The Payroll Protection Program (“PPP”), established under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) is designed to provide cash, in the form of a potentially forgivable loan, to enable small businesses and their employees to survive the economic devastation wrought by the COVID-19 pandemic. While we are still waiting for more definitive guidance from the government on how PPP funds can be used and will be forgiven, the following is some general guidance based on the information that has been provided by the SBA to date. This information is not meant to substitute for individual advice from your lender and/or professional advisors.
The SBA guidance that has generated the most urgent questions from our clients is the recent SBA statement reminding businesses that they had certified that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” This guidance was issued in response to reports of PPP loans being made to national restaurant chains with large cash reserves and organizations like the Los Angeles Lakers. While our guidance has been that PPP loan funds were not intended to be funds of last resort, determining if your business could make the certification at the time your application was submitted is a very fact specific inquiry that should be discussed with your attorney and accountant. The SBA has advised Borrowers that if they conclude that they cannot make the certification in good faith, they have until May 14, 2020 to return any PPP funds to their lender and be released from any obligations under the PPP program.
The goal of every business receiving a PPP Loan is to maximize the funds that will be forgiven. That will require you to monitor and document your use of all PPP funds. A good first step is to segregate PPP money from other business funds. PPP money should be clearly differentiated from other business funds. The most effective way to do this is to maintain PPP money in a separate bank account. In order to qualify for maximum (principal) loan forgiveness, you will be required to show that all of the PPP money was used for permissible purposes over the eight-week period after the loan is received, namely payroll expenses (a minimum of 75% of the funds) and allowable business expenses (a maximum of 25% of the funds). A separate account, comprised exclusively of PPP money, will facilitate your tracking the use of these funds to show you met these benchmarks.
Some or all of the PPP Loan may not be forgiven if during the eight-week loan period you reduce your full-time employee head count or if you decrease salaries and wages by more than 25% for any employees making less than $100,000 a year. A hard deadline of June 30, 2020 is set for restoring full time employment and salary levels for any changes made between February 15 and April 26, 2020. The SBA recently provided guidance that if you have laid off an employee and offer them employment on the same terms after receiving a PPP Loan, but the employee declines to accept that employment, that employee will not be included in the calculation for loan forgiveness.
Payroll costs include salary, wages, commissions or tips (capped at $100,000 on an annualized basis for each employee), employee benefits, including costs for vacation, parental, family, medical, sick leave, health care benefits, including insurance premiums and payment of any retirement benefits. Allowable payroll-related costs also include state and local taxes assessed on compensation. However, the CARES Act does not, in defining payroll costs, include the employee’s and employer’s portion of federal payroll taxes, the employee’s income taxes required to be withheld by the employer, or payments to independent contractors.
As stated earlier, up to 25% of PPP funds may be used on certain business expenses, assuming you can show those expenses existed on or before February 15, 2020. These expenses include mortgage interest payments (not including mortgage pre-payments or mortgage principal payments), rent payments, utility payments, interest payments on other business debt obligations, or the refinancing of an SBA Economic Injury Disaster Loan made between January 31 and April 3, 2020 if that loan was used to pay payroll costs.
To substantiate both payroll costs and allowable business expenses during the eight-week loan period, you should be meticulous in maintaining, and be able to produce, documentation, including all of the documentation submitted in applying for the PPP loan. A schedule detailing how the PPP money was spent should be kept. Documents evidencing gross payroll, including payroll records through your payroll services provider, should be on the ready as should evidence of expenses (canceled checks, mortgage statements, bills, etc.). If you use a third-party payroll provider, you should ask them how they are tracking these expenses and what reporting will be available at the end of the 8-week period.
Following the guidelines outlined above will allow you to document for your lender how your PPP funds were used and should maximize the amount of the PPP loan that is forgiven. If any portion of your PPP loan is not forgiven, it will accrue interest at a rate of 1% per year and will need to be repaid within two years, with payments beginning in six months. You should review the terms of your PPP Note for exact terms and dates for when any payments would begin.
Since guidance from the government regarding PPP is ongoing and not formalized, there continue to be many unanswered questions relating as to the interpretation of the Act and loan forgiveness. If you have questions or concerns about your PPP Loan including best use of those funds and your obligations, please contact our COVID-19 response team by sending an email to [email protected].
1 Two valuable resources for borrowers are the PPP Information Sheet for Borrowers and the PPP Loans FAQ’s, both publications issued by the SBA in consult with the Department of Treasury and available at the home.treasury.gov website. The FAQ is updated frequently so it is important to be certain you are relying on the most current guidance.
2 Employees earning greater than $100,000 annually may have their salaries reduced by more than 25%, although not below $100,000, without running afoul of loan forgiveness. PPP money should be clearly differentiated from other payroll money when compensating these individuals during the loan period.
3 Excluding family and sick leave eligible for a credit under the Families First Coronavirus Response Act (“FFCRA”).