Posted on April 19 2020

Coronavirus Update 4/19/20 — 3 important questions about PPP

EMERGENCY UPDATE — Sunday, April 19 —

To our clients:

A little over two weeks ago – April 3 to be exact – marked the first day small businesses across the United States could apply to the Small Business Administration (SBA) for a Paycheck Protection Program (PPP) loan. As we first predicted in our Coronavirus Update on March 31, the $349 billion available under this program did not last long. The possibility that the entire loan, or certainly at least a portion of it, could be forgiven was too good of an opportunity for business owners to pass up.

In the week leading up to April 3, we urged our clients to contact their bank right away to begin the application process. As you probably know by now, as of Wednesday, April 15, the SBA stopped accepting PPP applications – the entire $349 billion was gone. A couple of days earlier, successful applicants began receiving their PPP loans, and the road to forgiveness began.

As a result of the above, three questions have been asked more than any others:

  1. My application was not approved. What happens next?
  2. I received my loan, but my business remains closed because the state in which I operate continues to have a shutdown order in effect. What should I do?
  3. How can I determine the amount of my PPP loan that can potentially be forgiven?

These are all very good questions and, much like the application process (which was fraught with confusion, frustration, and differing interpretations), so too are the answers to these three questions.

Let’s start with the first question.

“My application was not approved. What happens next?”

Assuming that your application was submitted by your bank, you will have to wait for the next round of funding. You have probably read that the Administration requested an additional $250 billion in funding, and there appears to be widespread support in Congress to provide this funding. Unfortunately, in typical Washington, DC fashion, politics has entered the equation, stalling the approval of the additional funding. The earliest it can be considered is Monday, April 20.

While we expect that additional funding will occur, we cannot be sure. If it does, our expectation is that the SBA will pick up where it left off – continuing to process and approve applications they were not able to fund out of the initial $349 billion. Once the additional funding is approved, we can expect more guidance in this regard.

There is no way to know how many businesses will benefit from the additional $250 billion, but we do know this – if you have not applied, you won’t get anything. So, for those of you who have yet to apply, contact your bank today to get the ball rolling.

The second question.

“I received my loan, but my business remains closed because the state in which I operate continues to have a shutdown order in effect. What do I do?” The SBA’s current position, and they are very clear about this, is that the day you receive your PPP funds is the day the critical eight-week period begins. As a reminder, it is this eight-week period that will determine the extent of potential forgiveness on your loan. The SBA has outlined what they have termed forgivable costs (payroll costs, rent, utilities, etc.) that you can pay during this period and use for potential forgiveness.

The first thing you must understand is that there cannot be any forgiveness without incurring payroll costs during the eight-week period. The payroll costs have to be at least 75% of the amount of the loan to be forgiven. Note that we are not talking about the entire loan balance at this point, just the amount to potentially be forgiven.

If your business is under shutdown orders, what do you do? The intent of the program is that you bring your employees back. But if you cannot work, what’s the sense of doing that. You essentially are bringing them back to pay them to do nothing, just for the sake of forgiveness.

You have two choices.

You can bring them back and pay them to do nothing, or you can allow them to continue collecting unemployment. Most employees are doing well with the new unemployment rules, so they might be very hesitant to come back to work to do nothing for less money.

If your business is not allowed back to work during the eight week period, and you choose to bring your employees back, you may very well spend all of the proceeds, and you may very well spend 75% of those proceeds on payroll costs. At the end of the eight weeks, you will apply for forgiveness, and hopefully the loan is forgiven in its entirety.

What have you accomplished? If you do not bring your employees back, unemployment would take care of the employees’ pay, but nothing else. What you will gain by bringing your employees back is that the PPP proceeds can be forgiven to the extent used not only to pay your employees, but also for state unemployment taxes, health insurance coverage, and retirement plan coverage for those employees, as well as some or all of your rent and utilities. Remember that state unemployment taxes are highest in the first quarter when the wages of all employees are subject to the tax. So, at the end of the day, you have gained something, but you will have exhausted this source of funds and won’t have them available to use when you may need them the most – when you are able to resume operations.

If you choose to not bring your employees back and let them continue to collect unemployment for the entire eight week period, none of the loan can be forgiven because you did not have any payroll costs during the eight-week period. You can, however, still use the proceeds to pay your rent, utilities, and potentially health insurance and retirement plan contributions. Assume your PPP loan starts at $200,000, and you spend $40,000 on these non-payroll costs. At the end of the eight-week period, you will have a $200,000 loan that will have to be paid back over two years at 1% interest (with a six-month moratorium on payments). You will also have $160,000 of the initial loan to use as you see fit over the next two years. Essentially, you have a 1% line of credit. Think about that – you will still have $160,000 left to use through sometime in 2022 that will cost you a mere $2,000 per year (i.e. 1% of the $200,000 loan).

A fair solution to this problem would be to delay the start of the eight-week period until the day your home state lifts its shutdown orders. Of course, this is just our thought, and not the position of the SBA. Well, it just so happens that the AICPA feels the same way we do. On Thursday, April 16, they issued a news release that urged Congress to act quickly to provide the additional $250 billion in funding for the PPP program. In addition, “the AICPA suggests greater flexibility…on timing of the PPP’s eight-week payroll support cycle. Some business owners have suggested it makes more sense to delay the start of the cycle until restrictions are lifted and businesses can operate again.” So there may be a glimmer of hope that the SBA will recognize the inequities that will result if they strictly interpret and enforce the eight-week timeframe starting on the date that PPP funds are disbursed, particularly given that there will likely be a significant backlash from business owners in shutdown states as they come to realize their dilemma.

Question three.

“How can I determine the amount of my PPP loan that can potentially be forgiven?” Alternately, this question could be “how much of my PPP loan will I have to pay back?” Understanding how to determine the extent of forgiveness now can help to decide what you may be able to do over the remainder of your eight-week period to increase your potential forgiveness. When your PPP loan was approved, your bank may have provided you with a worksheet to calculate the loan forgiveness amount.

We have had the chance to review a couple of these worksheets and, not surprisingly, there are ambiguities. For example, current guidance says that only those “costs incurred and payments made” can be forgiven. Does this mean costs incurred and payments made OR costs incurred or payments made? The difference in interpretation could be significant. Another issue that is not clear is exactly how reductions in the number of employees or their compensation are determined. The spreadsheets we have seen are based on certain assumptions regarding these determinations – we cannot be sure that these assumptions are correct. Many other professionals have similar concerns.

At this point, we will await further guidance and clarification. The AICPA is expected to release its own PPP Loan Forgiveness Calculator. We anticipate that this calculator will remove some, if not all, of the aforementioned ambiguities. As soon as this calculator is available, it will be posted on our website for your review and use. Likewise, we will continue to keep you informed of any new developments in regards to SBA financing programs.

In the meantime.

Click the “Download File” button at the top of this page to get your copy a report issued by the SBA that summarizes all the PPP loans approved through noon on Thursday, April 16, 2020. You can see the total number and amount of loans by state, by loan size, and by NAICS subsector.

MillerSearles LLC | Certified Public Accountants | Advisors