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Paycheck Protection Program Round 2 – Update on Loans and Forgiveness

By May 4, 2020 May 8th, 2020 Small Business

The Paycheck Protection Program (PPP) resumed a week ago on April 27. As with round 1, there have been plenty of challenges, confusion, and some success. Here is an update for those who have received a loan or are still looking to get a loan.

Loan Status

Paycheck Protection Program Round 2 had some explicit provisions for smaller lenders to be able to provide loans. This appears to have some success as the smallest of lenders have provided 32% of the loans as of May 1. Our experience has been that the big banks are a crap shoot unless you have a great relationship with your banker there. Fintechs have been better, but the feedback we’ve heard is your application must be tight as they are trying to do a high volume of loans. The best experience is the small local bank. They are better at providing feedback on issues with an application and help a business get the loan successfully. The challenge with small banks is they could only scale so far so too many applicants would neutralize their advantage. We have definitely seen the difference when businesses worked with us or other accountants versus trying to do it themselves. We know how to get the right information for those who need it.

Forgiveness

For those who have received your PPP loan or expect to soon, the top concern is maximizing forgiveness. I wrote an article, Maximize Paycheck Protection Program Loan Forgiveness, a few weeks ago where I provided some guidance and many questions that remain unanswered. There are still many questions that remain to be answered, but some additional clarifications.

Calculating Number of Employees

Question and Answer 36 from the PPP FAQ indicates that “the CARES Act uses the standard of “fulltime equivalent employees” to determine the extent to which the loan forgiveness amount will be reduced in the event of workforce reductions.”

There is still a question of what time frames will be compared. For the pre-loan period, we believe it could be:

  • The same period as was used with the application
  • A timeframe around February 15, 2020 which is the benchmark that is used repeatedly in the CARES Act and PPP FAQ.

As to the period for measuring employee count for PPP forgiveness, it could be:

  • The entire eight-week forgivable period
  • The end of the eight-week forgivable period

Because of the uncertain nature, we would advise you employee wisely, but be careful not to obsess over loan forgiveness as there is a big land mine that was announced last week.

No Tax Deduction for You!

Everyone loves free money, but the PPP loan isn’t as free as we thought. The tax man is coming and has staked their claim.

Good News

The loan forgiveness will not be treated as income. That means whatever is forgiven is truly a gift from the government and the rest of society who fund things.

Bad News

The IRS announced that any expenses that are forgiven will be treated as non-deductible expenses.

What this means is there will be a cost to forgiveness and an added tax burden. This will unfortunately mean simply employing people may not be the best idea as it will come with a cost.

Hope Abides

The AICPA, who is the organization that manages the CPA credential, has stated that they believe the IRS is wrong and should allow forgiven expenses to be included for deduction. If there is one thing we have learned from the PPP, it is that it is constantly changing. Let’s hope that the AICPA convinces the powers that be to agree.

Borrower Beware

Sadly, the Paycheck Protection Program has become very politicized over time. I supposed we could expect no less in our super polarized society and world. Some of the criticism makes sense to us like public companies getting PPP loans instead of using the stock market for capitalization. Also, there were some noteworthy and well-funded private organizations like the Los Angeles Lakers and Harvard that also received loans. Here are some points to be aware of with the PPP:

  • Your Loan Eligibility May be Questioned
  • Your Loan May be Audited
  • Your Loan May be Public

Your Loan Eligibility May be Questioned

With public companies and well-funded private organizations getting loans, there is a growing desire for accountability. The challenge here is the main qualification is this question:

“Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

Our initial opinion was that every business has sufficient economic uncertainty to truthfully answer this question yes. The PPP FAQ since clarified this point by stating the following in Question and Answer 31 and 37: 

“Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”

They also gave borrower’s the option to repay the loan in full by May 14, 2020 (it was May 7, but extended on May 5) and be clear of any repercussions which have not been specified. As the tone around PPP loans has become critical, let’s walk through some reasonable justifications.

Sales are Down Year Over Year

This is easy – you need the loan. Take it, use it wisely, and try your best to keep people employed. Nobody should criticize you here – although they might.

Sales are Flat Year Over Year

This may be more difficult to justify, but if you saw sales growth before February 15 then sales flattened out, the risk is there, and extra capital is a safe bet because we just don’t know what to expect week to week. You have a reasonable case for being concerned and data to prove why.

Your Sales are Up

This is a tougher case and your justification may depend on a few things. Here are a few justifiable examples:

  • Supply chain disruption – if you had or foresee supply chain disruptions, today’s bounty will be tomorrow’s dearth. Take the loan, document your supply chain issues, and be prepared to make your reasonable case.
  • Capital limitations – perhaps your ability to sustain your business is dependent on working capital and lending has shut down in large part. You may also see a slowdown in customer payments that puts receipt of payment at risk. Again, if you can document your concerns, you can make a case.
  • Business losses – if you have been operating at a loss, no sales growth will suffice. This creates risk and you can argue that without reasonable capital access, you will need to contract or even go out of business. Good financials will prove your case here.

Now here are some tough cases to consider:

  • Alternative Capital – the question is what is “other sources of liquidity” and is any source acceptable. If your other source is an expensive line of credit that will create massive interest debt over time, you could argue that you need the loan. This is a judgement call and be prepared to defend your argument if it gets challenged.
  • Sales Up, No Issues – this is the most difficult case. If sales are up, supply chain is great, capital is fine, and profits are there, you may have a difficult time defending a loan. That said, if you have an argument and you can defend it with documentation, you may still be alright to proceed. One argument is that other similar companies are not so lucky and you’re just waiting for the other shoe to drop.

The challenge here is there is no clear indications of consequences. Work with your accountant and\or lawyer if you have doubts. They should provide good guidance and defend you if needed.

Your Loan May be Audited

The Small Business Administration (SBA) has indicated that they will be reviewing loans. Specifically, in Question and Answer 39 of the PPP FAQ, they stated:

“To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.”

This will come down to 2-3 key points:

  • Did you need the loan?
  • Was the application accurate?
  • Was forgiveness accurate?

For the need, refer to the previous section and follow accordingly.

As to application accuracy, if you have documentation that can support the loan amount calculation and you told the truth, you should be fine.

As to forgiveness, there is much more to figure out. I will be publishing more here when we start seeing further guidance. Bottom line is you should be fine if you adhere to the guidance and document everything.

Your Loan May be Public

With the increasing scrutiny around the PPP, there is a good chance that your company and the amount that they received may be made public. Numerous politicians are calling for this to happen. For most, this should be a non-issue, but operate as if your company is going to get written up in a major news outlet. Some may not want the visibility so pay back the loan quickly if that is the case.

Final Thoughts

A program of this nature was doomed for scrutiny. Keep people on payroll and stay alive to keep the economy going. Some businesses are holding onto the money for use as low cost working capital in future months. While not popular, this isn’t a terrible strategy.

Businesses need to stay alive so they can retain employees, grow, spend money, and hire more people. If the PPP helps this, then we believe it is in the spirit of the law and worthy of the loan.

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