on the PPP and other COVID-19 relief measures that will provide another opportunity to address this matter later this summer.
Rohen: Let’s take some time that we have at the end of this session to address any hot topics.
Rybicki: Since May 22 we have not had received any new guidance from the SBA or Treasury. The things that we do know:
- We did get clarification on the paid versus incurred expenses, you can have more than two months’ worth of utilities if you paid something in arrears.
- We did get the IFR on May 22 on bonuses and hazard pay being includable.
- In the next round of legislation there are more things related to PPP.
- Senator Collins would like to include PPE (Personal Protective Equipment) as an allowable cost.
- Next group of legislation laws won’t come out until July or August timeframe.
- A lot of questions regarding the 8-week or 24-week period.
- If you are getting 100% forgiveness in the eight-week period there is no reason to extend it out to the 24-week period.
- The SBA doesn’t have the mechanism set up for the banks to submit the applications. The rules on how the bank is going to submit the applications and what they need to submit to the SBA and the technology mechanism haven’t even been created yet. The banks have 60 days to review things. Realistically loans will not get reviewed until Q3 and most likely won’t get information on forgiveness until Q4.
- We don’t think there will be new rules, will more likely have rules that clarify things.
Rohen: One question on EIDL – Can you give us any ideas on how we can confirm if we have an EIDL that we have to repay, or if it is an advance?
Metcalf: When you get an initial communication from the SBA, they will tell you it’s a grant or an advance. They will then follow up with the loan application process and you will be able to clearly see when they send you a term sheet with the loan. You will know that’s the loan process. There were also questions on the forgiveness piece, as an example if you received a $3,000 EIDL grant, and you also received a PPP loan and you received 100% forgiveness on your PPP loan. Technically without the EIDL loan you would have nothing to repay or $0 to finance. Because you have that $3,000 EIDL grant that is the remaining amount to be financed at 1%.
Rohen: One last question — Can I increase my salary as a business owner if I can’t take distributions with the EIDL?
Metcalf: The comment in the term sheet says there should be no bonuses or advances. My advice to you is to use the EIDL proceeds for what you need, if you plan on paying bonuses in the future, I would prioritize paying off the loan as soon as possible and then those requirements would go away. The SBA does give guidance, reach out to them.
Rohen: Unfortunately, that’s all we have time for today. Thank you to our guests today, to you for your questions, and to our moderators in the chat for all the support, great information, and answers. On Thursday, Leslie will be back with Todd to take a deeper dive into the changes to MSLP, as well as Jack or Rick to discuss more about PPP forgiveness as it comes available this week, and Paul Neiffer to share the impact of COVID-19 and economic relief on agribusiness.
We’d like to remind you to continue to visit our COVID-19 Landing page at CLAconnect.com for more information on PPP forgiveness as well as other hot topics. You should also take a minute to subscribe to our emails so that we can continue to share up-to-date information with you around the forgiveness tool, including a demo of the tool itself and how we can continue to support you during this time. Please continue to send us your questions, and we will be back next week with more information.