In this session, we'll be covering our most common PPP and EIDL questions with our team of CLA professionals. Please be sure to submit your questions ahead of our session to email@example.com and we will dive in and discuss what you need to know around these ever changing regulations.
- Leslie Boyd, CLA Principal, Manufacturing
- Rick Krueger, CLA Principal
- Jack Rybicki, CLA Principal, Managing Principal of Industry, Real Estate
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Leslie Boyd: Hello CLA family, friends, colleagues, and community partners. Welcome back to our livestream. We sincerely hope that you are continuing to stay safe and healthy at this time. Since last week, the Treasury issued two new interim final rules (IFR), and also announced that the Federal Reserve’s Main Street Lending Program is now open for lender registration. It appears that this program still has some structural issues, but is making progress toward the start of lending.
Our session today will be a targeted toward answering more of your questions and some key topics that you’d like to address related to Paycheck Protection Program (PPP) Forgiveness and Economic Injury Disaster Loan (EIDL) updates. We will start by discussing the IFRs released on June 11 and 12. Jack Rybicki and Rick Krueger are here with me to navigate through these topics. Welcome back, gentlemen!
Jack, I’d like to start with you walking us through the IFRs that were released at the end of last week. I think that would help everyone understand where things stand as of now and what, if anything, additional we know.
Jack Rybicki: Thanks, Leslie. The IFR on the 11th brought certain terms of the PPP Flexibility Act into the rules governing the program. In addition to memorializing components of the PPP Flexibility Act, such as the extension of the loan forgiveness period to 24 weeks and the extension of the maturity date for new loans under the PPP to five years, major clarifications made by the SBA include:
- The requirement that 60% of loan proceeds be used for payroll costs will be interpreted “as a proportional limit on nonpayroll costs as a share of the borrower’s loan forgiveness amount rather than as a threshold for receiving any loan forgiveness.” In other words, forgiveness will be reduced (but not eliminated) if less than 60% of the loan was used to pay payroll costs.
- If a borrower submits a loan forgiveness application within ten months after the end of the covered period, no payments of principal or interest will be due until the SBA remits the loan forgiveness amount to the lender. If a borrower does not submit a loan forgiveness application within ten months after the end of the covered period, the borrower must begin paying principal and interest on or after the last day of the ten-month period. This extension of the deferral period for PPP loans beyond the six-month period contained in the CARES Act is retroactive to March 27, 2020, and applies to all loans under the PPP.
- The last day a lender can obtain an SBA loan number for a PPP loan is June 30, 2020.
The IFR on the 12th was in direct response to issues raised by Senator Corey Booker during the meeting of the Senate Committee on Small Business and Entrepreneurship on June 11th. It reduces the timeframe for the exclusion of “justice-involved” small business owners in the PPP from five years to one year for felonies that did not involve financial crimes, and also made modification to ensure that business owners who participated in a pretrial diversion program would be eligible for PPP loans.
Boyd: Thanks, Jack. I think that gives us a little more clarity. Now we’re going to do something different than in the past and really let the questions that the audience has sent to our livestream inbox define the course of our entire session. Most of the questions so far can be broken down into three distinct groups related to PPP: technical/administration, payroll, and utilities. We will answer some EIDL questions as well. Let’s talk technical first:
Patrick asked: Like many, we applied for and received a PPP loan in early April. Upon review of press coverage and our success at fundraising, we decided to repay our loan (which was over $2 million) to help others who did not get loan and avoid uncertainty of audit risk and bad press.
With the changes – especially the 24-week term – we are considering applying again. Will we be prohibited due to our round one PPP loan?
Rick Krueger: Unfortunately, while the CARES Act doesn’t explicitly limit PPP loans, the SBA set a limit of one PPP loan per eligible borrower. Repaying the loan may have qualified for the safe harbor regarding the necessity of the loan. However, it doesn’t undo the loan itself.
Boyd: Mark asked: The new PPP has been extended to 24 weeks. Do we apply for forgiveness for an eight-week period within the 24 weeks or do we apply for the entire 24-week period beginning on the date of the loan origination? For us, loan origination is April 20.
Rybicki: We should learn more about the forgiveness application process once SBA releases their new application. The PPP Flexibility Act changed the covered period to 24 weeks, but for borrowers with an existing loan, they have an option to elect to retain the eight-week period. As far as how to make that election and apply, we’ll need to see what instructions SBA gives us. It seems likely for borrowers who want to elect the eight weeks, there will be a process to do so earlier than the 24 weeks.
Boyd: Tulani asked: I have a question regarding the loan terms. We received the PPP loan on April 30 with the first wave of approved loans. Will our loan terms change to five years or stay at the two years?
Krueger: The extension from two years to five years only applies to new loans. Borrowers certainly can contact their lender to ask about extending the repayment. Unfortunately, I’m not sure many lenders will be enthusiastic about extending the term of a 1% loan.
Boyd: She also asked a question regarding the extension from eight weeks to 24 weeks. Do we have to submit our application based on the 24 weeks or can we submit it once we have fully spent the funds at 18 weeks?
Rybicki: That is a question we are being asked quite often now. Based on the way the law is currently written it appears that you have the option of either the original eight-week period or the new 24-week period, but nothing issued thus far appears to allow a period in between those two once all the loan proceeds are used. However, in testimony to the Senate Committee on Small Business and Entrepreneurship, Secretary Mnuchin seemed to allude to the potential opportunity to apply for forgiveness as soon as you have fully utilized the PPP loan proceeds. We’ll need to wait to see how or if something like this will be implemented, which will likely come out when Treasury issues the updated Loan Forgiveness Application over the coming weeks. Wish we knew the answer to your question for sure, but at this point all we can do is speculate.
Boyd: Jackie asked: If a client who received proceeds from the PPP Loan opts to take the 24 weeks because they did not meet the loan requirements in the eight weeks, but the 24 weeks goes over their fiscal year, does that pose any issues? Are there any guidelines regarding a fiscal year and the PPP loan?
Krueger: Specifically related to the PPP loan program, that shouldn’t cause any issues (other than ensuring you have supporting records for all periods that reconcile to the forgiveness application).
There are a couple related issues that come up. For taxes, the expenses related to forgiveness are not currently deductible. With the extended period, we’re not yet sure how this will impact tax returns when the expenses are incurred now, but could be forgiven up to 15 months after the end of the covered period. We’ll have to keep watching this.
For financial reporting, the American Institute of Certified Public Accountants (AICPA) recently issued a technical question and answer for PPP. They give a few different answers depending on the entity type. If you have any questions, definitely reach out to your CLA representative.
Boyd: Are we allowed to keep the PPP/EIDL funds in an interest-bearing account?
Rybicki: As far as restrictions on where to hold the funds, the SBA has been pretty silent. Tracking the use of funds and retaining supporting documenting seem to be the important part.
Boyd: Is there any reason not to apply for forgiveness as soon as we expend the funds? Are we better served in any way to wait the full 10 months even if we use the funds within three months?
Krueger: For timing of the application, it’s probably worth a little thought. First of all, even with the eight weeks, you probably have some time. Part of the required documentation include a Form 941, which likely wouldn’t be ready for a few more weeks. In the meantime, we’re hoping to get more information from SBA on their updated application and how they’ll apply some of the PPP Flexibility Act changes. That’ll help borrowers understand if they’ll be better off with the 8- or 24-week option.
Boyd: We have a lot coming in related to payroll. Let’s start with the question from Luis: Now that PPP program has been extended from 8 to 24 weeks. How do the FTE and Gross Salary requirements work? Which are the periods to compare to meet FTE and Gross Salary requirements for forgiveness if one chooses 24 weeks instead of eight?
Rybicki: We have not seen any guidance thus far that would make us believe that the FTE and wage tests work any differently now that the covered period has been extended to 24 weeks. You will still compare your FTE’s (now measured over a 24-week period) to the same pre-COVID periods (2/15 – 6/30/19 or 1/1 – 2/29/20) and average hourly wage or salary rates during the 24-week covered period to Q1 2020 hourly wage or salary rates. If you meet the safe harbors of returning the size of your workforce back to pre-COVID levels at prior rates by 12/31/20 then you will not be subject to FTE or wage reductions. We expect guidance out from Treasury over the next week or two.
Boyd: Rava asked: When calculating the forgivable amount of payroll, would FICA and Federal taxes be included in the payroll and considered forgivable?
Krueger: The employee portion would be included as part of their gross compensation (you wouldn’t separately add the amounts). You do not get to include the employer portion of FICA.
Boyd: Antonio asked: I heard that the Paycheck Protection Flexibility Act of 2020 provisions such as the minimum amount required to be spent on payroll for loan forgiveness purposes was reduced from 75% to 60% retroactively to loans disbursed before June 5. I thought this change was optional, not mandatory.
Krueger: This is an update that applies to everyone (no option to avoid), but that’s not a bad thing. Those limits were effectively caps on nonpayroll. Previously the cap was 25% of forgiveness and now the cap for nonpayroll is 40% of forgiveness. This gives flexibility, but it’s totally fine if a borrower spends less than 40% of the forgiveness amount on nonpayroll.
Boyd: Alyce asked: If you terminate an employee for cause and give them a severance package, is the percentage of the severance that is in the eight-week period allowable? Or if it is paid within the eight-week period is it all deductible, or none?
Rybicki: Great question. We believe that severance paid during the covered period is eligible for forgiveness subject to the total being paid to the employee during the eight-week period being limited to the $100,000 annualized equivalent ($15,385 for the eight-week period). Amounts over that amount would not be eligible for forgiveness.
Boyd: For the lookback period do you include overtime, and if not, do you include it in the covered period? Do pension benefits also need to be adjusted for those earning over $100,000?
Krueger: As the total wages paid to an hourly employee is somewhat irrelevant, you don’t need to factor in overtime. For the wage reduction test for hourly employees you are comparing their hourly wage rate pre-COVID to their covered period hourly wage rate.
As long as the covered period rate is 75% or more of the pre-COVID rate then there is no reduction in forgiveness as a result of wage rates. Regarding your second question, pension benefits do not need to be adjusted for non-owners who earn more than $100,000. If a non-owner employee earns more than $100,000 annualized wages, only the cash comp portion is limited; the health care and retirement contributions can still be included.
Boyd: Dean presented an example related to seasonal employees: We operate a school with seasonal employees who normally do not work or get paid during the summer months (After May 15 until the start of the new school year).
These seasonal employees appear in our FTE calculations for either of the two base periods (2/15/19 - 6/30/19 --- at least through mid-May of 2019 and 1/1/20 - 2/29/20).
However, based on the timing of our loan and original eight-week loan period, the last couple of weeks of the eight-week period extended beyond the last day of school (May 15, 2020) by a few weeks. In order to maintain forgiveness eligibility (no FTE reductions compared to the base periods), we continued to pay those seasonal employees for a few extra weeks as it was generally immaterial in relation to total payroll and the PPP Loan on the whole and it kept our FTE counts in line with either of the two base periods.
Now, with the extension to 24 weeks, we would like to take advantage of the additional weeks in order to use all of the PPP loan funds (we will have some left if we stop at eight weeks).However, do we have to continue to keep the seasonal employees on payroll for additional weeks that they would not ordinarily be on payroll in order to preserve full loan forgiveness potential?
Also, if we were to exhaust all PPP funds in week 10 or 11, can we stop tracking FTE counts at that point or do we have to keep up the FTE for the full 24 if we used some portion of the 24 weeks?
Rybicki: Right now, the rules seem to indicate that you can either use the original eight-week covered period or the new 24-week covered period. However, if you use the 24-week period, then you will need to measure all the FTE and wage tests for the 24-week period. We have heard there might be some flexibility introduced to allow a shorter period if you spend all the money before the 24-week period ends, but that was just based on comments in committee hearings. Nothing formal has come out from Treasury to support that position.
If you aren’t getting 100% forgiveness when using eight-weeks, then using the 24-week period might be beneficial. You do not need to retain seasonal employees when they normally aren’t working, while this may hurt you overall FTE retention percentage, since you will be applying the retention percentage to a much larger number, you will likely get a better forgiveness answer. For instance, if you had a $1 million loan but only spent $800k and had a 75% retention rate, you would only be eligible for $600k in forgiveness during the eight-week period. However, if the weeks 9 – 16 you had another $500k in payroll and 50% retention and then got back to $800k and 75% retention in weeks 17 – 24, your total payroll would be $2.1M and your weighted average retention would be 66%. Factoring down for the lower retention percentage, you would now still be eligible for $1.4M of forgiveness using the calculation, so your whole $1M loan would be forgiven.
Boyd: Shiela asked: If a payroll pay date falls early within the covered period, does it need to be adjusted for the number days the payroll refers to the "incurred".
Many have said that this payroll would be fully included as well as the last payroll, which would be incurred costs paid on the next regular pay date. Others have said it must be adjusted to include only a total of 56 days incurred for any individual.
Rick: Great question. Wish I could give you a definitive answer. Based on a literal reading of the Loan Forgiveness Application, it would appear that you do not need to prorate the payroll on the front end (i.e., you can include amounts paid during the covered period), and that you are allowed to prorate on the back end as long as the payroll at the end of the covered period that will be paid after the covered period is paid in the normal payroll cycle. Thus, it does appear that it is possible that more than 56 days will be eligible for forgiveness. We hope that SBA issues an FAQ or IFR on this matter to provide clarity, as this is a question we get a lot that we can’t answer with 100% certainty.
Boyd: We have a nonprofit question from Monica: As a non-profit, our payroll allocations are spread over grant and non-grant programs. If an employee is partially funded by a grant, say 15%, am I to count them as .85 for FTE calculation purposes instead of 1.0 if using the 1.0/.5 method?
Rybicki: Unfortunately, there is no clear guidance on how to handle payroll (or other) costs that are reimbursed through grants/contracts. Each grant/contract may contain its own unique language regarding costs that can be reimbursed and may disallow certain costs to be included under the grant/contract. We are hopeful that this issue will be addressed in the long-awaited FAQs on forgiveness that we are expecting from Treasury/SBA.
Boyd: Those are all great questions and I’m told there are more coming in from the audience as well. Let’s answer some common questions about expenses. First, Cindy asked: Please clarify what is contained in allowable transportation costs, along with if cell phones are covered.
Krueger: So, here’s what we know. We know utilities include transportation and telephone. We also know that a borrower needs to have had a service agreement in place for the utility prior to February 15. Of those two, cell phones seem slightly easier to me. If the organization had a contract for service directly with the provider, it’d seem includable. If they reimbursed employees, then probably not. Transportation is definitely grayer. The service contract requirement would disqualify some items that people think of such as filling up the tank of a company vehicle at a gas station. However, there are many items that might be includable.
Boyd: Rick asked: What is status on floor plan interest? Is it a qualified expense? If so, is it forgivable?
Rybicki: The CARES Act allows interest on mortgage obligations incurred before February 15. Many borrowers and advisors are wrestling with whether or not other secured debt obligations (which would include floor plan) are includable too. We’re really not sure. The allowable use section permits other debt obligations beyond mortgages. However, the forgiveness sections specifically use the term mortgage, which makes us think it might be more restrictive. We’re hoping for further clarification.
Boyd: Carol asked: One question I have is, we are a church who received a PPP loan. My pastor has talked with other pastors who informed him they are using postage for mailings to parishioners about suspension of Masses and re-opening the church, cleaning and other supplies they had to purchase to disinfect, etc.; as part of the expenses for the PPP loan. Are these expenses that can be used when reconciling the 25% utilities?
Rybicki: We have not seen any guidance that would permit the inclusion of incremental operating costs such as postage, cleaning supplies, personal protective equipment, etc. as eligible costs for forgiveness. I have seen articles that some of our legislators would like to see these types of costs included within the scope of the program, but nothing like that has been written into the laws or rules that we are aware of.
Boyd: For EIDL, can you give us a quick update on the development from yesterday?
Krueger: SBA announced yesterday that they were opening back up the EIDL portal to a broader array of businesses and nonprofits. The system was completely overwhelmed and had suspended taking applications for loans and advances a couple months back. For the last month, it was only accepting applications from agricultural businesses since they were originally excluded from EIDL. Now SBA announced it is back open for eligible entities. More information is available on the SBA site, where eligible borrowers can apply directly with them.
Boyd: Unfortunately, that’s all we have time for today. Thank you to our guests today, to you for your questions, and to our moderators for all the support, great information, and answers.
Please continue to send us your questions. We will be back next week with more information.
For more information:
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- Marketing Senior