On Saturday, July 4, 2020, President Trump signed a new law extending the due date for obtaining an Income Protection Program (PPP) loan from June 30 to August 8. This extension begins the heels of new Interim Final Rules (IFR) issued by the Small company Administration (SBA) on June 22, clarifying some concerns and attempting to make total loan forgiveness achievable for most borrowers.
In addition, on July 6, 2020, the SBA and the Treasury Department released the complete database of all PPP loans issued to date– around 4.9 million. For loans above $150,000, the data consists of business name, address, NAICS codes, demographic details, the date the loan was provided, a variety of employees, and a congressional district. For loans under $150,000, the name and address were left out.
In a July 6 press release released by the SBA, Treasury Secretary Steven T. Mnuchin specified, “The typical loan size is around $100,000, showing that the program is serving the tiniest of businesses.” He added that “Today’s release of loan information strikes the appropriate balance of providing the American people with openness while safeguarding delicate payroll and personal income info of small companies, sole owners, and independent specialists.”
The release of the data came at the behest of numerous groups and politicians seeking openness for the $650 billion loan program created under the CARES Act. There is concern amongst some that the program undergoes prevalent scams and abuse, and they desire responsibility. Currently, many companies receiving unfavorable press protection and fearing audits and charges returned $30 billion in PPP funds, although probably they got them legitimately under the standards.
On the other side of the dispute are many company groups who wish to see a “safe harbor” that all borrowers who received the loans, or a minimum of those under a certain threshold such as $1 million, will get loan forgiveness for parts of the loan they use according to policies– 60% on payroll and 40% on expenditures such as rent, mortgage payments, utilities, and interest payments on loans.
The release of the data caused instantaneous stress and anxiety among customers as the data seemed insufficient. After examining the data, numerous businesses were reported having none or one worker, even though their loan quantities were over $150,000, indicating a lot more employees. This raised issues that incorrect data would trigger audits or adversely impact a review. The reality is the information shows the input from lending institutions who were working all the time to issue the loans as quickly as possible and, according to the CARES Act, gave debtors the advantage of the doubt that the loans were needed and employees were to be kept the payroll.
For a lot of debtors, the inaccurate information will be of no effect. Businesses with 10 or fewer workers, sole owners, or independent professionals will not be the target for extreme evaluations or audits, and while those debtors who got over $2 million in PPP funds have a much higher possibility of an audit, the genuine targets will include fraudsters lying on loan files.
While the program has been riddled with problems, confusion, and new guidelines coming out practically weekly, the reality is, it has had the wanted impact of injecting liquidity into the economy and keeping workers on the payroll. While roughly $130 billion remains in the program, necessitating the extension to August 8, the federal government moved at an extraordinary speed and scale on this program. Considering that the SBA problems about 1,000 loans in a normal year, 4.9 million PPP loans in three months are commendable.
The reality that funds stay is the outcome of a slowdown in applications as many customers were worried that audits would leave them holding a loan they believed would end up being a grant, or even worse, civil or criminal charges. So, in addition to the extension, the new guidance from June 22 was likewise meant to relieve the concerns of lots of services and increase applications.
While it remains to be seen whether the new assistance will increase loan applications over the next month, the new assistance and future policies sure to come still produce as numerous concerns as they look for to respond to. Here are some of the most often asked questions on PPP loans and forgiveness:
- When can I look for PPP loan forgiveness?
The greatest question coming up about the brand-new rules is whether a customer needs to choose to use after eight weeks or needs to wait for 24 weeks– to put it simply, “either-or.” The guideline made clear that a customer might use anytime in between 8 and 24 weeks, mentioning as follows:
A customer may send a loan forgiveness application whenever on or before the maturity date of the loan–– including prior to completion of the covered period– if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness.
The rule continues to discuss that debtors who got loans before June 5 can choose 8 weeks as the covered duration before making an application for forgiveness, and borrowers have 10 months from after the covered period ends to make an application for forgiveness.
Of course, there is a caution to this rule, which is if a borrower has lowered salaries or incomes of employees by more than the 25% allowed under PPP, they have to apply that reduction for the entire duration of the loan period, either eight weeks or 24 weeks, and not as of the date they request forgiveness. Here is an example supplied in the IFR, which is made complex:
A customer is using a 24-week covered duration. This customer lowered a full-time staff member’s weekly income from $1,000 each week throughout the referral period to $700 weekly during the covered duration. The worker continued to deal with a full-time basis throughout the covered duration, with an FTE of 1.0. In this case, the first $250 (25% of $1,000) is excused from the loan forgiveness decrease. The debtor seeking forgiveness would list $1,200 as the salary/hourly wage reduction for that worker (the additional $50 weekly reduction increased by 24 weeks). If the debtor requests forgiveness before the end of the covered duration, it needs to account for the salary reduction for the complete 24-week covered duration (totaling $1,200).
This scenario can be lessened, or avoided altogether, by not decreasing wages above 25% and using all PPP funds before looking for loan forgiveness. Remember, the PPPFA extends the time limit for debtors to rehire employees till December 31, 2020. So, there needs to be plenty of time to rehire and pay workers the salaries they are due based upon the loan application amounts and to receive complete forgiveness. After the forgiveness application is sent, the company will be free to make choices on headcount and wages.
- What is the process for requesting PPP loan forgiveness?
Thankfully, among the key brand-new changes is a simpler application kind. The initial Kind 3508 was so complicated, company owners would definitely need an accountant or lawyer to analyze it. There is now Kind 3508EZ, and loan providers are also enabled to produce their application.
Once the application is sent, the loan provider will have 60 days to make a “good faith” review, request additional information or documentation, and approve forgiveness in entire or in part. “Good faith” review is described as taking a look at a payroll report from a third-party service provider, like ADP, together with records of payments for licensing expenditures. A lot of debtors, therefore, need to get total loan forgiveness by utilizing all the funds on payroll and providing a payroll report together with the application. As with the loan application on the front end, a lot of third-party payroll companies are producing reports, particularly for PPP loan forgiveness.
Once the lender has performed its evaluation, it will send the application and documents to the SBA for its review. The SBA will have 90 days to conduct a review. It can either approve the forgiveness, request for more details, or approve a part of the loan for forgiveness. If it does not authorize all or part of the loan for forgiveness, borrowers now have 5 years (up from two years) to pay back the loan at 1% interest. Debtors who got the loan before June 5, 2020, will need to work out the five-year term with their lender.
- What is the optimum quantity owner-operators, self-employed, and independent professionals can have forgiven on their PPP loan?
The previous assistance, for reasons challenging to figure out, capped the quantity of forgiveness at $15,385 for sole proprietors, worker-owners, and independent specialists. For those utilizing $100,000 of salary to calculate the loan quantity, they would have received $20,833, leaving a space of approximately $5,000 to use on licensing costs. For lots of in this classification, working from home or with minimal expenditures exposed the possibility that a portion of the loan would be unforgiven. The new guidelines alter the cap on forgiveness received by self-employed individuals to $20,833. Now with a 24-week time horizon, these borrowers can just run enough payrolls to spend these funds and get complete forgiveness.
- Should I still be fretted about an audit on my PPP loan?
The brand-new guidance did not supply any particular safe harbors for an audit. The SBA currently offers a safe harbor, where loans under $2 million will be thought about made in excellent faith-based upon financial unpredictability, so there will not be much reason to audit these loans. With federal government-mandated shutdowns, continuous cases of COVID-19, and a rocky resuming of the economy, financial uncertainty stays for all businesses.
The main interest in audits of loans over $2 million will remain the issue of the “credit elsewhere” test and the liquidity of the customer. Unlike traditional SBA loans, company owners didn’t need to record an absence of credit somewhere else and only accredit if they did not have adequate access to credit. At this point, it appears that except venture financing available or access to public capital markets by virtue of a stock market listing, the majority of companies that are audited will likely have the ability to reasonably declare a lack of adequate credit elsewhere, even with conventional lines of credit.
- What can I expect next for any easing of restrictions on PPP loans?
The main issue remaining in the program is around taxes. PPP loans do produce adverse tax effects, primarily that expenditures, including federal payroll taxes paid by the company with PPP funds, are not deductible. So, while PPP funds that are forgiven are not taxable, services will lose these reductions.
Organization groups are lobbying furiously to make changes to PPP, specifically on the payroll tax issue, in what’s being called Phase 4 legislation. The new law could also provide brand-new funds targeted at particular demographics or allow businesses a second PPP loan. Negotiations for the new law are underway and should conclude prior to the Congressional August recess.
The extension of the PPP program until August 8 and the new guidelines need to incentivize more services to make an application for loans. Despite the confusion, the program is largely working as designed, which is to offer little organizations with extra funds to weather the coronavirus storm. While the prospect of an audit stays very genuine, there are likely more guidelines to come to that will, ideally, explain and specify what that looks like so businesses have the certainty they need.
In the meantime, with COVID-19 cases rising in many parts of the country, services might be dealing with a new age of complete or partial shutdowns. That prospect will likely accomplish two things: One, remove the concern of “financial unpredictability” from the conversation; and two, cause a robust new package of economic stimulus.