Disney World and Disneyland may be shut down, but the unpredictable and sassy ride that PPP borrowers, banks and CPA’s are going through under this well-intentioned, but somewhat unorganized, program continues. Here are the curves and surprises baked into the ride since June 5th.
On June 5th, President Trump signed the Paycheck Protection Program Flexibility Act of 2020, which made significant changes to the PPP program. The Bill he signed was the exact law passed as H.R. 7010 by the House of Representatives, as reviewed in my blog posts entitled, Senate Passes House Bill H.R. 7010 – PPP Borrowers Breathe A Great Sigh of Relief, and The PPP Prescription — H.R. 7010 Is The Right Medicine, But Not For All.
Since then, the Treasury Department issued regulations on June 11th, which included four important pronouncements, as discussed below.
We will discuss these changes, and common questions we are asked in a free 30-minute Webinar on Tuesday, June 16 at 9 a.m. EDT, with free replays at noon EDT and 3 p.m. EDT. You can e-mail Agassman@gassmanpa.com and put the word “Mr. Toad” in the re line and we will send you the information, and also a website where you can view this after Tuesday. Popcorn is not included.
1. No Splash Mountain Here – The 60% Rule Is Not a Cliff. The Treasury Department does not consider the 60% requirement, which replaced the 75% requirement as to amounts spent on “payroll costs” to be a “cliff.” If a PPP borrower cannot spend 60% or more of the loan proceeds during the 8- or 24-week testing period on payroll, state and local payroll taxes, group health insurance and retirement plan contributions, then there will nevertheless be PPP loan forgiveness based upon whatever is spent on the above “payroll costs,” plus up to 66% of the amount spent on the above items, to the extent of permissible rent, interest and utility expenses.
While most of us who read the Flexibility Act language believe that this was clearly written as a cliff, the regulation gives multiple reasons that it should not be considered to be a cliff, which helps to show why maybe it will not be cliff, despite the apparent lack of authority that the Treasury Department and SBA have to change this rule:
A. It would be “incongruous” to interpret the Flexibility Act’s 60% requirement as a threshold for receiving any loan forgiveness, because in some cases it would directly conflict with the flexibility provided by the new safe harbor.
B. The 60% requirement was enacted against the backdrop of the SBA’s existing rules governing the PPP, which Congress was aware of, and which provided for proportional reduction, and not a cliff, for borrowers that used less than 75% of their loan amount for “payroll costs.”
C. The non-cliff interpretation is the most consistent with Congress’s purpose, which was “to increase the flexibility provided to borrowers for PPP loan forgiveness.”
An example from the June 11th regulation that illustrates how this rule works is as follows:
For example, if a borrower receives a $100,000 PPP loan, and during the covered period the borrower spends $54,000 (or 54 percent) of its loan on payroll costs, then because the borrower used less than 60 percent of its loan on payroll costs, the maximum amount of loan forgiveness the borrower may receive is $90,000 (with $54,000 in payroll costs constituting 60 percent of the forgiveness amount and $36,000 in nonpayroll costs constituting 40 percent of the forgiveness amount).
The 60% test, and the former 75% test that it replaced, are described in my blog post dated June 8, 2020.
2. 24 Months Will Seem Like a Long Ride in the Haunted Mansion – Post June 5 Borrowers Can Only Use the 24-Week Test. Post-June 5 PPP borrowers will only be able to use the 24-week testing period, while borrowers who received their loans before June 5th can elect to use either an 8-week expenditure period or a 24-week expenditure period. Post-June 5th borrowers are required to use the 24-week period, for no apparent reason. This was confirmed by the revised Borrower Application released on June 12th which now says, “The Applicant will provide to the Lender documentation verifying the number of full-time equivalent employees on the Applicant’s payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the 24-week period following this loan.”
The 24-week period is advantageous, if the borrower would not be able to spend sufficient amounts and satisfy the 60% test within an 8-week period.
The 8-week test is much more advantageous for borrowers who are able to spend the appropriate amounts during the 8-weeks, and then apply for forgiveness and have the loan over and done with, and off of their balance sheets, in order to be able to borrow conventionally going forward.
The 8-week testing period is also better for borrowers who have had significant reductions in their workforce, and are required to reduce forgiveness pro-rata to the reduction in total working hours, as compared to pre-virus working hours for the business. It is easier to keep the doors open and the staffing up for 8 weeks as opposed to 24 weeks, although the June 5th legislation, regulations and Frequently Asked Questions (“FAQ’s”) have several exceptions for situations beyond the control of borrowers.
It is nevertheless very surprising that pre-June 5th, and post-June 5th, borrowers will be treated so differently, and perhaps in error.
3. This One is Goofy! – New 5 Year Maturity Date Only Applies to Post June 5th Loans. Loans made before June 5, 2020 have a 2-year maturity, and loans made on or after June 5th have a 5-year maturity.
Post-June 5th borrowers will not have to repay their loans until five years after the loan date, as long as they file their Applications for Forgiveness within ten months after the end of the 24-week testing period that they are required to use.
Pre-June 5th borrowers will still have a due date that is two years after the loan date, but banks and borrowers can agree to extend these loans to five years. Many borrowers will now feel that their bank has an upper hand, and that they better do what the bank asks them to do, if they want to get the loan extended when the time comes.
Banks will have somewhat of a conflict of interest because conventional loans that they have made to borrowers will be impacted by when the PPP loans will become due.
We know of no rationale to treat pre-June 5th borrowers differently than post-June 5th borrowers with respect to the above rules, other than to please the banks that would have to rerun their paperwork and monitor loans over a longer period of time than they want to. I am certainly not trying to imply the SBA is a Mickey Mouse organization! Time will tell whether the many complaints that are sure to be lodged with members of Congress will cause the SBA to try to even the playing field on this.
4. When is a Loan Made for Purposes of This Rule? – – Going Back to the Future. For these purposes, a loan is considered to be made when the SBA assigns a loan number to the PPP loan, notwithstanding that the loan monies may not be received until several days later. This will cause some confusion, since the expenditure rules provide that a loan is to have been received when funded with the first dollars deposited into the bank account of the borrower. As a result of this, many borrowers who received their funds on or after June 5th will still be stuck with a 24-week testing period, and a very long wait for confirmation of forgiveness.
5. Practical (Pig) Deadline for Forgiveness Applications. The new regulations indicate that those borrowers who do not submit an Application for Forgiveness within ten months after the end of the 8- or 24-week period must begin paying principal and interest after that date, with no specificity as to how much principal and how much interest would need to be paid before the 2- or 5-year balloon payment of all remaining interest, at 1% per annum, and principal would be due and payable.
6. Cruella DeVille is Eligible for PPP Loans – Many More Ex-Felons Can Apply. Consistent with discussion in the Senate Committee on Small Business and Entrepreneurship, the newly updated Borrower Application on June 12th reveals that the rule that individuals that have had felony convictions within five years before applying cannot qualify was changed to one year, based upon considerations that are further discussed below, except that five years still applies if the charges were for fraud, robbery, embezzlement or a false statement in a loan application or an application for federal financial assistance. It is noteworthy that when a borrower entity has an ex-felon who owns more than 20%, then this prohibition will apply, but there is nothing to prevent the ex-felon from transferring enough ownership to get down below 20% in order for the business to qualify. A felony is considered to have occurred if there was a conviction, a guilty plea, a plea of nolo contendere or any form of parole or probation, “including probation before judgment.”
7. Will Independent Contractors Have to Retire in the Swiss Family Robinson Treehouse? – No Guidance for Independent Contractors. There was no mention of independent contractors and whether they are “Scott-free,” based upon the ability to elect the 24-week period, as discussed below.
Under the separate rules that apply to individuals who are considered to be independent contractors or sole proprietors who file a Schedule C to their personal Form 1040, which is entitled “Profit or Loss From Business,” it would be impossible under an 8-week testing period to have all debt qualify for forgiveness.
Under the independent contractor PPP regulations, the amount of the loan would be equal to 20.8333% (2.5 divided by 12) of the borrower’s 2019 Schedule-C net income. 15,3846% of the PPP loan to an independent contractor who does not have employees is automatically forgiven based on an 8-week testing period, because 8/52nds of 100% is 15.3846%, and 15.38% divided by 20.83% is 73.835%. This happens regardless of how that money is spent, because it is assumed to be compensation received and paid to or for the independent contractor.
The remaining 5.4487% would have to be spent on qualified rent, interest and utilities to get close to having total forgiveness. Total forgiveness was impossible under the 75% rule, but is now hopefully going to be the rule of the land for all living independent contractors who choose the 24-week period, unless future guidance takes this away, because 24/52nds equals much more than 20.8333%.
No guidance has yet been provided, but millions of fingers are crossed and half that many people are hoping that this will be the case. This will mean that independent contractors will have a very short and simple Application for Forgiveness.
Independent contractors still have a huge disadvantage under the program – they were not able to include their personal costs of health insurance or retirement plan contributions in determining how much they could borrow. This seems unforgivable, as described in my post entitled Why Are Independent Contractors And Sole Proprietors Treated Poorly Under The Paycheck Protection Program? It shouldn’t take Snow White and the Seven Dwarfs to figure out how to handle letting independent contractors know what these rules are and how they will apply to them.
CORDIAL SENATE COMMITTEE MEETING GIVES HOPE FOR OUR DEMOCRACY. The other news on PPP loans is that on June 10th there was a 2 hour and 16 minute hearing where Secretary of the Treasury, Steve Mnuchin, and SBA Administrator, Jovita Carranza, appeared before the Senate Committee on Small Business and Entrepreneurship. The meeting was chaired by Marco Rubio, who was accompanied by committee members Mitt Romney, John Kennedy, Cory Booker and others (possible future candidates for the Hall of Presidents).
Americans who do not think that Washington, D.C. is working may wish to watch some or all of the video replay of this session which can be found on YouTube.
I believe you will find it is definitely worth the price of an “E Ticket.”
Important items of discussion included the following:
1. Simplified Application for Forgiveness Process (This is No Mickey Mouse Operation!). Mr. Mnuchin indicated that the Application for Forgiveness for PPP loans was being rewritten to be much less complicated than the present application. He specifically indicated that there would be a portal available that would enable borrowers to determine their forgiveness amount “in 15 minutes.”
I will believe that one when I see it. A 15-minute application process would be better than a cross between Space Mountain and the Grand Prix, but I just don’t think it is possible.
Borrowers should not be stationary or come to the conclusion that they should not have their accountants or other financial advisors spreadsheeting their expenditures to see what they need to spend by when, and to evaluate alternatives.
If you would like to see a free webinar on spreadsheeting for PPP loans, send me an email and put the words “spreadsheet webinar” in the RE line and I will be glad to send it to you.
2. Saving Businesses Owned by Past Felons — One Last Chance for the Pirates from the Caribbean – – If They Are (Johnny) ADeppt. There was a discussion of whether individuals who had felony convictions within five years before the loan application should be able to borrow.
Cory Booker indicated that there was bipartisan support to allow any law-abiding individuals who have paid their debt to society to qualify in order to allow them to save their businesses.
As the result of this, the new regulation issued on June 12th moves the 5-year rule back to three years, and as further described below, there was discussion to the effect that those who have had their records expunged may not be subject to the rule, if and when this is modified.
It is noteworthy that the PPP loan program allows loans to borrowers who are the successors in ownership to a business.
An individual with a recent felony conviction could sell the business or possibly gift it to a trusted individual, who could then qualify for the loan.
3. June 30 May Be the End of the Line — Take One More Trip Around the Kingdom. It appears from the hearing and everything we have seen that June 30 is a hard deadline for businesses that have not applied for the PPP program.
There was discussion of a subsequent PPP program that would be somewhat different. Mitt Romney indicated a strong desire to only provide these loans to individuals and businesses that have suffered loss revenues, as you will see below.
More detail on the hearing of the implementation of the PPP is set forth below for “PPP avid readers.” Others may wish to read something more settling, or watch more reruns.
1. Mnuchin Makes It Clear: Zippity Doo Dah, No (60%) “Cliff” Today.
Right out of the gate, Senator Rubio aimed to get a definitive answer from Sec. Mnuchin regarding the new 60% cliff rule established by the PPP Flexibility Act of 2020 that replaced the 75% rule from the CARES Act. Originally, those not in compliance with the 75% rule would be subject to a reduction in forgiveness; however, the language of the new 60% rule made it such that borrowers not in compliance would no longer be eligible for any forgiveness at all.
Senator Rubio asked Secretary Mnuchin, “in a joint statement you released with the Administrator this week, you indicated that borrowers which failed to spend 60% of their loan on payroll costs will continue to be eligible for partial loan forgiveness. Can you confirm that this statement means that borrowers failing to meet the 60% requirement will still receive loan forgiveness equal to their payroll costs, and a proportional amount of nonpayroll costs?”
Mnuchin responded with a simple, one-word answer: “Yes.”
2. The Bear Necessities – Will the Forgiveness Application Really Be Simplified?
Senator Ernst (R-IA) quipped that many businesses felt they would need a team of lawyers and accountants to file their Loan Forgiveness Application appropriately. Secretary Mnuchin reiterated, “I don’t want this to be any more complicated than all of you do. There are requirements in the Bill that make it difficult on the forgiveness. I do think in the new law, the Safe Harbor, for people who check the Safe Harbor will make it significantly easier . . . and we’re coming out with new forms for people who check that. And again, I would also just advertise there is a third-party calculator that if you put in all the information, it fills it out in 15 minutes, so you don’t need to go hire lawyers and accountants, but I can assure you, we’ll work with you very closely, we want to make this easy for people to do . . . .”
Senator Kennedy (R-LA) took it one step further and emphatically reminded Secretary Mnuchin and Administrator Carranza that borrowers and lenders alike are wary that the federal government will look for any small mistake they can use to justify declining an Application for Forgiveness. Kennedy stated, “a lot of the banks and the small business women and small business men think that the federal government is going to double-cross on the forgiveness of these loans. You need to be mindful of that. You also need to take some of those smart minds in your office, and you have plenty of them, and try to reduce that 11 page form to about half.” Mnuchin assured the panel that that would not be the case and emphasized, “the majority of this money is going to be forgiven in the next few months, and that’s our intent. That’s why we’re going to get the job done quickly.”
3. Romney Channels his Inner Ludwig Von Duck, Reiterates Concerns Over Loan “Necessity.”
Senator Romney (R-UT) stated that he was, “concerned about circumstances where businesses applied for a loan, received money, but actually saw no reduction in revenues at all, and remain fully profitable.” Romney referenced the certification that borrowers are required to make that the loan be “necessary” to continue ongoing operation of the business. Being brutally honest, Mnuchin said, “When we put in that certification, we thought that people would self-select appropriately.” This has clearly not been the case. A number of large, high-profile businesses have been compelled to return their PPP loans, when it became clear they did not need the funds in the first place.
Mnuchin reiterated that the revenue test was left off the application because the determination was ultimately made that 98% of loans taken by small businesses were under $2 million, so it would be presumed that the need was legitimate. He did go on to clarify that the remaining 2% of borrowers taking more than $2 million would be subject to more rigorous “necessity” reviews.
There will doubtlessly be litigation and even some criminal prosecutions of PPP borrowers who did not have the need for the funds. Even though the SBA has indicated that it will not question the necessity of loans for PPP borrowers who received less than $2,000,000, whistleblowers and the Department of Justice or the IRS may have different plans. This subject is covered in my post entitled Was Your PPP Loan ‘Necessary’? If Not, There Could Be Horrific Repercussions.
4. Bi-Partisan Support to Eliminate Barriers Preventing Felons from Accessing PPP Funds.
Even after Secretary Mnuchin announced that he anticipated guidance to be released later that week reducing the exclusion period preventing convicted felons from accessing PPP funds from 5 years to 3 years, multiple senators indicated their desire to do more.
Senator Cardin (D-MD) told Secretary Mnuchin, “I can assure you that we would like you to go probably further than that. We’ll have those conversations and we have an opportunity to work together on legislation, so we don’t run into this problem in the future.”
Senator Booker (D-NJ) sought to address the issue of those in pretrial diversion programs being excluded from the PPP. “We’re denying people that are in these pretrial diversion programs, who are entrepreneurs contributing to our economy employing other Americans, we’re denying them what prosecutors judges and defense attorneys all agree should not be collateral consequences . . . the PPP program is being denied to those folks, and this should shock the conscience.” said Senator Booker.
Seemingly surprised to learn of this exclusion, Mnuchin said, “I’m not aware of that, but I’ll work with the administrator and if that’s the case, we’ll make that fix immediately.”
It looks like Secretary Mnuchin kept his word because on Friday, June 12th when the updated Borrower Application was released, question 6 regarding the felony exclusion rule asked the following:
“Within the last 5 years, for any felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance, or within the last year, for any other felony, has the Applicant (if an individual) or any owner of the Applicant 1) been convicted; 2) pleaded guilty; 3) pleaded nolo contendere; or 4) been placed on any form of parole or probation (including probation before judgment)?”
5. No Need to be an Eeyore – What is Next for the PPP?
One consistent theme throughout the hearing was Senators inquiring about future rounds or extensions to the PPP.
Senator Scott (R-SC) noted that the June 30th deadline was fast approaching and inquired whether or not, “there is an appetite for folks to perhaps see another four weeks of the PPP.”
Mnuchin said he definitely felt that, “we are going to need another bipartisan legislation to put more money into the economy.”
A number of Senators also noted the $130 billion surplus of PPP funds that remain available, and wondered whether the program should be continued to dispense the remainder of that money.
In response to a question from Senator Shaheen (D-NH) about whether or not he would be open to another round of funding, Sec. Mnuchin stated “There’s no question that small businesses in many industries are going to need more help, so we look forward to working with the Committee and the rest of the Senate on a bipartisan basis to include incentives, and whether it’s through the PPP or others or tax credits we’re open-minded, but we absolutely believe, small businesses . . . are absolutely going to need more help.”
At this point, it feels unlikely that the June 30th application deadline will be the last we see or hear of the PPP.
Please watch your step as you exit left. We hope you have enjoyed the ride!