What Business Owners need to know – Paycheck Protection Program

PPP Explained

As most business owners know by now, the Paycheck Protection Program (PPP) was launched in April 2020 with $349 billion in funding. The first round was exhausted in less than two weeks. Congress then voted on April 21 for an additional $310 billion in funding. However, the program soon ran into trouble due to controversies over publicly traded companies and other large enterprises being awarded loans. Additionally, concerns and confusion about the attainability of loan forgiveness under the program’s unclear rules, plus a lack of access for small businesses without an established banking relationship, have plagued the program since its inception.

Congress established the PPP to provide relief to small businesses during the coronavirus pandemic as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. The legislation originally authorized Treasury to use the SBA’s 7(a) small business lending program to fund loans of up to $10 million per borrower that qualifying businesses could spend to cover payroll, mortgage interest, rent, and utilities.

Changes to PPP

On June 3, the U.S. Senate passed the House version of the Paycheck Protection Program Flexibility Act (PPPFA), giving small businesses more time and flexibility to use their PPP loans with the aim of maximizing loan forgiveness.

Possibly the most significant change to the PPP is the reduction in the requirement that 75% of loan proceeds be spent on “payroll costs.” Under the PPPFA now, 60% of loan proceeds must be spent on “payroll costs.” The PPPFA also extends the 8-week “covered period” during which borrowers were required to use their PPP loan proceeds, to a much longer 24-week period.

Here are some other important changes:

  • The PPPFA extends, until December 31, 2020, the current June 30, 2020 “safe harbor” deadline for borrowers to rehire employees and reverse salary cuts of greater than 25 percent.
  • The legislation includes two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they do not fully restore their workforce. Previous guidance already allowed borrowers to exclude from those calculations employees who turned down good faith offers to be rehired at the same hours and wages as before the pandemic. The PPPFA will also exempt borrowers from the proportional reduction in loan forgiveness due to a reduction in employees, if the borrower is able to document in good faith that for the period of February 15 to December 31, 2020, the borrower was unable to:
    • Rehire employees who had been employed on February 15, 2020, or hire similarly qualified employees for unfilled positions by December 31, 2020; or
    • Return to the same level of business activity at which the borrower was operating before February 15, 2020, due to compliance with federal requirements or guidance set forth between March 1 and December 31, 2020, relating to standards of sanitation, social distancing, or other worker or customer safety requirements related to COVID-19.
  • New borrowers now have 5 years to repay the loan instead of 2. Existing PPP loans can be extended up to 5 years if the lender and borrower agree. The interest rate remains at 1%.
  • The bill allows PPP loan borrowers to also delay payment of their payroll taxes, which had been prohibited under the CARES Act.

Loan Forgiveness – Dealing with Confusion and Uncertainty

There is no doubt that there is still much uncertainty over some of the program details. However, business owners should be aware that there is no necessary rush to file their PPP loan forgiveness applications. Currently, lenders who will ultimately be responsible for processing forgiveness applications are still waiting for final guidance from the Small Business Administration (SBA) and U.S. Treasury. There is no definite timeline for when needed guidance will be received from the federal government. Additionally, the deadline for filing new PPP loan applications has been extended through August 8, 2020.

Even still, all business, and especially small business, are now understandably agonizing over whether they will meet the requirements necessary to maximize loan forgiveness. Being a patient and prepared business will ultimately be the key to maximizing forgiveness. Make sure that you keep good books and records relative to how loan proceeds are used. Be sure to gather and safe keep documentation necessary to support costs/expenses (i.e., non-payroll costs, mortgage interest, lease payments, or utilities).

Finally, remember that while the recent changes to the PPP provide needed flexibility and are generally good for borrowers, there will be more changes and added complexities. If you have any questions about the PPP program or need additional guidance contact one of our attorneys. We are here to help.

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