By Neil Hare
On Saturday July 4, 2020, President Trump signed a new law extending the deadline for applying for a Paycheck Protection Program (PPP) loan from June 30 to August 8. This extension comes on the heels of new Interim Final Rules (IFR) issued by the Small Business Administration (SBA) on June 22, clarifying some issues and attempting to make complete loan forgiveness attainable for most borrowers.
In addition, on July 6, 2020, the SBA and the Treasury Department released the complete database of all PPP loans issued to date—approximately 4.9 million. For loans above $150,000, the data includes company name, address, NAICS codes, demographic information, date the loan was issued, number of employees, and congressional district. For loans under $150,000, the name and address were omitted.
In a July 6 press release issued by the SBA, Treasury Secretary Steven T. Mnuchin stated, “The average loan size is approximately $100,000, demonstrating that the program is serving the smallest of businesses.” He added that, “Today’s release of loan data strikes the appropriate balance of providing the American people with transparency, while protecting sensitive payroll and personal income information of small businesses, sole proprietors, and independent contractors.”
The release of the data came at the behest of many groups and politicians seeking transparency for the $650 billion loan program created under the CARES Act. There is concern among some that the program is subject to widespread fraud and abuse, and they want accountability. Already, many companies receiving negative press coverage and fearing audits and penalties returned $30 billion in PPP funds, although arguably they received them legitimately under the guidelines.
On the other side of the debate are many business groups who want to see a “safe harbor” that all borrowers who received the loans, or at least those under a certain threshold such as $1 million, will receive loan forgiveness for portions of the loan they use according to regulations—60% on payroll and 40% on expenses such as rent, mortgage payments, utilities, and interest payments on loans.
The release of the data caused instant anxiety among borrowers as the data seemed incomplete. After reviewing the data, many companies were reported having none or one employee, even though their loan amounts were over $150,000, signaling many more employees. This raised concerns that inaccurate data would cause audits or adversely impact a review. The reality is the data reflects the input from lenders who were working around the clock to issue the loans as fast as possible and, as per the CARES Act, gave borrowers the benefit of the doubt that the loans were necessary and employees were to be kept on the payroll.
For most borrowers, the inaccurate data will be of no consequence. Businesses with 10 or fewer employees, sole proprietors, or independent contractors will not be the target for harsh reviews or audits, and while those borrowers who received over $2 million in PPP funds have a much higher likelihood of audit, the real targets will consist of fraudsters lying on loan documents.
While the program has been riddled with problems, confusion, and new regulations coming out almost weekly, the reality is, it has had the desired effect of injecting liquidity into the economy and keeping workers on the payroll. While approximately $130 billion remains in the program, necessitating the extension to August 8, the federal government moved at an unprecedented pace and scale on this program. Considering that the SBA issues about 1,000 loans in a typical year, 4.9 million PPP loans in three months is commendable.
The fact that funds remain is the result of a slowdown in applications as many borrowers were concerned that audits would leave them holding a loan they thought would become a grant, or worse, civil or criminal penalties. So, in addition to the extension, the new guidance from June 22 was also meant to assuage the worries of many businesses and increase applications.
While it remains to be seen whether the new guidance will increase loan applications over the next month, the new guidance and future regulations sure to come still create as many questions as they seek to answer. Here are some of the most frequently asked questions on PPP loans and forgiveness:
1. When can I apply for PPP loan forgiveness?
The biggest question coming up about the new rules is whether a borrower has to choose to apply after eight weeks or has to wait for 24 weeks—in other words, “either or.” The rule made clear that a borrower could apply anytime between eight and 24 weeks, stating as follows:
A borrower may submit a loan forgiveness application 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.
The rule continues to explain that borrowers who received loans prior to June 5 can elect eight weeks as the covered period prior to applying for forgiveness, and borrowers have 10 months from after the covered period ends to apply for forgiveness.
Of course, there is a caveat to this rule, which is if a borrower has reduced salaries or wages of employees by more than the 25% allowed under PPP, they have to apply that reduction for the entire duration of the loan period, either eight weeks or 24 weeks, and not as of the date they apply for forgiveness. Here is an example provided in the IFR, which is complicated:
A borrower is using a 24-week covered period. This borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period, with an FTE of 1.0. In this case, the first $250 (25% of $1,000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $1,200 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by 24 weeks). If the borrower applies for forgiveness before the end of the covered period, it must account for the salary reduction for the full 24-week covered period (totaling $1,200).
This scenario can be minimized, or avoided altogether, by not reducing salaries above 25% and using all PPP funds prior to seeking loan forgiveness. Remember, the PPPFA extends the time limit for borrowers to rehire workers until December 31, 2020. So, there should be plenty of time to rehire and pay workers the wages they are due based on the loan application amounts and to receive full forgiveness. After the forgiveness application is submitted, the business will be free to make decisions on head count and salaries.
2. What is the process for applying for PPP loan forgiveness?
Thankfully, one of the key new changes is an easier application form. The original Form 3508 was so complicated, business owners would certainly need an accountant or lawyer to decipher it. There is now Form 3508EZ, and lenders are also allowed to produce their own application form.
Once the application is submitted, the lender will have 60 days to make a “good faith” review, ask for additional information or documentation, and approve forgiveness in whole or in part. “Good faith” review is described as looking at a payroll report from a third-party provider, like ADP, along with records of payments for authorized expenses. Most borrowers, therefore, should receive complete loan forgiveness by using all the funds on payroll and presenting a payroll report along with the application forms. As with the loan application on the front end, most third-party payroll providers are creating reports specifically for PPP loan forgiveness.
Once the lender has conducted its review, it will submit the application and documentation to the SBA for its review. The SBA will have 90 days to conduct a review. It can either approve the forgiveness, ask for more information, or approve a portion of the loan for forgiveness. If it does not approve all or part of the loan for forgiveness, borrowers now have five years (up from two years) to repay the loan at 1% interest. Borrowers who received the loan prior to June 5, 2020, will have to negotiate the five-year term with their lender.
3. What is the maximum amount owner-operators, self-employed, and independent contractors can have forgiven on their PPP loan?
The previous guidance, for reasons difficult to determine, capped the amount of forgiveness at $15,385 for sole proprietors, employee owners, and independent contractors. For those using $100,000 of salary to calculate the loan amount, they would have received $20,833, leaving a gap of approximately $5,000 to use on authorized expenses. For many in this category, working from home or with minimal expenses left open the possibility that a portion of the loan would be unforgiven. The new rules change the cap on forgiveness received by self-employed individuals to $20,833. Now with a 24-week time horizon, these borrowers can simply run enough payrolls to fully spend these funds and receive full forgiveness.
4. Should I still be worried about an audit on my PPP loan?
The new guidance did not provide any specific safe harbors for an audit. The SBA already provides a safe harbor, whereby loans under $2 million will be considered made in good faith based on economic uncertainty, so there will not be much reason to audit these loans. With government mandated shutdowns, ongoing cases of COVID-19, and a rocky reopening of the economy, economic uncertainty remains for all businesses.
The main concern with audits of loans over $2 million will remain the issue of the “credit elsewhere” test and the liquidity of the borrower. Unlike traditional SBA loans, business owners didn’t have to document a lack of credit elsewhere, and only certify if they did not have sufficient access to credit. At this point, it appears that short of venture funding available or access to public capital markets by virtue of a stock exchange listing, most companies that are audited will likely be able to reasonably claim a lack of adequate credit elsewhere, even with traditional lines of credit.
5. What can I expect next for any easing of restrictions on PPP loans?
The main issue still remaining in the program is around taxes. PPP loans do create adverse tax consequences, mainly that expenses, including federal payroll taxes paid by the employer with PPP funds, are not deductible. So, while PPP funds that are forgiven are not taxable, businesses will lose these deductions.
Business groups are lobbying furiously to make changes to PPP, especially on the payroll tax issue, in what’s being called Phase 4 legislation. The new law could also offer new funds targeted at certain demographics or allow companies a second PPP loan. Negotiations for the new law are underway and should conclude before the Congressional August recess.
The extension of the PPP program until August 8 and the new guidelines should incentivize more businesses to apply for loans. Despite the confusion, the program is largely working as designed, which is to provide small businesses with additional funds to weather the coronavirus storm. While the prospect of an audit remains very real, there is likely more regulations to come that will, hopefully, explain and define what that looks like so businesses have the certainty they need.
In the meantime, with COVID-19 cases surging in many parts of the country, businesses may be facing a new wave of full or partial shutdowns. That prospect will likely accomplish two things: One, remove the issue of “economic uncertainty” from the discussion; and two, lead to a robust new package of economic stimulus.
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I am an attorney with the law firm McCarthy Wilson LLP, and the president of Global Vision Communications, an agency specializing in strategic communications, marketing, and advertising for trade associations, nonprofits, coalitions, and corporations. Neil specializes in small business policy and has run small business outreach campaigns for major organizations such as Visa, MasterCard, the U.S. Chamber of Commerce, and the U.S. Department of Commerce. Neil is a writer and expert on communications and business strategy. He is a sought-after speaker at business events on marketing and communications, both inside and outside the Beltway. Neil is the author of two novels, An Animal Cries and God in Hell’s Kitchen.