April 23, 2020

PPP – Paycheck Protection Program

Dear Clients and Friends,

Many of you have embarked on the task of applying for the Paycheck Protection Program (PPP) over the last few weeks. As we have worked through this process in close partnership with many of you, we wanted to send you an update on next steps on this journey.

If your small business has received approval for a loan from the Paycheck Protection Program (PPP), congratulations on obtaining aid to help get your business and your employees through this shutdown.  If you were part of the even larger group of small businesses that applied but are still in process, there is hope! Make sure your applications are complete with your lender and ready to go.  As of April 21st, the Senate approved an additional $370 billion in additional funding for small businesses, with $310 billion of this going to replenish the PPP, $50 billion for the EIDL program and another $10 billion for small business grants.   It was not immediately clear if these additional funds would come with a different set of rules. The House is set to vote on the additional funds on April 23rd, with the President saying he will sign immediately.

As you know, the PPP loan has the potential to be completely forgivable and completely federal tax free. It is a golden ticket for any small business during this challenging time, so if you have yet to delve into this process, do reach out to us.

PPP Update

The first week after the PPP loan application came out, many of you reached out to us to determine if you were eligible, and how to apply.  There were many questions about the application itself. There was a rush to get this done as soon as possible, since this was communicated as a “first come first serve” opportunity. Now, we are faced with the daunting task of how exactly the PPP loan forgiveness works and what will be needed to ensure your small business maximizes this relief.

The SBA says a company can maximize the percentage that is forgivable by avoiding layoffs and furloughs through June 30th, 2020. This ensures that you can forgive at least 75% of the loan amount when used to pay payroll costs. The remaining 25% of the loan may be utilized for rent, mortgage interest or utilities and still achieve loan forgiveness. The banks processing these SBA loans will be involved in this forgivable loan application and calculation. There are many nuances to the forgiveness calculation rules that impact forgiveness maximization strategies. The Treasury Department has indicated an intent to clarify these rules through further guidelines. There are many questions at this moment in time with very few concrete answers. As we experienced in the application process, we are bracing ourselves for multiple updates and iterations of the rules before we know how to truly know how to apply this in the real world with your banks.

Businesses should set up a tracking system to ensure—and to be able to demonstrate, if asked—that they are using the funds for the approved purposes only. We recommend holding the funds in a separate account and paying eligible expenses from this account, when possible. Additionally, to the extent the company’s board of directors, owners, or other governing body discusses the loans, we recommend the company memorialize these discussions by way of meeting notes (sometimes called “minutes” for a formal board of directors meeting).

What We Know Today

The SBA recently clarified that the 8-week period begins on the date the borrower receives the disbursement of the loan, and the bank is required to make the disbursement within 10 days of loan approval. As a result, a business that took out a PPP loan in the past week has to start the clock immediately upon receipt of the funds, regardless of whether their business has even restarted operations.

The CARES Act states that during the “covered period” – an 8-week stretch beginning on the date a PPP loan originates – the sum of the following “costs incurred and payments made” will be eligible for forgiveness:

  • Payroll costs (limited to a prorata 8 weeks of $100,000 maximum per person);
  • Any payment of interest on any mortgage obligation (not including any prepayment of or payment of principal on a mortgage obligation) that was incurred before February 15, 2020,
  • Any payment of rent under a leasing agreement in force before February 15, 2020,
  • Any utility payment, including payment for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

Putting it all together, a business has eight weeks to spend PPP loan proceeds on payroll cost, mortgage interest, rent and utilities. That amount will be eligible for forgiveness.  Any portion of a PPP loan that isn’t forgiven must be repaid over two years at an interest rate of 1%.  The SBA stated that no more than 25% of the forgivable amount of a PPP loan can be attributable to non-payroll costs. This is bad news for business owners with small payroll – or who laid off workers prior to taking out the PPP loan – and large rent and utility obligations.

Furthermore, the Cares Act built in mechanisms to the forgiveness calculation to ensure that small businesses are retaining their work force and the same level of payroll through at least mid-year. As a result, the lenders will want to see proof of your full-time equivalents (FTEs) to ensure there was no decrease in your employee headcount. The additional limitation is an analysis of decrease in salaries by more than 25% for any employee making less than $100,000 annualized in 2019. The additional stipulation is that you have until June 30th, 2020 to restore your full-time employment and salary levels for changes made between February 15th and April 26th, 2020.

We urge you as we move forward in the coming weeks to remember that forgiveness is NOT guaranteed. Aside from having to meet the computational guidelines, the CARES Act provides that a borrower must submit an application to their lender, which must include a host of certifications and documentation verifying payments made. The lender then has 60 days to make a decision on forgiveness. However, as we saw with the application process, in the absence of guidance, every lender will come up with their own interpretation of key terms and computational formula, and just as was the case with the determination of maximum proceeds, some borrowers will win and some will lose. You will need to work closely with your lender and with us to ensure that your understanding of requirements is complete and that guidelines are being followed to ensure the maximum benefit.

Deferral of Employer Tax Payments

It was widely believed at the start of the PPP loan guidance that an employer could not benefit from the deferral of employer tax payments and take advantage of the PPP loan forgiveness as well.  On April 10th, the IRS clarified that employers may defer the employer’s share of social security tax that would otherwise be required to be paid beginning on March 27th, 2020. The caveat for those with a PPP loan is that once you receive a decision from your lender that the PPP loan is forgiven, you will no longer be eligible to defer these social security tax payments. However, anything deferred up to that point will continue to be deferred through the applicable dates required for repayment. These have been identified as 50% due on December 31, 2021 and the remaining 50% due on December 31, 2022.

Requested Guidance

As mentioned throughout, there is still significant guidance needed. We expect to hear more in the coming weeks, as the SBA issues further interim rulings on the forgiveness aspect of the PPP. Rather than provide you with speculation on how these issues will be treated, we will update you on further guidance as it is released. Here are some items that we hope will garner additional explanation –

  1. Clarification is needed on what specific costs are forgiven, as definitions are still pending.
  2. What type of costs are allowed for the calculation — is it incurred, paid, or both?
  3. What happens if your loan is funded beginning of May? How will the 8-week period be calculated if a portion falls past June 30th?
  4. How will the reduction in forgiveness be calculated related to lost employees or reduced salaries, or how to restore that reduction if it occurred?
  5. How will self-employed individuals account for non “payroll” expenses, and what types of expenses are eligible for forgiveness (i.e. home office)?
  6. Will there be any difference in treatment for  self-rentals for loan forgiveness purposes?


Businesses that received PPP loan proceeds remain subject to applicable local business closures orders. In most instances, this means that if a non-essential business receives PPP loan proceeds, it may not use those proceeds to return to regular non-remote operations.

Many of you are now shifting your focus to the forgiveness analysis.  The answer will differ depending on the specifics of each business, but for most of our clients, the preferred course of action is to keep on as many of their employees as possible. The PPP funds will give them the ability to retain their talented workforce and ramp back to 100% operations quickly, while obtaining the full benefit of the anticipated PPP forgiveness.

If a business is not eligible for PPP funds, or will not receive them given the limitation of availability, unemployment benefits may be a good option. There are also several strategies available to employers to use “Workshare” or partial-unemployment benefits programs that permit companies to retain workers, without affecting employees’ ability to seek individual relief benefits that may be available to them.

Our team is available to discuss these options with you and be of assistance as you embark on the various application paths alongside your lenders and other financial advisors. Do not hesitate to schedule a call so we can discuss these programs further. Please note that these are still very new programs and we will be issuing additional resources and guidelines as they become available.