The first phase of the Paycheck Protection Program (PPP) is well under way with over 200,000 loan applications filed in the first week of the program and Congress considering increasing the budget for the small business safety net from $350 billion to $600 billion. There is also serious discussion about extending the PPP beyond the initial “covered period.” The number of PPP loan applications signifies the value perceived from businesses and non-profit organizations around the country; the actual value, however, will vary depending on how the PPP loan proceeds are used and the management decisions made in the weeks and months to come. For applicants, now is the time to strategize and prioritize as the decisions you make today will not only impact your ability to retain employees and maintain customer relationships, but also the level of PPP loan forgiveness.
As of the date of this writing, additional SBA guidance on PPP loan forgiveness is expected. The current guidance indicates that loans distributed under the PPP could be fully forgiven if the funds are used for eligible payroll costs, mortgage interest, rent, and utilities over an eight-week covered period. beginning when the lender makes the first disbursement of PPP funds (the first disbursement of funds should occur within 10 days of loan approval). Although that sounds simple enough, there are several nuances that could materially impact the level of loan forgiveness.
- Potential loan forgiveness amounts are subject to reduction if employee headcount is not maintained throughout the covered period. The program requires that employee headcount during the covered period be compared to either (i) the average headcount for January and February of 2020 or (ii) the average headcount for February through June of 2019. The calculation will use whichever metric is most beneficial to the borrower.
- The loan forgiveness amount can also be reduced to the extent that compensation decreases for employees by more than 25%. There is a calculation that compares individual employee compensation during the covered period to their compensation in the last full quarter prior to receipt of the PPP funds. The calculation for compensation includes bonuses and could therefore impact different companies in different ways depending on when the funds are received and when bonuses are paid. This could also provide companies an avenue to reduce payroll costs by an amount up to 25% without reducing the PPP loan forgiveness.
- PPP loan proceeds are only to be used for specified purposes. This includes payroll costs and certain non-payroll costs including mortgage interest, rent, and utilities. Ultimately, not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs. This limitation on non-payroll costs demonstrates that the goal of the PPP is to retain employees during the COVID-19 pandemic. The number of Americans filing for unemployment from March 21st to April 3rd was over 17 million and the intention of the PPP is to limit unemployment from continuing to increase.
- To the extent that employee headcount or employee compensation has already been reduced, there is a remediation period. If employers restore headcount and/or compensation by June 30, 2020, the reduction in loan forgiveness that would otherwise be applicable may be avoided.
Due to all of the variables mentioned above, tracking how entities use their PPP loan proceeds will be very important. We are strongly advising our clients to place PPP loan proceeds in a special-purpose account and to use the account only for eligible costs. If PPP funds are intermingled with other cash balances, it could unnecessarily complicate this process.
We are deeply committed to our clients to provide clarity during these challenging economic conditions and to stay informed on the details of this dynamic program so you can focus on your business. Whether it’s modeling PPP loan forgiveness, assisting with cash flow forecasts and scenario analysis, or helping you restructure existing debt, we’re here for you. For more information on our suite of COVID-19 Advisory services, click here.