Update on Recent Guidance from the SBA related to the Paycheck Protection Program
New information is constantly coming forward related to the SBA’s Paycheck Protection Program. The guidance is constantly changing and borrowers are left wondering about compliance. This past week, the SBA updated its guidance on the necessity component that had been the center of debate once it was learned that public companies were unfairly taking advantage of the program. Additionally, the SBA released the form loan forgiveness application, a central component to the program. Today, we take a look at these updates and what it means for small business borrowers.
As always, if you have any questions about your real estate, business, estate planning, or any other legal issue, please let us know by e-mailing managing shareholder Keith Dunnagan at kbdunnagan@bpelaw.com.
Also, remember that we do legal presentations for business and community organizations. If your group would like to schedule a presentation, please contact me to setup a date and time.
Update on Recent Guidance from the SBA related to the Paycheck Protection Program
By: D. Keith B. Dunnagan, Esq.
One of the most popular and significant programs to be put into action during the COVID-19 outbreak was the Paycheck Protection Program (“PPP”). This program was created as part of the massive stimulus package under the CARES Act in late March 2020. It was a welcome source of stimulus because of the attractive potential for loan forgiveness. The first round of PPP funding was exhausted in less than two weeks, and a second round of funding was authorized. The PPP was created to help small businesses retain employees amid the fallout from the government-compelled shutdowns.
Under this program the SBA has done nearly 20 times more lending in the last 7 weeks than they typically do in an entire year. The program has been fluid and the SBA rulemaking and guidance has changed on a nearly weekly basis. On April 6, 2020, the SBA, in Question 17 of the Frequently Asked Questions stated that borrowers could “rely on the laws, rules, and guidance available at the time of the relevant application.”
Loan Necessity
Unfortunately, there were some that took unfair advantage of this program. Publicly traded companies with large valuations and access to equity markets created a barnstorm of negative press. Many of these companies have subsequently repaid the loans. Following stories of potential abuse of the program, the SBA began to issue a steady stream of guidance. Because of the actions of a few, questions began to float around related to a borrower’s necessity for obtaining a PPP loan and the statutory requirement of good faith in certifying the need for the request. On April 23, 2020, the SBA addressed this issue under Question 31 of its Frequently Asked Questions. The SBA stated that businesses needed to take “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.” This phrase, coupled with overtures that the SBA would potentially levy criminal prosecutions, as well as the seeming conflict with prior guidance, created more stress and worry for small business owners that had obtained PPP loans. Owners worried that, in the future, the SBA might determine their loan was not necessary. The unfortunate part of this statement is that the phrase “not significantly” appears nowhere in the CARES Act as it relates to the necessity of the loan.
At the same time this guidance began to come out, the SBA put forth a safe harbor provision that stated borrowers could repay loan funds by May 7 (ultimately extended to May 14), and if they did so, would be treated as having made the certification in good faith. Then again on April 29, 2020, the SBA put forth additional guidance stating that it would potentially review individual loan files and review all loans over $2 million. This again sparked more concern amongst small business owners. Without clear definitions, many borrowers needed the loan, took the loan, and by the time the guidance had come out the borrowers had already began to spend the loan proceeds on rent and payroll (both allowable under the statutory framework). Many owners were negotiating workout terms on their lease using PPP funds. These same business owners, many of whom took far less than the $2 million audit threshold began wonder if they would be better off returning the money and laying off staff instead, to legally protect themselves.
The problem with this is that the term “necessary” is legally vague. You could ask 10 lawyers what is the definition of “necessary” and you will likely get the answer “it depends” followed by 10 different definitions of a common and ordinary word. A quick review of US Supreme Court decisions reveals at least 3 different definitions for the word necessary. Each very broad in its own right. On May 13, 2020, the SBA issued additional guidance under question 46 of the FAQs that helped alleviate the concerns of many borrowers by stating “Any borrower that…received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.“ This clarification was good news to borrowers who really needed the assistance of the program but were worried whether Monday morning quarterbacking would come back to haunt them. The FAQs went further and stated that if the SBA determined the proceeds were not necessary, then as long as the borrower repaid the loan, no further action would be taken.
Loan Forgiveness
On May 15, 2020, the SBA rolled out its first draft of instructions and form application that borrowers will use when seeking loan forgiveness. The key points of this guidance are summarized below.
Before diving into this loan forgiveness application guidance, a few cautionary words. Be sure to speak with your LENDER before beginning to complete the application for loan forgiveness. Your lender may or may not modify the form to tailor to their software and computer systems. Additionally, as a borrower will have to apply for loan forgiveness through the lender, they will want to make sure the information is in a format that the lender is used to seeing. Making it easy on your lender will help maximize the potential and speed of the loan forgiveness.
Additionally, consult with your accountant and attorneys. Make sure the numbers and accounting of payroll costs are complete and accurate and make sure you understand the legal issues related to applying for the loan forgiveness. The goal is to provide the necessary information so that SBA/Treasury can process your application quickly and provide a favorable result.
Further, as we begin to breakdown the loan forgiveness process, remember this form instruction and application was just released. It is likely that much more guidance will be forthcoming as the SBA begins to work out the kinks. Make sure to stay abreast of these changes. We will do our best to summarize important changes in our newsletters.
Some things to remember, the loan forgiveness calculations will be based upon the 8 weeks commencing on the date of the first disbursement of PPP loan funds, that is the day the borrower received the funds.
Remember, calculating payroll costs has some limitations. Employee-allowed salary is capped at $100,000 annual salary per employee prorated for the covered 8 weeks. If a borrower has an employee making $150,000 per year, only the pro-rated portion of $100,000 is eligible for loan forgiveness. Salary is limited to the actual cash compensation paid to the employee. That means contributions to retirement plans (maybe a safe harbor contribution), benefits including healthcare coverage and payment of state and local taxes assessed on the employee’s compensation are included in the definition of payroll costs but are not part of “salary.” It would be useful to review the statutory allowable payroll costs prior to completing the loan forgiveness application.
One of the difficult components of payroll will be that most borrowers likely received the loan proceeds in the middle of a pay period. Under the SBA summary of eligible payroll costs the directions state that the borrower can generally include the “payroll costs paid and payroll costs incurred.” From a legal standpoint, this may be vague. What does this mean? Does it mean the payroll costs must be incurred and paid to be counted; does it mean payroll costs actually paid plus payroll costs incurred but not yet paid. What does it mean? This will need to be fleshed out more. The SBA directions further state that “Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period…are eligible for forgiveness if paid on or before the next regular payroll date.” In looking at the plain language multiple interpretations would seem reasonable, but additional guidance is likely forthcoming. This will likely settle at 8 weeks-worth of compensation for employees regardless of how the pay periods fall. The purpose of the forgiveness under the statute was to create an 8-week window of costs that would be eligible for forgiveness.
Additionally, borrowers will need to document non-payroll costs such as rent, utilities, and mortgage payments paid during the covered period.
Any borrower that received more than $2 million in PPP loan proceeds, will be required to denote that on the application for loan forgiveness. This will be a tracking mechanism consistent with prior guidance related to audits and loan reviews that will be completed by the SBA.
The borrower/principal(s) will have to attest the accuracy of the applications and use of the funds to ensure that the funds were used properly.
The borrower will be required to provide sufficient documentation to support the basis for the loan forgiveness. This will include documentation for payroll costs paid during the cover period. For those using a payroll service, the first place to start will be the periodic payroll reports. If your payroll provider will allow you to do a report for the 8-week covered period, that would be immensely beneficial. This report should cover things like salary paid, benefits coverage, retirement contributions, etc. All the components needed to determine allowed payroll costs. Additionally, for non-payroll costs such as lease payments, it will need to be supported by a copy of the lease and cancelled checks showing payments or lessor account statements. Documentation for tax payments and full-time equivalent employees will also be required.
Finally, the borrower will be required to keep records related to the PPP loan. Some of this information includes basis for borrower’s determination of necessity, documentation of salary calculations, and documentation regarding employment status of employees that separated from the business or did not return to work. Under the recent guidance, these documents should be kept for a period of six years after the date of forgiveness and be made available for inspection by the SBA upon request.
One thing is for sure, the PPP continues to change as more information becomes available. Guidance will continue to be rolled out as the processes evolve related to the operation of this program and the likely first wave of loan forgiveness applications that will be happening in the next couple of weeks.
The information contained in this article is for informational purposes only and not to be construed as legal advice. If you have questions, you should seek competent legal representation to assist you.
The attorneys of BPE Law Group, PC. have been advising our clients on real estate, business and estate planning issues for over 20 years and have assisted numerous clients in probate, business and real estate matters and have represented and advised brokers on their professional obligations as well as consumers on their rights. If you have questions concerning legal matters, give us a call at (916) 966-2260 or e-mail Keith at kbdunnagan@bpelaw.com. Our flat fee consult for new clients may get you the answers you need for the questions you have.
The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.
New information is constantly coming forward related to the SBA’s Paycheck Protection Program. The guidance is constantly changing and borrowers are left wondering about compliance. This past week, the SBA updated its guidance on the necessity component that had been the center of debate once it was learned that public companies were unfairly taking advantage of the program. Additionally, the SBA released the form loan forgiveness application, a central component to the program. Today, we take a look at these updates and what it means for small business borrowers.
As always, if you have any questions about your real estate, business, estate planning, or any other legal issue, please let us know by e-mailing managing shareholder Keith Dunnagan at kbdunnagan@bpelaw.com.
Also, remember that we do legal presentations for business and community organizations. If your group would like to schedule a presentation, please contact me to setup a date and time.
Update on Recent Guidance from the SBA related to the Paycheck Protection Program
By: D. Keith B. Dunnagan, Esq.
One of the most popular and significant programs to be put into action during the COVID-19 outbreak was the Paycheck Protection Program (“PPP”). This program was created as part of the massive stimulus package under the CARES Act in late March 2020. It was a welcome source of stimulus because of the attractive potential for loan forgiveness. The first round of PPP funding was exhausted in less than two weeks, and a second round of funding was authorized. The PPP was created to help small businesses retain employees amid the fallout from the government-compelled shutdowns.
Under this program the SBA has done nearly 20 times more lending in the last 7 weeks than they typically do in an entire year. The program has been fluid and the SBA rulemaking and guidance has changed on a nearly weekly basis. On April 6, 2020, the SBA, in Question 17 of the Frequently Asked Questions stated that borrowers could “rely on the laws, rules, and guidance available at the time of the relevant application.”
Loan Necessity
Unfortunately, there were some that took unfair advantage of this program. Publicly traded companies with large valuations and access to equity markets created a barnstorm of negative press. Many of these companies have subsequently repaid the loans. Following stories of potential abuse of the program, the SBA began to issue a steady stream of guidance. Because of the actions of a few, questions began to float around related to a borrower’s necessity for obtaining a PPP loan and the statutory requirement of good faith in certifying the need for the request. On April 23, 2020, the SBA addressed this issue under Question 31 of its Frequently Asked Questions. The SBA stated that businesses needed to take “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.” This phrase, coupled with overtures that the SBA would potentially levy criminal prosecutions, as well as the seeming conflict with prior guidance, created more stress and worry for small business owners that had obtained PPP loans. Owners worried that, in the future, the SBA might determine their loan was not necessary. The unfortunate part of this statement is that the phrase “not significantly” appears nowhere in the CARES Act as it relates to the necessity of the loan.
At the same time this guidance began to come out, the SBA put forth a safe harbor provision that stated borrowers could repay loan funds by May 7 (ultimately extended to May 14), and if they did so, would be treated as having made the certification in good faith. Then again on April 29, 2020, the SBA put forth additional guidance stating that it would potentially review individual loan files and review all loans over $2 million. This again sparked more concern amongst small business owners. Without clear definitions, many borrowers needed the loan, took the loan, and by the time the guidance had come out the borrowers had already began to spend the loan proceeds on rent and payroll (both allowable under the statutory framework). Many owners were negotiating workout terms on their lease using PPP funds. These same business owners, many of whom took far less than the $2 million audit threshold began wonder if they would be better off returning the money and laying off staff instead, to legally protect themselves.
The problem with this is that the term “necessary” is legally vague. You could ask 10 lawyers what is the definition of “necessary” and you will likely get the answer “it depends” followed by 10 different definitions of a common and ordinary word. A quick review of US Supreme Court decisions reveals at least 3 different definitions for the word necessary. Each very broad in its own right. On May 13, 2020, the SBA issued additional guidance under question 46 of the FAQs that helped alleviate the concerns of many borrowers by stating “Any borrower that…received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.“ This clarification was good news to borrowers who really needed the assistance of the program but were worried whether Monday morning quarterbacking would come back to haunt them. The FAQs went further and stated that if the SBA determined the proceeds were not necessary, then as long as the borrower repaid the loan, no further action would be taken.
Loan Forgiveness
On May 15, 2020, the SBA rolled out its first draft of instructions and form application that borrowers will use when seeking loan forgiveness. The key points of this guidance are summarized below.
Before diving into this loan forgiveness application guidance, a few cautionary words. Be sure to speak with your LENDER before beginning to complete the application for loan forgiveness. Your lender may or may not modify the form to tailor to their software and computer systems. Additionally, as a borrower will have to apply for loan forgiveness through the lender, they will want to make sure the information is in a format that the lender is used to seeing. Making it easy on your lender will help maximize the potential and speed of the loan forgiveness.
Additionally, consult with your accountant and attorneys. Make sure the numbers and accounting of payroll costs are complete and accurate and make sure you understand the legal issues related to applying for the loan forgiveness. The goal is to provide the necessary information so that SBA/Treasury can process your application quickly and provide a favorable result.
Further, as we begin to breakdown the loan forgiveness process, remember this form instruction and application was just released. It is likely that much more guidance will be forthcoming as the SBA begins to work out the kinks. Make sure to stay abreast of these changes. We will do our best to summarize important changes in our newsletters.
Some things to remember, the loan forgiveness calculations will be based upon the 8 weeks commencing on the date of the first disbursement of PPP loan funds, that is the day the borrower received the funds.
Remember, calculating payroll costs has some limitations. Employee-allowed salary is capped at $100,000 annual salary per employee prorated for the covered 8 weeks. If a borrower has an employee making $150,000 per year, only the pro-rated portion of $100,000 is eligible for loan forgiveness. Salary is limited to the actual cash compensation paid to the employee. That means contributions to retirement plans (maybe a safe harbor contribution), benefits including healthcare coverage and payment of state and local taxes assessed on the employee’s compensation are included in the definition of payroll costs but are not part of “salary.” It would be useful to review the statutory allowable payroll costs prior to completing the loan forgiveness application.
One of the difficult components of payroll will be that most borrowers likely received the loan proceeds in the middle of a pay period. Under the SBA summary of eligible payroll costs the directions state that the borrower can generally include the “payroll costs paid and payroll costs incurred.” From a legal standpoint, this may be vague. What does this mean? Does it mean the payroll costs must be incurred and paid to be counted; does it mean payroll costs actually paid plus payroll costs incurred but not yet paid. What does it mean? This will need to be fleshed out more. The SBA directions further state that “Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period…are eligible for forgiveness if paid on or before the next regular payroll date.” In looking at the plain language multiple interpretations would seem reasonable, but additional guidance is likely forthcoming. This will likely settle at 8 weeks-worth of compensation for employees regardless of how the pay periods fall. The purpose of the forgiveness under the statute was to create an 8-week window of costs that would be eligible for forgiveness.
Additionally, borrowers will need to document non-payroll costs such as rent, utilities, and mortgage payments paid during the covered period.
Any borrower that received more than $2 million in PPP loan proceeds, will be required to denote that on the application for loan forgiveness. This will be a tracking mechanism consistent with prior guidance related to audits and loan reviews that will be completed by the SBA.
The borrower/principal(s) will have to attest the accuracy of the applications and use of the funds to ensure that the funds were used properly.
The borrower will be required to provide sufficient documentation to support the basis for the loan forgiveness. This will include documentation for payroll costs paid during the cover period. For those using a payroll service, the first place to start will be the periodic payroll reports. If your payroll provider will allow you to do a report for the 8-week covered period, that would be immensely beneficial. This report should cover things like salary paid, benefits coverage, retirement contributions, etc. All the components needed to determine allowed payroll costs. Additionally, for non-payroll costs such as lease payments, it will need to be supported by a copy of the lease and cancelled checks showing payments or lessor account statements. Documentation for tax payments and full-time equivalent employees will also be required.
Finally, the borrower will be required to keep records related to the PPP loan. Some of this information includes basis for borrower’s determination of necessity, documentation of salary calculations, and documentation regarding employment status of employees that separated from the business or did not return to work. Under the recent guidance, these documents should be kept for a period of six years after the date of forgiveness and be made available for inspection by the SBA upon request.
One thing is for sure, the PPP continues to change as more information becomes available. Guidance will continue to be rolled out as the processes evolve related to the operation of this program and the likely first wave of loan forgiveness applications that will be happening in the next couple of weeks.
The information contained in this article is for informational purposes only and not to be construed as legal advice. If you have questions, you should seek competent legal representation to assist you.
The attorneys of BPE Law Group, PC. have been advising our clients on real estate, business and estate planning issues for over 20 years and have assisted numerous clients in probate, business and real estate matters and have represented and advised brokers on their professional obligations as well as consumers on their rights. If you have questions concerning legal matters, give us a call at (916) 966-2260 or e-mail Keith at kbdunnagan@bpelaw.com. Our flat fee consult for new clients may get you the answers you need for the questions you have.
The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.