May Day or MayDay?

Update to SBA Paycheck Protection *Loan* Program

On this very interesting “International Workers Day” which is full of protests for worker safety, protests for the right to work, and  walkouts and boycotts of certain “front-line” businesses – we will try and give our clients and friends an update on the PPP loan (as it stands today) as so many of our clients, and other small businesses on Cape and around the nation have been driven mad by the frantic pace required to keep up with this program.

Overriding Elements

First, the “spirit” of this program was/is to maintain the employer and employee relationship. We have been including this spirit in every conversation, email, video-chat etc. that we are having with clients. We must not lose sight of that. This Loan program was not to make money – it was to enable survival.

Second, as a business owner we must think and behave operationally and economically. If it makes sense to let someone go for performance purposes – do it – how that impacts your forgiveness calculation be damned. Do not put this program in front of making the proper business decisions. Spend your time running your business – if you have to pivot your business model do it, create new revenue streams, lead and inspire your people, market your business to new customers, enhance existing relationships and begin new ones, establish tele-commuting options, etc. Do what is best for your business first and foremost – the forgiveness portion of the PPP will take care of itself (we can certainly strategize along the way but that should not be our primary goal).


Forgiveness Heartaches – see above! 100% Forgiveness should not be a goal or objective unto itself. Run your business. That said, it would be nice. The two elements that are most disruptive to the forgiveness calculation are 1: reduction in headcount or FTEs; and 2: payroll costs during the covered period.

As a borrower, your eligibility for the forgiveness of your PPP loan may be reduced if:

  • Less than 75% of PPP funds are spent on payroll costs;
  • A borrower employs fewer full-time equivalent (FTE) employees than it did during the base period, which can be either February 15, 2019 through June 30, 2019, or January 1, 2020 through February 29, 2020;
  • The salary or wages of an employee are less than 75% compared to the prior quarter; and,
  • The reduction in number of employees and/or compensation isn’t cured by June 30, 2020.

It’s important to note that the statute refers to “costs incurred and amounts paid” during the 8 week covered period. This phrase has the potential to create a host of problems. Borrowers should be diligent in tracking what their payments made during the covered period relate to.

Eligible expenditures incurred and paid during the covered period include:

  • Payroll Costs up to $15,385 per individual ($100,000 x 8/52) plus the following covered benefits for employees (we are waiting for more guidance on the inclusion of covered benefits paid on behalf of owners – we think “Yes” as the $100k cap should cover abuse)
    • Health care expenses;
    • Retirement contributions;
    • State taxes imposed such as unemployment insurance premiums (SUTA, SUI).
  • Active partners/LLC members may be included subject to the $100,000 limitation (i.e. $15,385 each).
  • Interest on a mortgage in existence before 2/15/20.
  • Rent on a lease in force before 2/15/20 (We are waiting for further guidance on if this is just real estate rent or if it also includes equipment rentals – we think “No”).
  • Utilities for which service began before 2/15/20 – includes electricity, gas, water, telephone, Internet access, transportation (The statute uses the word transportation without further elaboration – very puzzling – The SBA has not given further guidance as to what is included in transportation).
  • Borrowers can use the money to pay interest on any other debt obligations that were incurred before 2/15/20 but those expenditures will not be included in the forgiveness amount (The Act does not list any other expenses in the section entitled “Allowable Uses of Covered Loans”).

Here are some suggestions to track PPP funds in order to maximize your eligibility for loan forgiveness:

– Keep PPP loan proceeds in a separate bank account to avoid co-mingling with other funds. This will allow you to more easily track exactly how the funds are being used.

– Determine a process for transferring funds from the bank account that holds PPP loan proceeds to the company payroll bank account, or operating bank account, to cover the allowable costs. This will allow the business to track the funds that must be spent over the 8 week period.

– Compute the average full time employee count during the base period as defined. Keep in mind that the amount of the loan that will be eligible for forgiveness will be based on maintaining a headcount of at least this number – or by restoring headcount on June 30th.

– Create a separate analysis listing the salary of current employees as of the first quarter of 2020. Then, list each employee’s current salary payable utilizing the PPP funds. The current salary must be at least 75% of the salary paid in the first quarter. Employees making more than $100,000 are excluded from this computation.

– Expand on the above analysis by tracking the amount paid in gross payroll to the employee over the 8 week period. For those employees with an annual salary of over $100,000, track the gross payroll to an annualized salary of $100,000.

– Other payroll costs such as health benefits paid and retirement benefits paid are allowable payroll costs under the PPP. Be sure to pay these costs within the 8 week period.

– Maintain documentation. While the loan forgiveness application is not yet available, proof of the usage of funds is expected to be a key component. Documentation requests are expected to include: (i) verification of the number of FTE employees and (ii) support for employee pay rates comparing before and after salary and wage rates, (iii) proof of expenditure on eligible mortgages, leases and utility obligations. The documentation requests for the non-payroll expenditures may include cancelled checks, payment receipts, copies of leases, copies of mortgages and copies of vendor invoices.

Implementing good processes and tracking mechanisms as soon as the funds are received will be key to maximizing the forgiveness of your PPP debt and complying with the PPP’s loan provisions. The SBA has threatened criminal penalties for misrepresentation and false certification, so documentation of the usage of these funds is crucial.

Partial loan forgiveness – how would that work? For some businesses, that scenario—receiving, at most, partial loan forgiveness is not necessarily a bad thing.

That is because the terms of PPP loans are incredibly generous. With a 1% interest rate and loan payments deferred for six months, a PPP loan is the lowest-cost source of capital that any business could hope to obtain – however it is a pretty short-term. Consider comparing it to a common line of credit at say 4% or 5%. Not bad. Further, other loans tend to have fees to obtain, required profitability and good credit scores, have collateral requirements and personal guaranties – not so for PPP.

Some businesses feel as though the 25% allotment for rent, utilities, and mortgage interest isn’t enough to meet their needs if they want forgiveness. Many businesses, restaurants for example, have a high rent factor and may find that using their loan for many months of rent rather than rehiring their staff right away is a more sustainable path forward.

Keep in mind, not receiving full forgiveness for your PPP loan is not the same as defaulting on your loan. Defaulting on your loan can seriously damage your credit report and make it difficult for you to obtain more financing in the future – especially government-backed funding.

Instead, consider how just partial forgiveness of your loan can provide you with low-cost financing for a period while you wait to see which direction the economy is moving. Not seeking forgiveness is within your rights as a business owner here.

Just be careful to limit your use of your PPP loan to eligible costs, as described above.

Knowingly using your PPP loan for unauthorized purposes may make you liable for criminal charges, so obtain proper guidance before moving ahead.

The bottom line is that not receiving full PPP loan forgiveness does not spell doom for your business. This use of the PPP loan may not be exactly how Congress intended it be used when the CARES Act was passed, but as we continue to come to grips with the long-lasting effect the coronavirus pandemic will have on our society, it may turn out to be the more salient move for businesses that are thinking long term.


Don’t get Shake-Shacked and Beat LAafter round 1 of funding, there were some serious misgivings about large companies tapping into this funding – it was supposed to be for the little guy, so… the Treasury bumped up the language regarding the required certification that “uncertainty” made this loan program appropriate for your operation – and made the declaration that all loans granted over $2M would receive a “full review”. Questions 31 and 37 of the Treasury’s FAQs address this:

  1. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: … all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application {emphasis added}. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” 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.

For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. (Question 31 was published April 23rd)

  1. Question: Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: See response to FAQ #31. (Question 37 was published April 23rd)

Define “adequate”? Define “sources”? Define “ongoing”? What time frame are borrowers allowed to consider? A hundred more questions could come out of this.


The IRS on Thursday night (April 30th) released guidance stating that expenses related to forgivable loans through the Paycheck Protection Program (PPP) won’t be tax-deductible. Under the PPP, small businesses wouldn’t have to repay the low-interest loan they received as long as the loan went to eligible expenses (identified above).

Usually, wages are deductible expenses and forgiven debt counts as taxable income. But under the coronavirus relief law, the PPP loan forgiveness is not counted as taxable income. The IRS said in its guidance Thursday that expenses that result in forgiveness of a PPP loan are not tax deductible in order to prevent a “double tax benefit”. 

The agency cited Section 256 of the tax code, which states that deductions can’t be taken if they are tied to a certain class of tax-exempt income.

With QBI (Qualified Business Income) deduction properly in place this too could be subject to a 20% haircut – which we could all use right now (case specific).

If desired, Congress could override the IRS’s stance by passing a law that explicitly allows the deductions. It has done so previously for religious leaders and military service members, allowing them to deduct property taxes and mortgage interest even if they are receiving tax-free housing allowances.

So once again, the old adage proves true – there’s no such thing as a free lunch!

If you have any questions about obtaining, returning, reducing, effectively tracking the spending of your PPP loan, or anything else PPP related contact a SPM&Co advisor today.

Stay safe, stay well, support local.