Archives: News Items

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.