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Paycheck Protection Loans – Next Steps

Can I Still Get a Loan?

If you have not yet applied for Paycheck Protection Plan loan there may still be time for you to do so.  As of May 1, 2020, the Small Business Administration has approved funding for over 2.2 million loan applications for loans that total a little under $176 billion of the $310 billion authorized.[1]  Unlike round 1, where the 1.67 million loan applications were approved for an average loan size of $206,000,[2] in round 2 seventy percent of the loans approved as of May 1 were for under $50,000, and the average loan size is $79,000.[3]

As part of the loan application process you will need to certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  Treasury and the SBA have indicated that in making this certification borrowers should take into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.  The SBA has also stated that it will be reviewing all loans in excess of $2 million for compliance with the certifications.

 

I got a Loan – What is Next?

If you are successful in getting a Paycheck Protection Plan loan for your small business you are probably wondering how you figure out exactly how much of that loan can be forgiven, and what documents you are going to need to provide to prove you have made the required payments.

 

What kinds of payments are eligible to be forgiven?

  • “Payroll costs”.
  • Rent – the lease must have been in effect prior to February 15, 2020.
  • Interest on mortgages for real and personal property. The loan must have been in effect prior to February 15, 2020.
  • Utilities (electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020).

 

How is the forgiveness amount calculated?

The amount forgiven will equal the amount paid for each of the following during the 8 week period after the loan is funded:

  • Payroll costs
  • Rent
  • Mortgage Interest
  • Utilities

For the loan to be eligible for forgiveness, at least 75% of the amount loaned must be spent on payroll costs.

Under the current guidance from the SBA and Treasury, salary paid during the 8 week period immediately following the funding of the loan is eligible for forgiveness.[4]  Given that payroll periods may not match up with the timing of the funding of the loans, the AICPA is requesting that the period be aligned with, at the employer’s choice, the payroll period beginning when the loan is funded or the next payroll period after the loan is funded.  We expect that in the coming weeks SBA and Treasury will release further interpretive guidance on how these amounts will be calculated.

The amount of payroll costs eligible to be forgiven will be reduced (by a percentage formula) if the average number of “full time equivalent employees” during the 8 week period after the loan is funded is less than the average number of full time equivalent employees for each pay period during a month during either

(a) the period beginning on February 15, 2019 and ending on June 30, 2019; or

(b) the period beginning on January 1, 2020 and ending on February 29, 2020 (the employer can choose which period to use), or

(c) if the loan recipient is a seasonal employer during the period beginning on February 15, 2019 and ending on June 30, 2019.

The hours of part-time employees are added together to come up with full-time equivalent employees.  As of the date of this blog, neither Treasury or the SBA have issued any guidance on how the number of full-time equivalent employees is to be calculated.  The AICPA is suggesting that 30 hours per week be used for calculating full-time equivalent employees.

The amount of the loan forgiven will also be reduced if the salary paid to any employee during the 8 week period after the loan is funded is reduced by more than 25% of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period.  The reduction only applies to the salaries of employees who earned an annualized salary of $100,000 or less.

 

What Kind of Documentation Will be Needed as Part of the Application for Forgiveness?

To have a loan forgiven, the loan recipient will need to submit an application to its bank.  The exact form of that application has not yet been determined.  The application will need to include:

  • documentation verifying the number of full-time equivalent employees on payroll and pay rates for the periods described above, including
    1. payroll tax filings reported to the Internal Revenue Service; and
    2. state income, payroll, and unemployment insurance filings;
  • payroll reports for the 8 week period after the loan is funded, and for the most recent full quarter before the 8 week period
  • documents identifying any employees who received annualized pay in excess of $100,000 and/or who live outside the U.S.;
  • documentation of the average number of full-time equivalent employees for the relevant periods;
  • documentation showing total costs paid for health care benefits, including insurance premiums paid by the employer under a group health plan (not including employee withholdings for their contributions to premiums);
  • documentation showing all retirement plan funding costs paid by the employer (excludes employee contributions); and
  • documentation, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments

Some banks and accountants are recommending that loan recipients open up separate checking accounts to help them keep track of the loan proceeds and how they are spent.

 

[1] Paycheck Protection Program (PPP) Report: Second Round (May 3, 2020) https://home.treasury.gov/system/files/136/PPP2-Data-05012020.pdf

[2] Paycheck Protection Program (PPP) Report (April 16, 2020) https://home.treasury.gov/system/files/136/SBA%20PPP%20Loan%20Report%20Deck.pdf

[3] Paycheck Protection Program (PPP) Report: Second Round (May 3, 2020) https://home.treasury.gov/system/files/136/PPP2-Data-05012020.pdf

[4]Paycheck Protection Loans Frequently Asked Questions as of May 3, 2020 – question #20 https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf

 

 

© Caulkins & Bruce PC, 2020.  The information presented is for informational purposes only.  You should not construe it as legal advice or a legal opinion on any specific fact or circumstances.

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