The SBA Paycheck Protection Program – now that we are off and running with many, many businesses applying for the loans, and the banks starting to turn around approvals and funding – what should you do when hear from the bank that you’ve been approved and funding committed?
Read the promissory note – before you sign
Your bank will require you to sign a promissory note before funding takes place – this is your opportunity to make sure that you are clear on the rules, terms, certifications and expectations of the loan – remember this is a loan – not free money – while there is a forgivable component for those that qualify there are also penalties and not so fun elements.
Ensure That the PPP Funds Are Used Only for Allowable Uses
The funds are primarily to be utilized to retain workers and maintain payroll – you can also pay mortgage interest payments, lease payments and utilities (all had to be in place prior to 2/15/2020).
The essence of this program is to keep the employer and employee relationship intact. Rather than having your workforce scatter and collect unemployment, having to get off health care and retirement benefits etc., this program is designed to be more like a pause button than a hard stop and difficult re-start. Once the economy is able to be opened back up, by utilizing this program you should have an easier time getting back up to full speed – you shouldn’t have to hire and train and invest all that additional time and administrative burden but rather you’re able to hit the ground running with your existing and in-place staff.
The SBA issued an Interim Final Rule (only the government could say “interim final” with a straight face) on April 2, 2020.
Step 1 was obtaining funding – Step 2 is to Maximize the Forgivable Amount
The full PPP loan balance may be forgiven if the loan proceeds are used for a discrete group of costs during the 8-week period following the loan. Loan recipients should work closely with their advisors to ensure that they maximize the forgivable amount of the loan. This requires properly documenting the use and allocation of the funds. As part of this effort, borrowers may want to (should) segregate the funds and take steps to ensure that proper accounting mechanisms are in place.
The PPP loan can be forgiven to the extent that it is used on the following categories of costs during the 8-week period:
- Payroll costs;
- Interest on mortgage obligations incurred before February 15, 2020;
- Rent payments on leases dated before February 15, 2020; and
- Utility payments under service agreements dated before February 15, 2020
Aspects that can lead to limitations on the forgiveness amount:
- reductions in employee count; or
- reductions in an employee’s salary or wages; and
- no more than 25% of the loan forgiveness amount can be attributable to non-payroll costs.
Borrowers may be able to avoid these limitations through careful planning. Borrowers may also be able to course correct for pre-loan layoffs or furloughs in order to avoid reduced eligibility for the forgiveness provisions. Again, this may require careful and quick planning.
Get your Documents in Order
Keeping proper records may be the last thing you’re thinking about while you try to figure out ways to keep your doors open during the coronavirus crisis – but documents and records will be essential to the forgiveness component of the SBA PPP.
The importance of maintaining contemporaneous records during this difficult time cannot be overstated. The CARES Act expressly requires that the borrower be able to adequately document the use of the funds in order to obtain forgiveness.
Borrowers will ultimately be required to submit a request for loan forgiveness to the lender that is servicing the loan. The request will need to include a number of items, such as documentation to verify the number of full-time employees and their pay rates, as well as documentation to prove expenditures on eligible mortgages, leases, and utility obligations. This documentation may include cancelled checks, payment receipts, transcripts of accounts, and other documentation. If history teaches anything, it is that regulators tend to give more focus to the documentation requirements once the smoke has cleared and the underlying emergency has subsided. Borrowers should not overlook the need to document and substantiate.
File an Application with the Bank After the 8-Week Period to Request Forgiveness of Loan Amounts
PPP borrowers will need to file an application with their bank after the 8-week period. If you have been properly documenting your expenditures and following best practices, this should be a relatively easy process.
Keep in mind that a representative of the business will be required to submit a certification providing, among other things, that the amount for which forgiveness is requested was used for appropriate purposes.
Banks are required to make the forgiveness determination within a 60-day period after the application is submitted.
Did you say “Tax-Free”?
One of the most amazing aspects of this program is that loans that are forgiven under the PPP are not subject to federal taxation as discharge-of-indebtedness income. The CARES Act specifically excludes them from gross income.
Legalese to be aware of
PPP applicants are required to certify that “[t]he funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments.” And that requirement comes with a warning: knowingly using the funds for unauthorized purposes may lead to charges of fraud. In fact, there are a host of potential federal crimes that could apply for misusing funds or making false statements about the intended use of the funds.
There are other considerations as well. If a PPP loan is used for unauthorized purposes, the loan can be converted into a recourse liability. That is, the SBA may be able to come after the loan recipient or its shareholders, members, or partners for an unpaid loan if they use the PPP funds for unauthorized purposes. In addition, the recipient will not qualify for the loan forgiveness provisions.