Most visitors to our site are familiar with the Paycheck Protection Program (PPP). It has attracted massive interest from business owners and non-profits across the country. The loan program was established with the passing of the CARES Act on March 27, 2020. The Program went live April 3rd with a directive to qualified lenders to deliver funding as quickly as possible.
The Act relaxed underwriting rules, excluded collateral and credit worthiness from the borrower requirements, and included other provisions to attempt to facilitate that directive. It was welcome relief for small businesses across America experiencing economic hardship as a direct result of public health measures to mitigate the spread of COVID-19.
Predictably, the directive also contributed to widespread delays due to system issues. Evolving guidelines caused concern for lenders and borrowers. Despite this and the widespread reporting of the many issues, the PPP has delivered over $350 billion in loans (or approved and will be funded in approximately 10 days) to over a million small businesses in less than a month. Lenders and the SBA will likely double that amount by mid May.
Based on the demographic data from the Small Business Administration, over 95% of the approved loans in the first tranche were $1 million or less (72% under $150K). Secretary Mnuchin indicated that loans over $2 million will be audited. This will likely be an effective strategy to maintain the integrity of the Program. Less than 2% of the applications, but 30% of the approved funds (over a million/ $349 billion in total in the first tranche) are over $2 million.
Our firm presented 10 webinars (the most recent can be viewed HERE) to over a thousand participants with information and answers about various forms of COVID-19 financial resources. Questions we are receiving through our Cares Team (email@example.com) and the Q&A in our webinars have primarily focused on the PPP. The most frequent topics include issues with lenders, application questions, how various Interim Final Rule and FAQ releases impact borrowers, and increasingly so, understanding forgiveness.
Final guidance on forgiveness was expected earlier this week after allowing 30 days for public comments (the CAREs Act mandated issuance by April 26, 2020). To date, no additional guidance has been released that provides clarity on the major areas of concern and uncertainty with the Program. To our knowledge, there has also been no update about when we can expect the final guidance to be released.
This is a major problem for borrowers and lenders. Many borrowers are afraid to spend any money at all until we have certainty about the rules. Many businesses and non-profits are already unsure if they are viable enough to re-open due to the devastating impact the government mandates have had on their operations. Many businesses are facing restrictive re-open mandates that limit their capacity to a level that renders their survival an impossibility. They did not want a loan with unknown terms.
Businesses urgently need guidance and modifications that will bring the Program into better alignment with the spirit and intention of the CAREs Act, which was passed by elected representatives. The forgiveness component is the only reason so many businesses, especially the most harshly impacted, were so optimistic and hopeful about this program.
Initially, the gist of the program was 2.5 months of average payroll costs ( as defined by the Act) would be your total loan amount. Spend that amount on payroll, rent, covered mortgages, utilities and transportation over the next eight weeks (starting at receipt of loan proceeds) to be eligible for total forgiveness. Your forgiveness would be reduced if you did not fully restore your pre covid headcount and compensation levels by 6/30. In those guidelines, there are major areas of ambiguity (define full time equivalent, do you annualize the 8 week period for salary restoration or is it meant to compare an 8 week period to a 12 or 13 week quarter, if an employee chooses not to come back but you replace them – can that meet the salary restoration criteria, and many more)?
Subsequently released information from the Treasury and SBA have only made the process more confusing and rigid for businesses in dire need of resources accompanied by uncertainty about the terms and conditions of using those resources. In a recent Forbes article (that everyone should read), Tony Nitti puts it perfectly, “You have to hand it to the SBA. It has done a remarkable job of providing answers to questions that only create more questions.”
We previously sent a letter to the SBA within the 30 day window for public comments with suggestions for modifications and requests for clarity. Our letter echoed the sentiment of several members of Congress who saw the subsequent limitation on businesses that 75% of proceeds must be used on payroll costs (in addition to the ambiguous headcount and salary restoration requirements) as outside the intent of the Act and too limiting on business decision making.
You can read our letter HERE. Among other suggestions, we request a reversal of the 75% of proceeds on payroll costs limitation, a delay of the covered period until a business reopens, and an expansion of eligible costs to include costs associated with working in a remote environment.
Yesterday, the AICPA offered recommendations to the SBA that will bring clarity to the implementation of the PPP. Included in those recommendations are the below (to see the full letter, CLICK HERE):
- The eight-week covered period under PPP should align with the beginning of a pay period, not the date loan proceeds are received.
- The eight-week period should begin once local stay-at-home restrictions are lifted, not when loan proceeds are received, so small businesses have adequate funds to ramp up operations.
- Full-time job equivalent (FTE) employees can be calculated using a simple wage-based proxy when hours worked are not tracked by the employer.
- Payroll reduction calculations should be based on average payroll per employee per week, not total compensation per employee.
We are hopeful for swift action from the SBA and Treasury to ensure the PPP aligns with Congressional intent to deliver effective relief to businesses and will communicate with you as quickly as possible as we learn more.
We are happy to discuss any questions or comments you may have. Our team is working and available to review with you. Please contact our office at 610-544-5900 or firstname.lastname@example.org .
We are in this together,
Brinker Simpson & Company, LLC
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, & cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).