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April 22, 2020

PPP Loans – are you prepared to navigate the loan?

The Senate recently approved a  new $484 billion COVID-19 pandemic relief bill. The House is expected to vote on the bill on Thursday.

According to McCarthy & Company, excerpts of the $484 billion bill include:

·   $310 billion to replenish the Paycheck Protection Program (PPP).

·   $50 billion in small business funds not included in the PPP program will go to the SBA’s Economic Injury Disaster Loan (EIDL) program. EIDL provides working capital loans of up to $2 million that small businesses may use to pay fixed debts, payroll, accounts payable, and other bills that cannot be paid because of COVID-19. The interest rate is 3.75% for small businesses and 2.75% for not-for-profits.

·   $10 billion for small business grants administered by the SBA of up to $10,000 for disaster relief.

PPP Loan Forgiveness

While most companies are happy to receive PPP funding, accepting the money could backfire if you are not careful. There is a lot more involved than simply saying that you have maintained your headcount. You must document that PPP funding was used for allowable expenses. 

Make sure you keep good records so you can prove to your lender you spent the money on qualified forgivable expenses. Even though PPP is a government loan, your bank will review and approve your application for loan forgiveness. Take the time now to calculate the following amounts: 

1. Calculate payroll costs.

Companies have eight weeks from the first date of funding (“covered period”) to spend borrowed funds. Estimate your payroll costs, as well as what you need to cover other covered expenses. Seventy-five percent of the funding must be used for payroll. The other 25% can be used for interest on mortgages, rent, and utilities. Avoid spending excess cash on other expenses. Save the money instead so you have it to repay your PPP loan. 

2. Calculate non-payroll costs.

Only 25% of the forgiveness amount can be spent on qualified non-payroll expenses. Therefore, it is important to know how much you are going to spend on qualified non-payroll expenses during the covered period. You will have to pay back funds not used. 

3. Determine what full employment looks like for your company.

You are entitled under the CARES Act to a pro rata reduction in loan forgiveness if the average Full Time Equivalents (FTEs) during the covered period are less than the historical number of FTEs.

Companies have the option of using the period from February 15, 2019 through June 30, 2019, or the period from January 1, 2020 through February 29, 2020 to determine their historical number of FTEs. Seasonal employers should use the period from February 15, 2019 through June 30, 2019.

The period that results in the lowest FTE level is the one you should use for PPP planning purposes. Since the SBA has not release guidance on the definition of an FTE for PPP purposes, employees who work at least 30 hours per week may or may not be considered a full-time equivalent.

4. Project the number of FTEs needed in the covered period.

Make sure you have at least as many FTEs in the covered period as you did in the prior period. Otherwise, you may have to repay a portion of the loan.

Generally, if you reduced your workforce between February 15, 2020 and April 26, 2020 you have until June 30, 2020 to rehire those (or other) workers to qualify for loan forgiveness. Loan forgiveness is based on the following formula: Qualifying Costs Incurred and Paid During the Covered Period Multiplied by FTEs in the Covered Period Divided by FTEs in the Prior Period.

5. Calculate the the impact of pay decreases.

The CARES Act states there is a reduction in the amount of loan forgiveness if any employee’s pay is reduced by more than 25% compared to what that employee earned in last full quarter. The amount of the reduction in forgiveness is equal to the amount of the pay reduction in excess of a reduction of 25%.

Two exceptions to this rule that you should consider are:

·   The reduction in loan forgiveness does not apply to reductions in the wages of an employee who made more than an annualized salary of $100,000 during any single pay period in 2019.

·   The reduction in loan forgiveness does not apply if you restore wages by June 30, 2020 to the level existing at February 15, 2020.

6. Estimate your maximum amount of loan forgiveness.

You can estimate your maximum amount of loan forgiveness by using an Excel spreadsheet here. This spreadsheet was developed based on the CARES Act (PL 116-136) and guidance from the U.S. Treasury. The terms used in the calculator are subject to PPP requirements and may be subject to interpretation by lenders or additional guidance. The intention is to give you a general idea on how much you can expect to be forgiven.

Other Considerations

Businesses should consider what they need the loan for before deciding to take out a PPP or disaster loan. Although businesses can apply and be approved for loans under both programs at the same time, those loans cannot be used to cover the same costs. 

Disaster loans can be used for payroll and other expenses. Although disaster loans are not forgivable, they do have a 30-year term. PPP loans must be paid back in two years and payments are deferred for six months. 

The deadline for restoring your payroll is June 30. Keep in mind that loan forgiveness is not all-or-nothing. If you can only bring back five of your 10 employees, you can still get a portion of the loan forgiven.

We will share more details as they become available. Please visit McCarthy & Co’s. COVID-19 Resource Page for more updates.