The Shortest Distance to Loan Forgiveness is Not a Straight Line.
By Marilou C. Vroman, CPA, CFE
Has it been nearly eight weeks already? As many dealers are approaching the end of the 8-week period from their Paycheck Protection Program (“PPP”) loan origination date, questions are increasingly surfacing on how to potentially maximize the amount of loan forgiveness, effectively converting the PPP loan into a grant. As clients have asked for guidance in modeling their business decisions around the potential to maximize forgiveness, we caution that the rules are ever changing, and quite possibly to the dealers’ benefit. The question is how much time and resources should be invested in chasing this moving target? Let us explore.
When the PPP first launched, in simplest terms, the funds were intended to be used for certain payroll and occupancy costs starting on the date of the loan origination for a period of 8-weeks following this date. With the rapid implementation of the CARES Act, there were understandably many questions and concerns raised regarding compliance with the program, interpretation of the rules and ultimate use of the funds.
On day one of the PPP launch we received many questions about how to strategize and plan for the forgiveness component. Since that time there has been additional guidance altering the course towards loan forgiveness. Some of these changes include and are not limited to:
· The presumption of loan necessity for loans of $2MM or less.
· The choice between a “Covered Period” beginning on loan origination date, and an “Alternate Payroll Covered Period” beginning the first day of the pay period following PPP disbursement date.
· Provisions to include costs incurred but not yet paid.
· Headcount retention relief through exclusion of employees terminated for cause or voluntary resignation.
These updated provisions were included in the SBA’s recently released “Loan Forgiveness Application” and Instructions effective May 16,2020. And while many proactive dealers have been actively preparing to comply with this form as it stands with new provisions, the House has since passed the Paycheck Protection Program Flexibility Act (H.R.7010) on May 28,2020 which proposes additional significant changes and greater flexibility in the use of PPP funds received. This bill awaiting Senate approval includes the following potential changes related to loan forgiveness:
· Extension of the “Covered Period” to spend loan proceeds from a period of eight weeks from loan origination date to 24 weeks after such origination, or December 31, 2020, whichever is earlier.
· Full Time Equivalent (“FTE”) reduction quotient - Forgiveness shall be determined without regard to proportional FTE reduction if the loan recipient can document, in good faith, an inability to rehire individuals who were employees on or before February 15, 2020 and an inability to hire similarly qualified employees on or before December 31, 2020; or inability to return to same level of business activity as sustained before February 15, 2020 due to compliance with HHS, CDC, or OSHA work or customer safety guidance or requirements related to COVID-19.
· Payroll cost limitation – At least 60% of the covered loan shall be used for payroll costs; a reduction from the original 75% requirement to receive forgiveness.
These proposed changes are significant and once again, could change the course of loan forgiveness planning. Be cautious investing excess time and resources chasing this moving target in the short term. While we likely have most of the forgiveness rules and requirements in place, we can be assured some changes to the calculations are still forthcoming. We all need to be flexible knowing in the end, the final course to loan forgiveness will likely not be a straight line.