Paycheck Protection Program Loan Application Deadline Extended; Some New Considerations

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Congress has extended the deadline to apply for a Paycheck Protection Program (PPP) loan to August 8, 2020. The extension, from June 30, 2020,[1] reflects the poor structure and rollout of the program and that, despite the continuing dire financial prospects of many small businesses, $132 billion remained available under the PPP at the end of June. The extension allows new borrowers, including those who previously returned loans, to take advantage of the improvements to the program made by the Paycheck Protection Program Flexibility Act (PPPFA) and subsequent U.S. Small Business Administration (SBA) interim final rules and guidance. The primary positive changes made by the PPPFA are that a borrower has, or can elect to have, 24 weeks to spend the PPP funds eligible for loan forgiveness and need not apply the forgiveness reduction based on full time equivalents (FTE) reductions if the inability to retain FTEs is based on direct or indirect compliance with federal COVID-19 guidance.

Without question, recent changes make the program much better for small businesses, even if some of its key aspects remain unclear. Eligible applicants who do not have a PPP loan and can in good faith certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” should consider applying now.[2]

A summary of the loan terms for existing and new PPP loans is below. As a brief refresher:

  • Amounts spent in the “covered period” of the loan are eligible for forgiveness if spent for permissible purposes (at least 60% on payroll expenses and up to 40% on other permitted uses like mortgage payments, rent and utilities).
  • Forgiveness amounts may be reduced based on reductions to FTEs and wages in the covered period compared to a historical period, but in specified circumstances a borrower need not apply the reductions.
  “Covered period” for loan forgiveness
 
Interest rate
 
Term
 
Payment deferral
 
Reductions to forgiveness amount
 
Exceptions to reductions
Old PPP loans (before June 5, 2020) 8 weeks or 24 weeks (or Alternative Payroll Covered Period) 1% 2 yrs.
(borrowers and their servicing lenders may mutually agree to extend term to 5 yrs.)
Date SBA remits forgiveness amount to lender (if borrower submits a forgiveness application within 10 months of the end of the covered period) or 10 months from end of covered period (if a forgiveness application is not earlier submitted)[3]
 
Multiply forgiveness amount by ratio of average FTEs in covered period/average FTEs in historical period
 
Subtract aggregate wage reductions greater than 25% in covered period compared to historical period
Exclude FTEs who reject written offer of re-employment if notify state unemployment office
 
No FTE reduction calculation if unable to return to pre-COVID-19 operating levels as a direct or indirect result of federal COVID-19 guidance
 
Apply wage reductions only to FTEs employed in covered period
 
FTEs or wages are “restored” before December 31, 2020
New PPP loans (on or after June 5, 2020) 24 weeks (or Alternative Payroll Covered Period) 5 yrs.

 

New Considerations

Following adoption of the PPPFA, the SBA issued additional guidance, modified its loan forgiveness application, and introduced a simplified loan forgiveness application Form 3508EZ for borrowers who rely on the FTE “compliance with guidance” safe harbor. We expect borrowers that were unable to spend 60% of their PPP loan on payroll in the original eight-week covered period will elect the 24-week covered period, and will rely on exceptions to FTE and wage forgiveness cutbacks. We expect many borrowers will take aggressive positions to maximize loan forgiveness, and that, as long as those positions are taken in good faith, the consequence of SBA disagreement should be limited to partial denial of forgiveness by the SBA. A few tips and considerations follow.

There’s no rush

There is no deadline to applying for loan forgiveness, and if the loan is forgiven, then-accrued interest is also forgiven. If a borrower is not confident that 100% of the loan will be forgiven, delaying application will defer its first loan repayment, which may be advantageous. Payment is deferred until the SBA determines and remits loan repayment to the lender, provided that if a borrower does not earlier submit a loan forgiveness application, its first payment will be due 10 months after the end of the covered period. Payments on a PPP loan received April 15, 2020, for example, would be deferred until July 30, 2021; if the forgiveness application were submitted on July 30, 2021, however, the first loan payment may not be required until late 2021.

In addition, assuming a borrower is not able to rely on other exceptions to loan forgiveness reductions, a delay may allow it to “restore” FTE or wages to pre-COVID-19 levels (no later than December 31, 2020), which also eliminates the corresponding forgiveness reductions.[4]

A borrower may nonetheless wish to eliminate a PPP loan from its books for accounting or other reasons, including increasing its appeal if it must seek other sources of financing. A borrower may apply for loan forgiveness even before the end of its 24-week covered period, and we expect some who anticipate 100% loan forgiveness will do so.

Take advantage of the “compliance with guidance” safe harbor for FTE reductions

The FTE-based reduction to the loan forgiveness amount does not apply if a borrower certifies in good faith that it was not able to return to the same level of business activity it had before February 15, 2020 due to direct or indirect compliance with COVID-19 guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Health and Safety Administration.[5] The SBA cites as an example of “indirect” compliance state and local shutdown orders that are based in part on federal guidance. A borrower must retain documentation of applicable COVID-19 requirements[6] and relevant financial records, but it need not submit these records with its loan forgiveness application.

The SBA has not provided guidance on the following issues:

  • What does “the same level of business activity” mean? Does it apply to physical closures or limits on the number of customers it can serve, or can it mean more broadly that a requirement led to a decline in a demand for the borrower’s products or services?
  • Whose compliance matters? Can a borrower legitimately claim that social-distancing guidelines and stay-at-home orders that applied to customers led to business declines?
  • Must a borrower show a relationship between COVID-19 guidance and its level of business activity? If a business is required to be shut for a single day in its covered period, is that sufficient?

Without subsequent guidance, we expect most borrowers will be comfortable certifying in good faith that reduced post-February 15, 2020 business activity was directly or indirectly due to compliance with COVID-19 guidelines and comfortable that this safe harbor relates to any FTE-based reduction[7].

We expect more borrowers will rely on the “compliance” safe harbor than will rely on either the “restoration” safe harbor described below or the FTE exemption based on individuals rejecting re-employment,[8] although the safe harbors and exemption are not mutually exclusive.

Hope for the best on wage reduction safe harbors

To ensure there is no double penalty for FTE and wage reductions, the SBA earlier stated that wage reductions only apply to the portion of a decline in wages that is not attributable to an FTE reduction.[9] So, for example, if you reduce an employee’s hours by 50% and reduce their salary by 50%, the salary reduction would not affect the loan forgiveness amount. Even though arguably there is no double penalty if the “compliance” safe harbor applies to FTE reductions, we expect the SBA will take the position that if an FTE reduction would have affected loan forgiveness but for an exception, the salary reduction does not apply. If this proves true, borrowers have an incentive to reduce an exempt salaried employee’s FTE to match any salary reduction (but borrowers should be cautious about pushing an employee below the exempt status salary threshold).

Ironically, borrowers who retained reduced-wage employees in the covered period may be stung by the wage reductions while those that simply terminated them will not be. Exacerbating that inequity, wage reductions apply over the entire covered period irrespective of when the borrower applies for loan forgiveness—that is, if a borrower applies for loan forgiveness in week 12 of the covered period, it must extrapolate wage reductions over the 24-week covered period.

Applying the cold, hard math of loan forgiveness calculations may lead borrowers to take actions not anticipated by Congress or the SBA before the end of the covered period. For example, because the “compliance” safe harbor applies to FTEs but not to salary reductions (and assuming FTE reductions do not count as salary reductions), a borrower has an incentive to fire an employee rather than retain them at a reduced wage to ensure its loan forgiveness amount is not reduced.

Hope for the best on FTE and wage/salary restoration

A “rehire” safe harbor applies if FTEs or wages/salaries were reduced between February 15, 2020 and April 26, 2020, and subsequently restored[10] to February 15, 2020 levels. The revised forgiveness application and instructions continue to leave somewhat unclear how “restored” FTEs and wages are calculated and whether restored levels must be maintained for some period.

The application specifies that the borrower must compare “total FTE at the earlier of December 31, 2020 and the date this application is submitted” (which suggests FTEs at a single point in time) to “average FTEs over the pay period that includes February 15, 2020.” In contrast, the instructions to the application specify that the borrower must compare “the average annual salary or hourly wage as of the earlier of December 31, 2020 and the date this application is submitted” (the period over which the average is calculated is undefined) to “annual salary or hourly wage as of February 15, 2020.” Without additional guidance, we expect many applicants will calculate “restored” average wage/salary based on the pay period immediately preceding the loan forgiveness application date as long as the wage or annual salary is not reduced before the application date.

It would make sense that the “restoration” is for some significant period of time, rather than a single day or pay period, but it would be ironic if businesses unable to restore FTEs or wages by December 31, 2020, which may arguably be the hardest hit by the pandemic, must repay a portion of a PPP loan already spent on employees. There is no explicit requirement that a borrower maintain restored FTE or wage/salary levels for any specific period of time, although it’s possible the SBA could read into the safe harbor a “good-faith” intent to maintain restored levels for some period and might conclude, if it reviews a borrower’s loan and requests additional information, that levels were never really restored if they dip too much and too quickly after the date of the loan forgiveness application.

A few other odds and ends

  • Owner-employees and the self-employed have maximum forgivable payroll costs of $15,385 for an eight-week covered period and $20,833 for a 24-week covered period. The disproportionately small additional forgivable payroll costs in the 24-week period reflect the concern that an owner-employee could otherwise pay only themselves in the 24-week period in lieu of retaining other employees.
  • Lenders have 60 days to review loan forgiveness applications, largely only checking the math and ensuring appropriate documentation was provided, and then must submit the application to the SBA, which has 90 days to complete its review. The SBA has stated that all loans over $2 million will be reviewed for compliance with program requirements.
  • We expect the loan forgiveness process, like the loan application process, to be messy. Lender sophistication will vary significantly, and we are not confident that the SBA will evenly apply standards to its review of loans, in part because we and it do not know what the standards are. The SBA has promised to publish rules regarding the appeals process.
 

[1] The June 30, 2020 deadline was established in a statement of Congressional Intent for H.R. 7010 that was read into the record when the Senate passed the Paycheck Protection Program Flexibility Act. The statement contradicted the plain language of the PPPFA, which allowed loans to be made during a “covered period” ending December 31, 2020. The new law eliminates confusion, and clearly establishes that August 8 is the application deadline.
[2] The U.S. Treasury Department quelled enthusiasm for the PPP when it threatened to closely scrutinize borrower "necessity" certifications in the wake of outcry that large public companies—notably Ruth’s Chris and Shake Shack—had taken PPP loans, and criticisms that PPP loans were not being made to “small” businesses. Those threats were subsequently walked back following a flood of PPP loan repayments and widespread concern that the negative publicity associated with the loans, and their limited usefulness for businesses that could not hire back enough employees in the original eight-week covered period, made them more toxic than useful. Among other things, the SBA announced in FAQ #46 that those who borrowed less than $2 million would be deemed to have made the required certification in good faith. Although that FAQ was published May 13, 2020, and refers to borrowers who “received” loans, presumably the SBA will apply the same standard to loans of less than $2 million made after May 13. While no borrower should make a false certification, we expect some borrowers who qualify for slightly more than $2 million may nonetheless elect to borrow $2 million or less to avoid being second-guessed. (But note that the SBA may review any loan, and might scrutinize closely loans just below $2 million).
[3] Originally, payments were deferred six months from the date of the loan, and that date is memorialized in loan documents. The PPPFA purports to change the date for all loans to defer payments of principal and interest to the date that loan forgiveness amounts are determined and paid by the SBA to the lender. A borrower should consider contacting its lender before the original six-month first payment date to ensure the due date is properly recorded in the bank’s system.
[4] As discussed below, “restored” FTEs and wages/salaries are measured at the earlier of the date the forgiveness application is submitted and December 31, 2020. A borrower might consider whether to apply as soon as levels are restored if it is relying on that safe harbor and if it is not confident that restored levels will be maintained through December 31, 2020.
[5] The Form 3508EZ certification: “The Borrower was unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.”
[6] Federal guidance and Oregon and Multnomah County guidance are available at the links below. We generally expect state and local guidance to be easily tied to federal guidance.
[7] Although it seems self-evident that a business’s inability to return to pre-COVID operating levels is reflected in lower average FTEs in the 24-week covered period, a borrower must retain documents that support its certification that it was unable to operate at the prior level of business activity, including applicable requirements for each borrower location and relevant borrower financial records, for six years after the date the loan is forgiven or repaid in full. Absent additional guidance, which may not be forthcoming, the SBA might review a borrower’s good-faith determination if it audits the loan as it has said it will do with the good-faith certification that the PPP loan was “necessary.” For this reason, we believe a borrower should document its analysis of how compliance affected operating levels and document its affirmative determination that it can make the required certification. The SBA has not developed quantitative standards for reviewing those certifications, and its review may not be consistently applied among applicants.
[8] A borrower may exclude FTEs from its calculations if (1) the employee refused the borrower’s good-faith, written rehire offer and the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020, (2) the borrower made a good-faith, written offer to restore a reduction in hours and the employee rejected the offer, and (3) the employee during the covered period (a) was fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of hours. Because the exemption requires that the borrower notify the state unemployment office that an offer of employment was made and rejected, some borrowers may be hesitant to perfect this exemption.
[9] In an earlier interim final rule, the SBA stated: “f. How should borrowers seeking loan forgiveness account for the reduction based on a reduction in the number of employees (Section 1106(d)(2)) relative to the reduction relating to salary and wages (Section 1106(d)(3))? To ensure that borrowers are not doubly penalized, the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction.”
[10] Wage/salaries must be restored to 100% of historical levels, and not just to 75% of historical levels, which is the threshold for the reduction in loan forgiveness.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key Contributors

James M. Kearney
Blake R. Holbrook
Kristin E. Russell
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