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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.

The PPP Flexibility Act was signed into law on Friday, June 5. Over the last few weeks we have covered many important components of the Bill, our latest article covers more of the salient points as well as the nuances that all borrower need to be aware of. The topics in the article include:

• The 60/40 Rule (replacing the 75%/25% rule) appears to include a “cliff” effect, providing no forgiveness if you do not spend 60% of your proceeds on payroll.
• New ways to be exempt from the FTE reduction calculation, including  if a borrower can document an inability to return to the same level of business activity as it was operating at before February 15, 2020, due to compliance with requirements or guidance issued by the CDC, OSHA or HHS during the period from March 1, 2020 to December 31, 2020.
• Extension of the Covered Period – Important considerations borrowers should contemplate which may lead them to elect to keep an 8 week period as it is now otherwise automatically extended to 24 weeks.
• Extension of Loan Maturity Date – New terms for borrowers who received a loan after June 5^th, however a potential window to extend maturity for borrowers who received loans prior to as well.

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.

The PPP Flexibility Act is on its way to the White House for signature. A few observations that we wanted to make today that borrowers need to consider:

1. Cap on Forgivable Salaries: The cap on salaries has been a simple formula ($100,000/52 X 8), resulting in $15,385 of maximum forgivable cash compensation during the covered period. The bill would extend the covered period to 24 weeks, and that should mean that the maximum forgivable salary amount would be $46,153 ($100,000/52 X 24). Once the bill is passed, Withum believes the SBA will issue guidance to this effect to ensure clarity to Borrowers. Borrowers would need to incorporate the new cap into their calculations, but this change would be favorable and enable most borrowers to obtain full loan forgiveness.
2. 8 Weeks vs. 24 Weeks: The bill would extend the covered period to 24 weeks; however, a borrower could elect to retain an 8-week covered period if they wish. The bill does NOT provide flexibility to have a covered period between 8 and 24 weeks, it appears to be one or the other.
3. Timing of Forgiveness: With a 24-week covered period, borrowers would need to plan for the fact that it is highly likely that their loan will not be forgiven during 2020 based on the length of the covered period and the amount of time banks have to render a decision on forgiveness. Borrowers may need to consider if that is meaningful to them from a financial statement perspective or a loan covenant perspective.
4. Tax Deductions for Forgivable Expenses: If forgiveness has not been granted to a borrower before it files its 2020 federal income tax return, then the borrower will have to decide whether to claim deductions on such return for the expenses that ultimately will give rise to loan forgiveness. The IRS has stated that the expenses relating to forgiven PPP loan amounts are not deductible, but until a borrower receives a loan forgiveness decision from its lender, it would seem appropriate to claim the deduction. This is something we will monitor closely as borrowers will need additional guidance on how to deal with this – it appears to be an unintended snafu. 

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 4 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.

PPP Flexibility Act Passes the Senate! This evening the Senate passed the Paycheck Protection Program Flexibility Act.  The PPP Flexibility Act was passed by the House last week with bipartisan support.  The Senate had a competing bill called the Paycheck Protection Program Extension Act. that ultimately never made it to the floor.  The PPP Flexibility act was passed by the senate in its entirety without change, the details of the changes to the PPP are included in this article.  The article showed a comparison between the two pieces of legislation that is now no longer relevant, borrowers can just focus on the Flexibility Act.  The Act now heads to the President for signature, he has indicated that he is supportive, so we can expect this to pass into law within the next few days. 

The changes will be significant and will open the door for many borrowers to have their entire loan forgiven.  Withum recommends you review the article which breaks down the changes so you can begin planning out the impact on your loan.

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.

Status of the PPP Flexibility Act: So far there is no news on the status of the changes to the PPP program other than the fact that Mitch McConnell confirmed that the Senate would “take up the bill.”  This is significant and we expect to see movement in the next few days. It also seems there may be an effort to merge the two pieces of legislation. The PPP Flexibility Act was passed by the House and the PPP Extension Act originated in the Senate but has not come to a vote. There are subtle differences, but all of them are borrower friendly. Stay tuned.

Status of the Program: The SBA released new statistics on the status of the program via a PowerPoint as of May 30^th. The document shows various statistics with respect to the type of borrowers, the average loan size, etc. Notably, it also shows that the program itself still has over $80B of funds available, and apparently negligible remaining demand.

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 1 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.

We wanted to share news regarding the Paycheck Protection Program Flexibility Act. of 2020:

PPP Flexibility Act of 2020:  On Thursday, May 28, the House passed the PPP Flexibility Act. with a vote of 417-1. This is clearly a bipartisan piece of legislation that now goes to the Senate for the next phase in the process. The President has indicated his support for the bill. Based on what we are seeing it appears likely this bill will pass in some form. The changes proposed in this bill were largely included in the HEROS Act, which stalled in the Senate. This bill attempts to “carve out” changes to the PPP into a standalone bill to allow it to be pushed through without delay.

Our overall first reaction to this bill is that it is extremely borrower friendly. Congress appears to be attempting to open several doors to borrowers to allow for full forgiveness of the loan. The bill is without question a game changer. 

Here is what we know:

• Covered Period Extension:  The covered period would be extended from 8 weeks to 24 weeks.  There is some discussion that the Senate may want to shorten this to 16 weeks but that is not yet clear.  This change is significant because it provides borrowers enough time to use all of the funds to obtain max forgiveness.  Perhaps more importantly, if you have an FTE or wage reduction, that could be mitigated by a substantial increase in forgivable expenses incurred during the longer covered period.  For example, if you had a $100k loan, spent all $100k and suffered a 50% FTE reduction, you would only have $50k of the loan forgiven.  If the covered period is extended and you now have spent $200k on forgivable expenses, even with the 50% FTE reduction, you could have all $100k of the loan forgiven.
• 75% Rule Relaxed:  The bill would change the ratio of forgivable nonpayroll costs to payroll costs from 75%/25% to 60%/40%.  This will allow borrowers to get a much higher benefit for non-payroll costs like rent, utilities, interest, etc.  This is a nice win for borrowers who operate with low overhead or with limited staff.
• FTE Rule Relaxed:  Borrowers will have a new, fifth potential safe harbor from the FTE rule.  If the borrower can demonstrate (1) they were unable to rehire individuals who were employed on 2/15 (i.e., the original safe harbor rule), (2) they could not re-hire employees of similar skill sets or (3) they are able to document that they were unable to return to a similar level of activity when compared to 2/15 as a result of social distancing guidelines or other restrictions put in place by federal or local governments (e.g., capacity restraints put on restaurants), they will be allowed to ignore FTE reductions during their covered period. 
• Payroll Deferral Program Extended:  The IRS ruled that borrowers could take advantage of the employer payroll tax deferral provision until the date they received loan forgiveness.  This bill would extend that through December 31^st regardless of the status of the loan.
• Term of Loan Extended:  The repayment term of the portion of the loan proceeds that are not forgiven would be extended from 2 years to 5 years.  In addition, repayment does not need to begin until 1 year after the origination of the loan (rather than the current terms which require loan payments to begin 6 months after origination).

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 May 29 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.

IFR addressing “owner-employees”:  Last Fridays’ Interim Final Ruling came with an interesting Q&A that could have a meaningful impact on borrowers.  

The Q&A was as follows:

Question: Are there caps on the amount of loan forgiveness available for owner-employees and self-employed individuals’ own payroll compensation?

Answer: Yes, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation can be no more than the lesser of 8/52 of 2019 compensation (i.e., approximately 15.38 percent of 2019 compensation) or $15,385 per individual in total across all businesses. In particular, owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf.

This is significant – lets break down the issues:

• There is no formal definition of an “owner-employee” in any of the guidance that we have – for example, does it apply to C corporations, S corporations, partnerships, or all of the above. In the absence of a definition, borrowers may need to take a conservative view of this, meaning “any” ownership in a company would preclude forgiveness in excess of $15,385 for both Cash compensation AND the non-cash items listed. Keep in mind, a non-owner can have up to $15,385 of cash compensation forgiven AS WELL AS employer paid health and retirement benefits. This could limit total forgiveness for a population of employees that had not been considered in the past.
• If you have an employee stock incentive plan (or Profits Interest Plan), or an employee has RSUs, profits interests or has exercised a stock option, that could potentially make them “owner-employees” and thus limit the forgiveness on their cash/non-cash compensation.
• This will present accounting issues, for example, the need to “carve out” health benefits paid to these specific employees from total benefits paid (often in one bulk check).
• This calculation also limits forgiveness to “the lesser of” 2019 compensation or $15,385, so this logic will need to be factored into the calculation.
• What if an employee only became an owner in 2020 (e.g., through exercise of an option in 2020), do we still need to look at 2019 to determine compensation amounts?
• What if they only worked for a short period in 2019 and had significantly less compensation in that period? If we have to use “the lesser of,” will the borrower be unduly penalized in the calculation?

The Q&A within this IFR certainly can create some complexities when it comes to the forgiveness calculation, and unfortunately it has created more questions than answers. Hopefully we will have more guidance soon. For now, though, we recommend adjusting calculations for all owners and hope that some sort of de minimis threshold is announced in the future.

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.

PPP funds available: It has been widely reported that the demand for PPP funds is “drying up.” After the first tranche of funds ran out, there was an enormous outcry from the middle market who attempted to participate and could not do so. The second tranche funds was accompanied by a consistent narrative from several parties around evaluation of eligibility. The effort of creating doubt around eligibility combined with a large cash infusion into the PPP seems to have resulted in the overall demand being met. Over the last week, there has apparently been a net increase of PPP funds available, meaning more companies returned previously-issued funds than companies requested loan proceeds. In the end we think this is a positive as it will quell concerns that the program failed to reach the companies that needed the cash.

EIDL hiccup: Several companies have reported being approved for an EIDL loan but have not received the funds. One client alerted Withum today that its loan was not funded because one of their partners or investors did not see (or it went into their spam folder) the DocuSign email requiring it to finalize the loan agreement. If you are in the camp of having received approval for an EIDL loan but have not received the funds, check to make sure that all parties have actually signed the loan agreements!

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.

IFR 14 – On May 22nd, the SBA issued its 14^th “final” ruling with respect to the PPP.  We have written extensively about it in this article. Much of this ruling seems to support assertions made on the application itself which recently was released. The application came out before this ruling, and an application is certainly not “law”, thus this IFR was needed to cement the SBAs views on a variety of issues.

We highly recommend you read the entire article as many topics were covered, but here are some notable highlights:

• For the purpose of forgiveness, owners of Partnerships and Schedule C’s are capped at their 2019 earnings. That could be problematic for companies that had down years in 2019.
• As we know, borrowers do not have to count (as a reduction of FTEs) employees who were offered employment during the covered period and refused to come back to work,  however this IFR indicates that the borrower will need to inform the applicable state unemployment insurance office of the rejected offer of reemployment within 30 days of the rejection.
• As we expected, employee hazard pay and bonuses are eligible for loan forgiveness because they are a similar form of compensation. Notably, the IFR offers no other limitations on the payment of bonuses, so the bonus payment may be able to exceed 8 weeks’ worth of the annual bonus amounts and still be eligible for forgiveness (up to the $15,385 limit).

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 May 26 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.

Alston & Bird have released their May 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.

The Paycheck Protection Flexibility Act:  Critics of the PPP have been vocal in outlining the flaws of the program. It was a loan product that was created for the entire middle market; however, in a complex economy, it has not been equally helpful for all businesses.  

Take a restaurant for example: By its nature, a restaurant has high non-payroll costs (e.g., rent) and may have relatively low payroll costs (servers often make minimum wage). After the Pandemic hit, the CARES Act increased unemployment by $600 per week (over and above state unemployment) regardless of a recipients previous earnings. As a result, in some cases, low-wage earners are actually making more money on unemployment than they were when employed, thus giving them no reason to go back to work, especially if a business was shut down due to COVID-19 (like many restaurants were).

The PPP forces restaurants to bring back employees and put them on payroll, resulting in them actually receiving less income than they were receiving when on unemployment. At the same time, the expense the business really needs relief from is rent, and these types of non-payroll expenses are limited to 25% of the loan forgiveness amount. In the end, the employees made less money and the restaurant was unable to get most of its critical expenses paid and forgiven. This scenario happened over and over again in the middle market in ways that many could not have predicted.

Enter the proposed solution: Changes to the PPP to correct for some of these issues were first introduced in the HEROS Act, a bill largely drafted by house Democrats and that has completely stalled in the senate. The HEROS Act is a massive $3 trillion bill (larger than the CARES Act) that introduced a wide variety of stimulus measures. The bill contained pragmatic PPP changes that would have solves the issue above, but it wound up being a victim of the political process. To combat this, the Paycheck Protection Flexibility Act was introduced. It is a standalone piece of legislation that largely carves the PPP changes out of the HEROS Act.  This Forbes article outlines the background of the issues and many of the bipartisan proposed changes.  

This bill apparently has bipartisan support (including the President) and we have heard from multiple sources that it may be voted on as early as next week.  The changes would be VERY meaningful for all borrowers – here are some:

Changes Proposed:

• Extend the covered period from 8 weeks to 24 weeks.
• Remove the “75% rule”, therefore non-payroll costs will not be limited to 25% of all costs incurred.
• Extend the repayment terms from 2 years to a longer term. The CARES Act allowed for “up to” 10 years to repay loan proceeds that were not forgiven. 
• Enhance the payroll deferral and allow those who received the PPP to continue to benefit from the deferral all the way to the end of 2020 rather than up to the date the loan was forgiven.
• Extend the rehiring rule to allow companies to rehire employees past June 30 and therefore obtain a greater forgiveness amount.

We are watching this closely and will report if we see changes or momentum relating to this bill. 

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).
• Be in constant communication with your bank (about status of your PPP application).
• 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.

On April 3^rd, Treasury released a PPP Borrower Information Fact Sheet that was meant to clarify key questions with respect to the application process. In particular, this document reaffirmed the definition of “Payroll Costs” (Page 2) and clarified that salaries include bonuses and other forms of compensation subject to the $100k cap. It also clearly shows that “other compensation” such as vacation pay and severance were separate items, to be included over and above the cap. The guidance aligned with the way the law was written.  

In the newly-released loan forgiveness application, the SBA defines “payroll” to include an employee’s Cash Compensation and Non-Cash Compensation. Then it further defines Cash Compensation (see below), which is capped at $15,385 per employee during the covered period, to INCLUDE any form of cash compensation such as severance and vacation payouts. This was a very subtle change that went unnoticed by many. This change is contrary to the way the law is written and will have a meaningful impact on borrowers who were expecting these forms of compensation to be “over and above the cap.” We recommend that you review your calculations to determine what impact, if any, this change produces. We will be monitoring this issue as the SBA seems to have silently reversed its prior guidance.

Cash Compensation: Enter the sum of gross salary, gross wages, gross tips, gross commissions, paid leave (vacation, family, medical or sick leave, not including leave covered by the Families First Coronavirus Response Act), and allowances for dismissal or separation paid or incurred during the Covered Period or the Alternative Payroll Covered Period. For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the Covered Period; therefore, do not enter more than $15,385 in Table 1 or Table 2 for any individual employee. 

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).
• Be in constant communication with your bank (about status of your PPP application).
• 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.