Backend Category: Coronavirus

The nation’s employment attorneys are anticipating an onslaught of lawsuits over workplace exposures to COVID-19. To help avoid these lawsuits, and mount an affirmative defense if they do occur, it is recommended that employers develop a comprehensive COVID-19 exposure control plan. A single document showing that the company is carefully following OSHA, CDC, and health department guidance, to help prevent employees from contracting and spreading the virus, would go a long way towards an affirmative defense, should a lawsuit ensue. A current comprehensive plan establishes a record showing how thoughtful and complete the company’s response to the COVID-19 pandemic has been. If you don’t have a current exposure control plan, see the MCAA Model COVID-19 Return to Work Exposure Control Plan for guidance.

Once you have established your company’s exposure control plan it is critical that you keep it updated. OSHA, CDC, health department, and local critical industries requirements change frequently due to constant COVID-19 research. Carefully monitor MCAA’s COVID-19 Resource Center to help keep your plan updated.

New Safe Harbor from the FTE Reduction Rule:  In the latest IFR, the SBA discussed the new safe harbors to the FTE reduction rule in a manner that appears to be very borrower friendly.  As you know, PPP loan forgiveness is reduced if you reduce your FTE count during your covered period (when compared to your reference period).  The second of the two new safe harbors allows companies to ignore any FTE reductions after February 15, 2020 if they relate to an “inability to return to the same level of business activity” before February 15, 2020 as a result of guidance issued by a variety of agencies (including state and local government) that inhibits such business activity. Examples are closing non-essential businesses and reductions in businesses volume due to social distancing or sanitation guidelines, but the safe harbor can apply to a much broader set of circumstances. 

Withum has included below both an excerpt from the IFR as well as an example provided in the IFR.  This safe harbor does not require the business interruption to cover the entire covered period, meaning that borrowers just need to establish that a disruption occurred for some meaningful period of time during the covered period.  It also does not narrowly define a disruption, allowing borrowers to potentially rely on a broad variety of different “disruptions” caused by the requirements established by these agencies. Therefore Withum believes this new safe harbor has broad applicability, including in the auto, restaurant and hospitality industries, for example, as well as in a variety of professional service industries like law and medicine.

Withum believes the safe harbor is extremely broad, and unless it is pared back by the SBA, a large number of borrowers should be able to avail themselves of it.  If you have an FTE reduction during your covered period, Withum recommends that you closely review this safe harbor from the PPP Flexibility Act, as interpreted by the new IFR, to see if you can fall within it.  The forgiveness application requires that you maintain documentation of the business disruption that took place and what requirement or guidance created it.

Excerpt from IFR:

Borrowers are also exempted from the loan forgiveness reduction arising from a reduction in the number of FTE employees during the covered period if the borrower is able to document in good faith an inability to return to the same level of business activity as the borrower was operating at before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19 (COVID Requirements or Guidance). 

The Administrator, in consultation with the Secretary, is interpreting the above statutory exemption to include both direct and indirect compliance with COVID Requirements or Guidance, because a significant amount of the reduction in business activity stemming from COVID Requirements or Guidance is the result of state and local government shutdown orders that are based in part on guidance from the three federal agencies. 

Example provided in the IFR:

A PPP borrower is in the business of selling beauty products both online and at its physical store. During the covered period, the local government where the borrower’s store is located orders all non-essential businesses, including the borrower’s business, to shut down their stores, based in part on COVID-19 guidance issued by the CDC in March 2020. Because the borrower’s business activity during the covered period was reduced compared to its activity before February 15, 2020 due to compliance with COVID Requirements or Guidance, the borrower satisfies the Flexibility Act’s exemption and will not have its forgiveness amount reduced because of a reduction in FTEs during the covered period, if the borrower in good faith maintains records regarding the reduction in business activity and the local government’s shutdown orders that reference a COVID Requirement or Guidance as described above.

Reminder Section:  (what should I be doing):

• Call your payroll company about claiming the payroll tax deferrals and employee retention credits that were made available in the CARES Act.
• Talk to your payroll company about the qualified sick/family leave legislation (FFCRA, passed prior to the CAREs Act).
• Consider speaking with your lender to discuss changes to terms of existing debt facilities. The banking system remains strong.
• If you have already applied for the PPP, start forecasting how you intend to spend the funds and how to qualify for the highest amount of forgiveness possible.

Alston & Bird have released their June 25 COVID-19 update, including the latest news on emergency funding, administrative and regulatory actions, workplace and home issues, and many other topics, as well as to links to all their past updates.

Change to Forgiveness Process: As we all know, the Covered Period was recently changed to be either 8 weeks or 24 weeks, at the borrower’s election if the loan was issued before June 5th. This has opened the door to many companies obtaining full forgiveness of their loan. An issue that has often come up is that many borrowers are able to incur enough expenses to obtain full forgiveness within a period that is longer than 8 weeks but perhaps far shorter than 24 weeks. This has led to the question:  Do I need to wait the full 24 weeks before we apply for forgiveness?  

Up until now the answer was yes, however the IFR release has clarified that a borrower can apply for forgiveness at any time after or DURING their covered period. This will allow borrowers to get the process rolling and perhaps allow them to wrap up the forgiveness process prior to the end of the year.  

Update on Salary and Wage Reduction Rule: The IFR also indicates “If the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25 percent, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period.”

This is meaningful because it indicates that you will need to account for salary reductions through your full covered period even if you apply for forgiveness early. As an example, if you reduced an employee’s salary in excess of 25% for the first 12 weeks of your covered period, when applying for forgiveness you need to assume that reduction will have been in place for all 24 weeks for purposes of the forgiveness calculation. No guidance was issued about what to do if there are FTE reductions during the covered period. 

The new IFR clarified many other points regarding the loan forgiveness process, and all of the salient ones are included in Withum’s 06/20/2020 webinar on loan forgiveness.  It will be posted on Withum’s website afterwards.

Reminder Section:  (what should I be doing):

• Call your payroll company about claiming the payroll tax deferrals and employee retention credits that were made available in the CARES Act.
• Talk to your payroll company about the qualified sick/family leave legislation (FFCRA, passed prior to the CAREs Act).
• Consider speaking with your lender to discuss changes to terms of existing debt facilities. The banking system remains strong.
• If you have already applied for the PPP, start forecasting how you intend to spend the funds and how to qualify for the highest amount of forgiveness possible.

The Food and Drug Administration (FDA) is concerned that hand sanitizers manufactured by Eskbiochem SA de CV in Mexico may contain methanol (wood alcohol), which can be toxic when absorbed through the skin or ingested. The FDA has identified the following products manufactured by Eskbiochem:

• All-Clean Hand Sanitizer (NDC: 74589-002-01)
• Esk Biochem Hand Sanitizer (NDC: 74589-007-01)
• CleanCare NoGerm Advanced Hand Sanitizer 75% Alcohol (NDC: 74589-008-04)
• Lavar 70 Gel Hand Sanitizer (NDC: 74589-006-01)
• The Good Gel Antibacterial Gel Hand Sanitizer (NDC: 74589-010-10)
• CleanCare NoGerm Advanced Hand Sanitizer 80% Alcohol (NDC: 74589-005-03)
• CleanCare NoGerm Advanced Hand Sanitizer 75% Alcohol (NDC: 74589-009-01)
• CleanCare NoGerm Advanced Hand Sanitizer 80% Alcohol (NDC: 74589-003-01)
• Saniderm Advanced Hand Sanitizer (NDC: 74589-001-01)

LEARN MORE

Alston & Bird have released their June 22 COVID-19 update, including the latest news on emergency funding, administrative and regulatory actions, workplace and home issues, and many other topics, as well as to links to all their past updates.

Updated Loan Forgiveness Application:  The SBA released two loan applications, one is an updated version and the other is a new “EZ” form. Withum has analyzed both in this article.  The EZ form allows borrowers to ignore FTE and headcount reduction calculations and fill out a truncated form if they meet one of three criteria. True to form, some of the criteria requires meaningful clarification, specifically the third one noted in the article. There are rumors that a number of new FAQs are coming out within the next week or so.  

With respect to the criteria below, it is unclear if the borrower needs to demonstrate an inability to operate at a point in time, or a period of time. Also the SBA calls out requirements and/or guidance  issued by three specific Federal organizations, and for the most part the restrictions on commerce have been imposed by States. Withum assumes more clarification is coming or borrowers will have to scour the websites of the three Federal organizations listed to see what restrictions or guidance have been provided.

“Borrower was unable to operate during the CP at the same level of business activity as before 2/15/20 due to compliance with requirements established or guidance issued between 3/1/20 and 12/31/20 by HHS, CDC or OSHA, relating related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.”

New Bill in Congress Relating to the PPP:  It’s a new week, so there is of course a new Bill in the works. This one is called the Prioritized Paycheck Protection Program (P4) Act. This Bill is designed to allow small companies (less than 100 employees) to obtain a second PPP loan if they exhausted their current PPP loan and have suffered a 50%+ reduction in business as a result of COVID. This Bill was just introduced and we will see if it picks up steam in the coming weeks.  

Updated Loan Forgiveness Calculation:  The rules relating to loan forgiveness have evolved over time. Withum has updated the article on the mechanics of loan forgiveness here for those who are looking for updates and examples.

Reminder Section:  (what should I be doing):

• Call your payroll company about claiming the payroll tax deferrals and employee retention credits that were made available in the CARES Act.
• Talk to your payroll company about the qualified sick/family leave legislation (FFCRA, passed prior to the CAREs Act).
• Consider speaking with your bank to discuss changes to terms of existing debt facilities. The banking system remains strong.
• If you have already applied for the PPP, start forecasting how you intend to spend the funds and how to qualify for the highest amount of forgiveness possible.

OSHA recently released the new COVID-19 publication Guidance on Returning to Work. The publication addresses planning for reopening, applicable OSHA standards, employer FAQs, and much more.

OSHA GUIDANCE

On June 17, 2020 the SBA issued not one, but two PPP Loan Forgiveness Applications and sets of instructions – the revised PPP Loan Forgiveness Application and instructions (PPP Application) and the PPP Loan Forgiveness Application Form EZ and instructions (PPP EZ Application).

The revised version of the original loan forgiveness application hews closely to the original that was released on May 15, 2020, but updates it to accommodate the changes to the PPP made in the PPP Flexibility Act.  Both applications (and the two sets of related instructions) clarify some points and, in true PPP form, raise additional questions. Let’s discuss the salient points and the changes, starting with the biggest news.

Introduction of the PPP Loan Forgiveness Application Form EZ

Who Can Use Form EZ?

• Borrowers can use the form only if they are able to check one of the following three boxes:
  • Option 1: Borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time it filed its PPP loan application and it did not include any employee salaries in the computation of its loan amount when it filed its borrower application form.
  • Option 2: Borrower meets the following two requirements:
    • Borrower did not reduce the annual salary or hourly wages of any employee by more than 25% during the covered period (“CP”) compared to the reference period (January 1, 2020 – March 31, 2020); AND
    • The borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the CP. (Ignore reductions that arose from an inability to rehire individuals who were employees on February 15, 2020 if the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020.) Also ignore reductions in an employee’s hours that the borrower offered to restore and the employee refused.
  • Option 3: Borrower meets the following two requirements:
    • Borrower did not reduce the annual salary or hourly wages of any employee by more than 25% during the CP compared to the reference period (January 1, 2020 – March 31, 2020); AND
    • Borrower was unable to operate during the CP at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by HHS, CDC or OSHA, relating related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

Presentation of Form EZ

• The form involves a simplified calculation that adds the payroll and non-payroll costs paid or incurred during the CP, and then applies two limits on such amount: (i) the PPP loan amount and (ii) the 60% payroll cost requirement, e., that payroll costs must constitute at least 60% of the loan forgiveness amount.
• The form eliminates the headcount and wage reduction calculations because not having either one of them is a precondition to using the form, as noted above.
• The form includes a borrower certification regarding the lack of headcount or wage reductions.

Required Documentation

The instructions to Form EZ lay out the required documentation to be submitted with, and also maintained by, the borrower.

• The following documentation is required to be submitted to the lender:
  • Payroll –
    • Documentation verifying eligible cash compensation and non-cash benefit payments from the CP or APCP – including tax filings and/or third-party payroll service provider reports for payroll costs and payment receipts, cancelled checks and/or account statements for health insurance and retirement plan contributions
    • If a borrower selected Option 2 above, documentation supporting the average number of FTE employees on payroll on January 1, 2020 and the end of the covered period (since the certification requires that there was no reduction, we presume lenders will want to see support for the entirety of the period in between, as well, and recommend that borrowers are prepared to provide this)
  • Nonpayroll – it does not appear that there were any changes to the requested documentation from the initial loan forgiveness application
• The following documentation is required to be maintained, but is not required to be submitted. Please note that the lenders may require this information at their discretion:
  • Documentation supporting certification that annual salaries or hourly wages were not reduced by more than 25% during the CP or APCP relative to January 1, 2020 – March 31, 2020. Employees must be separately listed and it must show amounts paid to each employee during both periods.
  • Documentation regarding any employee job offers and refusals, refusals to accept restoration of reductions in hours, firings for cause, voluntary resignations, written requests by any employee for reductions in work schedule, and any inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020.
  • Documentation supporting the certification, if applicable, that the borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the CP (other than any reductions that arose from an inability to rehire individuals who were employees on February 15, 2020, if the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020). This documentation must include payroll records that separately list each employee and show the amounts paid to each employee between January 1, 2020 and the end of the CP.
  • Documentation supporting the certification, if applicable, that the borrower was unable to operate between February 15, 2020 and the end of the CP at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19. This documentation must include copies of the applicable requirements for each borrower location and relevant borrower financial records.

Revised PPP Loan Forgiveness Application

Calculation Form

• Allows the borrower to select its enter the CP – either 8 weeks or 24 weeks.
  • For loans received on or after June 5, 2020, the instructions make it clear that a 24-week CP is required.
  • The PPP application and instructions also retain the alternative payroll covered period (“APCP”) as an option for borrowers regardless of the time of their CP, as long as they have either bi-weekly or more frequent payroll cycles.
• The formula in the calculation remains the same form the previous application, except they modified line 10 to reflect the 60% threshold adopted in the PPP Flexibility Act.

Schedule A and FTE Reductions

• Compensation to owners (i.e., owner-employees, self-employed individuals, and general partners) – borrowers are limited on forgiveness based on their selected CP, including all cash compensation and other payroll costs (insurance premiums, retirement contributions and state and local taxes), in the following manner:
  • 24-week CP: lesser of 2.5 months’ worth of their 2019 compensation (subject to $100k cap) or $20,833
  • 8-week CP: lesser of 8/52 worth of 2019 compensation (subject to $100k cap) or $15,385 (i.e., no change from prior PPP Application)
• The PPP Application now provides three different options for borrowers to avoid having to complete the daunting FTE reduction calculation (though the instructions still require borrowers to compute and to keep the supporting schedules):
  • No reduction in employees or average paid hours: if a borrower has not reduced the number of employees or average paid hours between January 1, 2020 and the end of the CP.
  • FTE Reduction Safe Harbor 1: if a borrower was unable to operate between February 15, 2020 and the end of the CP at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, by HHS, CDC, or OSHA guidelines related to the maintenance of standards for sanitation, social distancing or any other worker/customer safety requirement related to COVID-19.
    • In order to claim this safe harbor, the instructions require that borrowers maintain in its files documentation that supports this certification, including copies of the applicable requirements for each borrower location and relevant financial records.
    • Borrowers must also sign an additional certification surrounding this selection, if made.
  • FTE Reduction Safe Harbor 2: if a borrower can meet the standard of a 5-step safe harbor calculation found on the PPP Schedule A Worksheet.
    • There was one update to this calculation from the previous version – Step 4 now requires a borrower to “enter the borrower’s total FTE as of the earlier of December 31, 2020, and the date this application is submitted” – presumably, this means that a borrower claiming this safe harbor can file after the end of its CP and before December 31, 2020 if its FTE levels have been restored by the date of its application.
    • In order to claim this safe harbor, the instructions require that a borrowers maintain documentation supporting the FTE information claimed in the 5 steps.
  • Curiously, regardless of whether or not one of the safe harbor options apply, the PPP Application still requires that borrowers submit documentation showing the average weekly number of FTEs for the chosen reference period (either February 15, 2019 – June 30, 2019, January 1, 2020 – February 29, 2020 or, if seasonal, any consecutive 12-week period between May 1, 2019 and September 30, 2019).

Overall, the PPP Application and PPP EZ Application are borrower-friendly in terms of the amount of forgiveness that will be available to borrowers.  There is still uncertainty about the threshold and information required of borrowers seeking to avail themselves of the FTE safe harbor pertaining to their inability to operate at the same levels as February 15, 2020. How will lenders and borrowers ascertain the reasonableness of this certification? What ”financial information” will be required to support the claim? Can a borrower claim the safe harbor if the COVID-19 restrictions have been lifted but business operations have still not recovered to the same levels? Does this certification apply through the date of application, or does it apply through December 31, 2020? This safe harbor option offered by the updated application process is bound to be one of the most widely-discussed issues in the coming weeks.

Alston & Bird have released their June 18 COVID-19 update, including the latest news on emergency funding, administrative and regulatory actions, workplace and home issues, and many other topics, as well as to links to all their past updates.

Main Street Lending Program (“MSLP”):  The MSLP was first introduced back in April and there was a lot of initial press around the program as an alternative to the PPP for larger companies. Actually rolling it out to the public, however, became a slow and arduous project. The program went through several changes and enhancements to make it more accessible to both the middle and upper-middle markets. On June 17th it was announced that the loan portal was open to lenders. This program, much like the PPP, will be administered through banks/lenders rather than through the SBA.  

The MSLP is not yet available for potential borrowers to obtain loans, but now that it is open to lenders, we suspect it will open up to borrowers shortly. Here is a link to FAQs that are helpful as this program continues to evolve. 

Below are some highlights of the MSLP:

• These loan products are NOT forgivable and do require security (assets, personal guarantee, etc.).
• Borrower Eligibility:
  • Must have 15,000 or fewer employees OR less than $5 billion of revenue in 2019.
  • Must not be an ineligible business and must be a US-based business established prior to March 13, 2020.
  • Must not have received support pursuant to section 4003(b)(1)-(3) of the CARES Act.  This is the “Mid-Sized Lending Program,” not the PPP.  Thus, borrowers can obtain both a PPP loan and a MSLP loan.
• There are three different loan facilities:
  • MSNLF:  Loan sizes from $250,000 to $35M and the loan cannot exceed 4X the borrower’s 2019 EBITDA when added together with existing and undrawn debt. The loan cannot be subordinate to existing debt of the borrower.  It is a 4-year facility, with principal and interest payments deferred for 1 year.  Interest is LIBOR+ 300 basis points.  The loan will have a 5 year term.  For more information on the terms, click here.
  • MSPLF: Loan sizes from $250,000 to $50M and the loan cannot exceed 6X the borrower’s 2019 EBITDA when added together with existing and undrawn debt.  The loan must be senior or pari passu with any other existing debt facilities and can be used to pay down existing facilities.  It is a 4-year facility, with principal and interest payments deferred for 1 year.  Interest is LIBOR+ 300 basis points.  For more information on the terms, click here.
  • MSELF: Borrowers can use this facility to refinance or upsize existing debt. This is a 4-year term loan ranging in sizes from $10 million to $300 million. The maximum loan amount cannot exceed (i) 35% of the Eligible Borrower’s existing outstanding and undrawn available debt or (ii) when added to the Eligible Borrower’s existing outstanding and undrawn available debt, 6X the Eligible Borrower’s adjusted 2019 EBITDA. The loan must be senior to or pari passu with existing debt facilities. Principal and interest payments are deferred for 1 year.  Interest is LIBOR+ 300 basis points.  For more information on the terms, click here.

Reminder Section:  (what should I be doing):

• Call your payroll company about claiming the payroll tax deferrals and employee retention credits that were made available in the CARES Act.
• Talk to your payroll company about the qualified sick/family leave legislation (FFCRA, passed prior to the CAREs Act).
• Consider speaking with your bank to discuss changes to terms of existing debt facilities. The banking system remains strong.
• If you have already applied for the PPP, start forecasting how you intend to spend the funds and how to qualify for the highest amount of forgiveness possible.

The SBA released yet another Interim Final Ruling which provides for a variety of administrative updates/corrections, however there are a few notable clarifications as follows:

1. The SBA confirms that the maximum forgivable salary for non-owner employees during a 24 week period is in fact $46,154 per FTE, exclusive of health insurance, retirement benefits and state-level employment taxes. For “Owner Employees”, that amount is inclusive of health insurance, retirement benefits and state-level employment taxes.
2. For self-employed individuals (i.e., Schedule C filers), the maximum forgivable amount is $20,833, a welcome increase over prior guidance which had capped it at $15k. If you are a sole proprietor without employees, 100% forgiveness of your loan is a virtual certainty.  
3. The loan forgiveness amount for sole proprietors will be completely tax free. The same result will obtain for partners in partnerships who account for their allocated portion of the PPP loan as a distribution of profit (rather than guaranteed payment) because no deduction will be disallowed and the loan forgiveness amount is not includible in income.

EIDL Announcement: The EIDL program (described below) is accepting applications again.  Many businesses have struggled to obtain this loan, largely because the SBA was inundated with applications.  Now it appears funds are available and they have caught up. A reminder that you can have both an EIDL and PPP at the same time but both cannot be used for the same purposes.

Notice – Now Accepting New Applications for Economic Injury Disaster Loans and Advance: On June 15, SBA will begin accepting new Economic Injury Disaster Loan (EIDL) and EIDL Advance applications from all eligible small businesses and U.S. agricultural businesses. To learn more about eligibility and apply, click here.

Reminder Section:  (what should I be doing):

• Call your payroll company about claiming the payroll tax deferrals and employee retention credits that were made available in the CARES Act.
• Talk to your payroll company about the qualified sick/family leave legislation (FFCRA, passed prior to the CAREs Act).
• Consider speaking with your bank to discuss changes to terms of existing debt facilities. The banking system remains strong.
• If you have already applied for the PPP, start forecasting how you intend to spend the funds and how to qualify for the highest amount of forgiveness possible.

Alston & Bird have released their June 15 COVID-19 update, including the latest news on emergency funding, administrative and regulatory actions, workplace and home issues, and many other topics, as well as to links to all their past updates.

Excellent questions surfaced in MCAA’s Webinar #17: Legal Issues Concerning COVID-19 Employee Screening, which was presented on May 28, 2020 by Littler law firm attorney, Brad Hammock. See those questions and answers provided below.

LEARN MORE

Accounting for the PPP Loan: A question that Withum has consistently received is: When do we “write off” the PPP loan? This is an important question for borrowers who may have audited financial statements, where the presence of debt can have an impact on the company’s ability to borrow or meet financial covenants. Withum’s view thus far has been that the loan should remain on the balance sheet until such time that the bank has officially forgiven it. The technical accounting guidance would be to view forgiveness as a “gain contingency”, an event that is not fully within the control of the company and not certain to occur, therefore the gain (write off of the loan and related interest) should not be recognized until such time that forgiveness has actually been confirmed.   

The AICPA recently released a  Technical Question and Answer (TQA) on the matter,  while the TQA does indicate that gain contingency guidance is acceptable, it also opens the door to an alternate conclusion (see the link above and excerpt below). This is meaningful because the AICPA and the SEC indicates here that a borrower “may” be permitted to view the loan as a government grant, and therefore you would write it off (into other income on the income statement) as you use the proceeds from the loan based on your best estimate of what will be forgiven. This creates a very different result than the gain contingency guidance above. There is not yet authoritative guidance on this issue,  however this TQA is a clear indication that borrowers may have multiple options available to account for this loan. 

TQA 3200.18: “How should a nongovernmental entity account for a forgivable loan received under the Small Business Administration Paycheck Protection Program (PPP)?” 

Answer: “Given the unique nature of the PPP, questions have arisen relating to how a borrower under the program should account for the arrangement. Although the legal form of the PPP loan is debt, some believe that the loan is, in substance, a government grant.” In addition, the Staff of the SEC’s Office of the Chief Accountant has indicated that they “would not object to an SEC registrant accounting for a PPP loan under FASB Accounting Standards Codification (ASC) 470, Debt, or as a government grant by analogy to International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance.”

Reminder Section:  (what should I be doing):

• Call your payroll company about claiming the payroll tax deferrals and employee retention credits that were made available in the CARES Act.
• Talk to your payroll company about the qualified sick/family leave legislation (FFCRA, passed prior to the CAREs Act).
• Consider speaking with your bank to discuss changes to terms of existing debt facilities. The banking system remains strong.
• If you have already applied for the PPP, start forecasting how you intend to spend the funds and how to qualify for the highest amount of forgiveness possible.

Alston & Bird have released their June 11 COVID-19 update, including the latest news on emergency funding, administrative and regulatory actions, workplace and home issues, and many other topics, as well as to links to all their past updates.

60/40 “Cliff” Rule Addressed: As we previously noted, the PPP Flexibility Act. changed the 75%/25% rule to a 60%/40% rule, allowing companies to realize a greater benefit from the non-payroll costs they incurred during their covered period. However, the law seemed to introduce a “cliff” effect whereby a borrower would not obtain ANY loan forgiveness if they did not spend at least 60% of their forgivable expenses on payroll. A joint statement made by Mnuchin and the Treasury today has clarified that this is not the intent. As noted below, it appears the intent is for the mechanics of this ratio to work in a similar way to the previous rule, meaning that non-payroll costs cannot exceed 40% of the total amount of forgiven costs, thus there is not a scenario where there will be no forgiveness on amounts spent if you do not reach a certain spend on payroll.  Borrowers just need to understand that increasing spend on payroll increases the non-payroll costs that will be eligible for forgiveness. This is obviously a welcomed clarification for borrowers. 

Lower the requirements that 75 percent of a borrower’s loan proceeds must be used for payroll costs and that 75 percent of the loan forgiveness amount must have been spent on payroll costs during the 24-week loan forgiveness covered period to 60 percent for each of these requirements. If a borrower uses less than 60 percent of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs.

Reminder Section:  (what should I be doing):

• Call your payroll company about claiming the payroll tax deferrals and employee retention credits that were made available in the CARES Act.
• Talk to your payroll company about the Sick Pay Bill (passed prior to the CARE Bill).
• Consider speaking with your bank to discuss changes to terms of existing debt facilities. The banking system remains strong.
• If you have already applied for the PPP, start forecasting how you intend to spend the funds and how to qualify for the highest amount of forgiveness possible.

Alston & Bird have released their June 8 COVID-19 update, including the latest news on emergency funding, administrative and regulatory actions, workplace and home issues, and many other topics, as well as to links to all their past updates.