On May 15, 2020 Collaberex hosted a webinar addressing common questions about loan forgiveness under the Payroll Protection Program (PPP). Signed into law on March 27th, under the CARES Act, the program offers forgivable loans of up to $10 million each to qualified small businesses in order to fund payroll and certain other overhead costs. During its first phase, approximately 1.6 million PPP loans were awarded, followed by an additional 2.6 million loans during a second phase. Eight weeks after receiving a loan, businesses may apply for forgiveness, but much confusion has ensued.
The webinar was moderated by William Malpica, Esq., Partner, Martin LLP, and panelists included Daniel Casanta, President and Founder, Cardinal Business Financing, Inc.; Alex J. Hart, CPA, Principal and Founder, Hart Vida & Partners; and Jason Putter, Esq., Martin LLP See their bios below.
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- PPP was implemented quickly and, at first, there were few ground rules. As of the webinar date, however, 17 changes have been announced, causing confusion. Participating businesses are encouraged to regularly consult sba.gov for the latest updates.
- Loan forgiveness is calculated in the following manner:
- 75%* of the loan must be used for payroll costs such as salary (up to $100,000 per person annually), vacation, sick leave, health care and retirement benefits, state and local taxes. (*The maximum percentage allocable for payroll was subsequently reduced to 60%)
- Up to 25%* may be used for mortgage interest, rent and utilities. (*This percentage was subsequently increased to 40%)
- As of the webinar date, funds must be spent within 8* weeks of loan origination (*This timeframe was subsequently increased to 24 weeks).
- The percentage of loan forgiveness is also driven by employee headcount. To achieve 100% forgiveness, a business must have the same or more employees by June 30 as the lesser of its headcount during the periods February 15, 2019 – June 30, 2019, or January 1, 2020 – February 29, 2020.
- An individual who works 40 or more hours per week is counted as 1 employee. For part-time employees, divide their number of weekly hours worked by 40 to determine the proper fraction.
- It is not necessary to rehire the same person in order to reach a company’s staffing goal for 100% forgiveness. If a furloughed employee refuses to be rehired, they can still be counted as rehired for loan forgiveness purposes. This may, however, affect their eligibility for unemployment benefits.
- If an employee resigns during the covered period, it will not reduce the borrower’s loan forgiveness
- Each employee’s salary during the 8-week covered period must be at least 75% of what it was during the last full quarter before loan application.
- In order to reach the goal of using 60% of the loan for payroll, it’s permissible to increase employee salaries by a total of $15,385, bearing in mind the $100,000 salary cap per employee. It is expected that the salary cap will move to $46,153, but more guidance is needed.
- Any unforgiven portion of the loan disbursed before June 5, 2020, must be paid over the course of 2 years* at 1% interest. Loan repayment may be deferred by 6 months, during which interest continues to accrue. Interest on the forgiven portion of the loan is also forgivable. (*For loans disbursed on or after June 5, 2020, unforgiven portion must be paid over 5 years at 1% interest).
- According to current guidance, use of loan proceeds cannot be reported as an expense for tax purposes. The loan must be reported as “Other Income & Expenses,” meaning that borrowers will be paying tax on it.
- It’s useful to establish a separate bank account for loan funds. When applying to the lending bank for loan forgiveness, have the following documentation:
- Payroll reports for the covered 8-week period.
- Cancelled checks for rent, mortgage, utilities.
- Copy of rental agreement.
- There has been recent guidance concerning borrowers who may have had other sources of liquidity besides the PPP loan. The SBA has announced that it may begin a review of any PPP loan of any size at any time, at its discretion. However, there is low probability that a small company with a small loan will be audited. The SBA will be focusing on loans over $2 million. If challenged, borrowers have the option of returning the loan without further repercussions. Regardless of loan size, it’s advisable to maintain a “PPP file” detailing why a business felt that the PPP loan was justified and containing all financial documentation supporting loan-related activities.
- Sole proprietors can claim “owner compensation replacement” through PPP. This is calculated by multiplying net income reported on Form 1040, Schedule C, by 8/52 (0.154).
- Businesses that have not yet applied for a PPP loan and would like to do so, should understand that not all banks are currently accepting applications. When they do apply, they ask the bank how fast the application will get into its system and who their contact person will be. Once approved, there may be lag time since the Treasury Department channels PPP loan funds to banks in daily batches.
Moderator: William Malpica (email@example.com / 203-973-5230 / www.martinllp.net) is a partner with the law firm of Martin LLP, where he advises middle market companies, investors and lenders on corporate finance, mergers and acquisitions and other corporate and securities transactions. Prior to joining Martin LLP, Will was inhouse counsel at The Royal Bank of Scotland and was an associate with the international law firm of Mayer Brown LLP. Will is a member of the board of directors of Lifting Up Westchester, a nonprofit dedicated to eradicating hunger and homelessness in the county. He also serves on the board of My Team Triumph, a Connecticut- based nonprofit that makes endurance challenges accessible to individuals with special needs, and is pro bono counsel to Building One Community, the Stamford-based nonprofit dedicated to serving the needs of the immigrant community.
Dan Casanta (firstname.lastname@example.org / 203-816-6956 / www.cardinalbusinessfinancing.com) is a seasoned commercial finance professional. In 2014, after years in the industry, he founded Cardinal Business Financing. Cardinal helps small and medium-sized businesses access financing, particularly when bank lending is not available. The firm works closely with over 75 lenders and underwriters across the country, focused primarily on equipment finance and working capital solutions. Dan and his firm have extensive experience with SBA lending and recently, due in large part to their strong network of SBA partners, they have been instrumental in providing millions of dollars in PPP funding to borrowers in dire need of this liquidity. These services are free of charge to the applicants.
Alex Hart (email@example.com / 914-617-7626 /www.hvandpartners.com) is a principal and founder of Hart Vida & Partners. With over 25 years of experience, Alex specializes in the areas of tax strategy and planning, business process improvement, and CFO advisory. Alex has acted as outsourced CFO and Controller for small and mid-sized businesses in a variety of industries. He is a member of the National Association of Tax Preparers and is a contributing author and mentor at Latin Business Today. Since the onset of the COVID pandemic, Alex and his firm have been on the front line, working tirelessly to help their business clients navigate the multiple options available to acquire short-term funding and remain operational.
Jason Putter (firstname.lastname@example.org) / 203-973-5233 / www.martinllp.net) is an attorney in the Business and Corporate practice group of Martin LLP. Jason’s practice concentrates on corporate and commercial transactions, including mergers and acquisitions, debt and equity financings, private equity, and corporate finance on behalf of middle market clients, including a substantial number of growth companies and the entrepreneurs who lead them. Immediately prior to joining Martin LLP, Jason worked at a small Connecticut firm. Jason was also a senior associate at Skadden Arps for six years, where he represented public and private companies and their principal stakeholders in M&A, financing, securities litigation and complex in- and out-of-court restructurings. Prior to entering private practice, Jason held a two-year federal clerkship.