Congress recently extended the application deadline for the Paycheck Protection Program by five weeks, moving the deadline from June 30 to August 8. As of July 6, approximately $528 billion of PPP loan funds have been received by businesses all across the country, leaving more than $130 billion of funding still available.
Thousands of businesses received PPP loan funds and have been able to keep paying their employees during the COVID-19 pandemic. Now what? As a business leader, you should be thinking ahead to the next steps. Consider these five practical tips to help your business stay on top of its responsibilities under the PPP and maximize forgiveness.
#1 – Start Filling Out the Forgiveness Application Now
Don’t wait until the end of the covered period to determine whether you are on track for maximum forgiveness! The Small Business Administration posted to its website on June 16 the revised loan forgiveness application forms. We recommend you begin gathering information needed for the forgiveness application form and start modelling the likely amount of forgiveness. By having a barometer of potential forgiveness, your business can make decisions such as (a) whether to elect to use an eight-week covered period, (b) whether to authorize bonus pay or hazard pay to compensate certain employees who are working during the pandemic and exposed to greater risk of contracting COVID-19, or (c) whether to make strategic hires or adjustments to existing employee’s hours/schedules, all in order to maximize forgiveness.
We recommend you:
- Work now to determine full-time equivalent (FTE) headcount for periods from February 15, 2019 – June 30, 2019 and January 1, 2020 – February 29, 2020.
- This can be time-consuming and hold up the forgiveness application in the future, so better to start the process now.
- Doing this early will also provide a target that you can work towards during the covered period.
- Work now to determine (and update on a regular basis) your current average FTE headcount for the 24-week (or eight-week) covered period.
- Having these numbers on hand allows you to know whether any percent of your PPP loan funds are in jeopardy of not being forgiven. The earlier you know your business’s position, the better chance you have of being able to make strategic decisions that could increase your loan forgiveness amount. For example, you could act now to increase certain employees’ hours or make a few strategic hires that may put your business on track for more forgiveness.
- Be mindful of FTE exceptions under the program such as voluntary reductions of hours, resignations, employees who were fired for cause, or employees for whom you made an offer in writing for them to return to the same job with the same pay and the same hours but who rejected the offer.
- Work now to determine whether your business, in the aggregate, reduced its average FTEs from February 15, 2020 through April 26, 2020.
- If your company falls into this category, the CARES act allows you to “cure” this FTE reduction by the earlier of (a) the date you submit your forgiveness application or (b) December 31, 2020. Knowing this information now allows you to be strategic with hiring additional employees or increasing hours for current employees.
- Consider alternative methods of calculation allowed by the SBA.
- For example, be sure to compare the FTE shorthand method vs. the proportional FTE method to see which method results in more forgiveness for your business.
- Consider whether you qualify for the simplified “EZ” loan forgiveness application.
- If you are in doubt about any aspect of the forgiveness application, ask your advisors, as well as your lender since it will process the forgiveness application.
#2 – Consider Applying for Forgiveness Prior to the End of the Covered Period
Recent guidance from the SBA allows any PPP borrower to apply for forgiveness “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.” This language was included in an interim final rule that was posted to the SBA’s website on June 22, and it allows a PPP borrower that has already used all of its PPP funds to go ahead with a forgiveness application rather than requiring the borrower to wait until the covered period expires.
Beware that if a borrower has reduced the salary or wages of any employees who made less than $100,000 in all pay periods in 2019 (or those of employees hired in 2020) by more than 25% and is thus subject to a compensation-based forgiveness reduction at the time of the early forgiveness application, the SBA requires the borrower to “account for” this reduction for the full 24-week (or eight-week) covered period. In other words, if a borrower applies for forgiveness after only 12 weeks and has reduced an employee’s wages by 50%, it must calculate its compensation-based forgiveness reduction as if that employee’s wages would continue to be reduced by 50% through the full 24-week period. As a result of this requirement, a borrower in this position would likely be better off delaying its forgiveness application, which allows it additional time to maximize forgiveness by either raising that employee’s wages (and thus reducing the amount of the reduction) or restoring that employee’s wages to February 15 levels by the earlier of (i) the date it applies for forgiveness or (ii) December 31 (thus eliminating the reduction altogether for that employee under the SBA’s announced safe harbor).
However, the SBA has not announced a similar rule for an FTE-based reduction. Moreover, the SBA has not announced any explicit requirement to update either the FTE reduction calculation or the compensation-based reduction calculation after an early forgiveness application is filed. Consequently, a borrower who has spent all of its PPP funds, not reduced any wages or salaries beyond 25%, and maintained its FTE levels (relative to its prior reference period) may be able to file its forgiveness application early and “lock in” its maximum forgiveness at that point in time, rather than risk future layoffs or future wage reductions that would limit forgiveness.
#3 – Check Your Loan Documents for Any Restrictions That May Be More Strict Than SBA Standards
Many PPP borrowers entered into written loan agreements (and/or promissory notes) with their lenders long before the SBA or Congress changed certain key terms of the loans. Consequently, your business may be subject to a contract with terms that are more restrictive than current law or current SBA guidance allows or with terms that may be changed by your lender. For example, all SBA loans issued prior to June 5 were documented with a two-year term; whereas, all SBA loans issued on June 5 or later were issued with a five-year term. If in doubt, reach out to your lender to raise these issues now and work towards a solution before your lender is overrun with forgiveness applications.
#4 – Strongly Consider Setting up a Separate Bank Account for the Loan Proceeds
Although not technically required for forgiveness, having a separate bank account for the PPP loan proceeds can facilitate tracking of forgivable expenditures. Deposit PPP funds into the separate account and use it to pay expenses expected to qualify for forgiveness. For any payroll costs that exceed $100,000 on an annualized basis for any single employee, pay the portion that would be in excess of $100,000 out of a separate bank account (such as your standard operating account). For mortgage payments, consider writing separate checks for the principal (using your standard operating account) and interest (using the dedicated PPP account) portions of the mortgage payment, as only mortgage interest is forgivable. If you have a separate account for PPP funds, pay the interest out of this separate account.
#5 - Maintain Invoices, Canceled Checks, and Payment Receipts for All Mortgage Interest, Rent, and Utilities Paid During the Covered Period
Generally, to qualify as a forgivable expenditure of PPP loan funds, the expenditures must be paid or incurred during the 24-week (or eight-week) covered period. However, keep in mind the SBA’s guidance that allows for utility payments, mortgage interest payments, and rent payments made after the 24-week (or eight-week) period to be forgivable in certain limited circumstances.
Bonus Tip: Stay Up to Date on Developments and Get Alerts
We have a team at Parker Poe who are constantly tracking PPP developments. For more information, please contact us or your regular Parker Poe contact. You can also sign up for our COVID-19 alerts here and find our previous here.