PPP Forgiveness - The Latest News (as of 6/18/20)
By Marilou C. Vroman, CPA, CFE
As anticipated in a recent Weekly Spiff, the SBA’s previous PPP Loan Forgiveness Application effective May 16, 2020 has gone through several key changes due to the Paycheck Protection Program Flexibility Act (H.R.7010) which became law on June 5th, 2020. With the rule of the game changed, two new Loan Forgiveness Applications were issued by the SBA on June 16th, 2020.
Many dealers who received PPP loans have been seeking to maximize the potential forgiveness amount since the program launched. And much like trying to catch a fish with your bare hands, hitting a moving target is not easy.
While the fundamentals of the program designed to cover payroll costs associated with employees, mortgage interest, rent, and utilities remain unchanged, the following new forgiveness provisions could be highly beneficial to dealers:
· The Covered Period (the period during which costs paid or incurred may be eligible for forgiveness) is now 24 weeks (there is option to elect 8 weeks if loan was received prior to June 5, 2020 but this would only makes sense if you spent all the funds in the 8 week period and haven’t reduced wages or headcount.)
· At least 60% of the loan amount forgiven must have been used for payroll costs.
· Salary/Hourly Wage reduction Safe Harbor for restoring reduced wages is the earlier of the date the forgiveness application is submitted or December 31, 2020 (one potential reason not to rush submitting your forgiveness application.)
· Owner’s compensation (general partners and S and C corporation owner-employees) in determining eligible payroll is capped at the lesser of $20,833 or 2.5 months’ worth of 2019 net profit for those who select the 24 week Covered Period.
· Streamlined “EZ” forgiveness application option (Form 3508EZ) for borrowers that meet either of the following combinations of criteria:
o Borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period compared to January 1, 2020 through March 31, 2020.
Note - “Employees” for purpose of this criteria exclude any individual who in any single 2019 pay period earned more than $100,000 at an annualized rate.)
AND
No reduction in the number of employees or average paid hours from January 1, 2020 to the end of the Covered Period.
Note - there are exceptions – let us say Karen was your parts manager and system administrator until February 15, 2020 and you decided to terminate her. If you attempt to rehire her and she declines, or you cannot find a similarly qualified individual on or before December 31, 2020 who knows parts management and CDK like Karen did, Karen’s impact on headcount would be ignored. A similar scenario applies to reduced hours – if Stanley used to work 40 hours per week, and his hours were then reduced to 25, and you later offered to return him 40 hours, and he’d rather keep fishing with that extra free time and refuses, then Stanley’s average paid hour reduction would also be ignored.
-OR-
o Borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period compared to January 1, 2020 through March 31, 2020.
Note - this is the same criteria as the first item above
AND
Borrower was unable to operate from February 15, 2020 to the end of the Covered Period at the same level of business as before February 15, 2020 due to compliance with HHS, CDC, or OSHA work or customer safety guidance or requirements related to COVID-19.
Note – Dealerships across the country sustained different degrees of operational shut down ranging from complete closure, to just the showroom being closed, to being deemed essential and open for business with safety measures in place, the operational impact is unique to each store but should be measurable.
The simplified “EZ” form is significantly less cumbersome for borrowers and certainly worth testing for eligibility. The form is not restricted by loan amount provided the above criteria have been met. However, use of this form should not be construed as less risk of a compliance review or audit, especially for loans in excess of $2 million. With the exception of sole proprietors, contractors, and self-employed individuals with no employees, if the above criteria are not met, the significantly more complex Form 3508 must be used to apply for forgiveness.
However, with extension of the Covered Period to 168 days, and less restrictive payroll cost criteria, given the initial PPP loans were based on 2.5 months of 2019 average payroll, it is probable the expenditures that would qualify for forgiveness could end up totaling more than the original loan itself.
As we continue to navigate these waters, keep in mind additional program interpretations and guidance are likely. With each PPP iteration we see a new list of FAQs and revisions of the SBA’s Interim Final Rules (which we know are not necessarily final.) Fortunately, we have now been granted additional time to try to catch this larger, yet slower moving fish.