When Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES), one of the most unique business relief programs in this nation’s history was born — the Paycheck Protection Program loan (PPP loan). At its core, the PPP loan is designed to provide low-interest, forgivable loans to small business affected by the COVID-19 pandemic to help those affected businesses bridge the gap back to normalcy. The program is administered by the U.S. Small Business Administration (SBA).
As originally enacted, the PPP loan was to provide small businesses money they could use (primarily) for the retention of employees, which included not only the payment of wages but also the employer cost of benefits (e.g., medical, dental and vision insurance premiums, employer 401k match, etc.) over an 8 week period. It also allowed PPP loan recipients to use up to 25% of the loan funds to pay mortgage interest, payment under a lease obligation, and to pay utility costs. If used properly, the loan proceeds were 100% forgivable. But as the COVID-19 pandemic drug on, business groups began to complain that the 8-week time frame, and percentage spending requirements were too onerous – particularly for businesses that were not allowed to reopen or only partially reopen during the 8-week, post loan period. Therefore, on June 5th the President signed legislation into law which made changes to the PPP loan program. The 8-week period was extended to 24 weeks and the 25% usage of funds for non-payroll purposes was enlarged to 40%. But even with this increased flexibility, businesses should still be wary of how they spend the money and how they complete their loan forgiveness applications. As with all things related to loans and the federal government, the devil is always in the details.
Loan Forgiveness
One of the benefits of the PPP loan is that it is 100% forgivable. However, forgiveness is not automatic. For the PPP loan to be forgiven, the borrower must meet a few criteria: (1) use the loan proceeds within the now extended 24-week loan period; (2) apply the funds toward approved uses; (3) and apply for forgiveness at the end of the loan period.
The PPP loan period begins on the origination date of the loan which is listed on the loan documents from the bank that provided the loan (not the SBA). The origination date for PPP loans is usually the date on which the loan funds are deposited into the company’s bank account. The coverage period now ends the earlier of 24 weeks after the loan origination date or the end of the year, extended from the original 8-week period.
With this in mind, every loan recipient should go back through their PPP loan documents to calculate the loan period and make note of the end date in order to accurately assess when the forgiveness application can be submitted. Companies should also reach out now to their PPP loan lender and ask for a copy of the forgiveness application to evaluate in advance what unique metrics or documentation that particular lender may require to support the forgiveness application. The forgiveness application must be completed and submitted to the bank that provided the PPP loan funds (not the SBA). Since forgiveness is not automatic, it will be critical to complete the application correctly and to supply all requested information to the lender in a timely manner so as not to jeopardize forgiveness of the loan. Notwithstanding differences between lenders, the following is a list of documents that companies will likely need to provide in support of their loan forgiveness application:
- Payroll reports showing payments to employees;
- Payroll tax filings;
- Receipts for funds used to pay non-related payroll expenses;
- Copies of Lender amortization schedule for mortgage interest, current lease agreements for business rent payments and utility invoices; and
- Bank Statements.
The lender has sixty (60) days to make a decision to forgive the loan in full, partially forgive the loan, or not to forgive the loan at all. If the loan is not forgiven in full or only partially forgiven, the company can appeal the decision. The SBA has promised to provide more information on the appeal process later.
Before the June 5th changes to the PPP loan program, once a loan was forgiven an employer could no longer take advantage of the employer Social Security tax deferral. With the June 5th changes this is no longer the case; employers can now take advantage of the employer Social Security tax deferral.
Misuse of PPP Loan Funds
When each company obtained their PPP loan they signed off on several certifications, one being that if the PPP loan funds were knowingly used for unauthorized use the federal government may hold the company legally liable for the loan proceeds. Another certification required the company to attest that the all the supporting documents and forms were true and accurate. False statements could be punishable under the law by fines and/or imprisonment.
Misuse of the PPP loan funds can cause the loan not to be forgiven and can result in the SBA requiring the immediate payback of the full loan amount. If you knowingly misuse the PPP loan funds for unauthorized purposes you can be subject to charges for fraud. A good “rule of thumb” is to use the funds for only those items that have been expressly authorized by the lender. Some examples of misuse include: (a) profit withdrawals by or paying personal expenses of shareholders, partners or members of a company; or (b) paying for business expenses that are not specifically identified as authorized under the PPP loan terms. Sound documentation will be critical to showing that the company used its PPP loan funds in an appropriate manner and were not misused.
Conclusion
The SBA already has the loan forgiveness application available on their website. However, it has not yet been updated for the program changes that were issued on June 5th. However, the basic format should not change. All companies who received PPP loans should go ahead and obtain a copy of the forgiveness application so that they can become generally familiar with what will be required for forgiveness and to set up a plan to demonstrate to their lender that the PPP loan funds were used as they were intended. The key to having your loan forgiven will be producing accurate documentation demonstrating that your company used the funds for its intended purpose.
C2 provides strategic HR outsourcing to clients who want to develop optimal workforce strategies and solutions to allow them to be more competitive and profitable. C2 blog posts are intended for educational and informational purposes only.
