Article written by:
Rebekah Smith, CPA, CFF, CVA, MAFF
Director of Forensic & Dispute Advisory Services
Dustin Minton, CPA, MBA
Director, Restaurant Services
Jeremy Bronson
Director, Accounting & Business Advisory Services
On June 22, 2020, the U.S. Department of the Treasury issued “Revisions to Loan Forgiveness Interim Final Rule and SBA Loan Review Procedures Interim Final Rule” (“IFR”). The IFR addresses forgiveness in light of the newly passed Paycheck Protection Program Flexibility Act of 2020 (“Flexibility Act”). While much remains consistent with the language in the Flexibility Act, there are additional considerations and even a few long-awaited examples of certain calculations. Chief among the clarifications include:
Covered Period of Eight, 24 or Something In-between
What The IFR States
“A borrower may submit a loan forgiveness application any time on or before the maturity date of the loan – including before the end of the covered period – if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness.”
What Does This Mean?
The language of the Flexibility Act appeared to change all instances of eight weeks to 24 weeks, suggesting that it was a bilateral choice. Either eight weeks or 24 weeks, but not anything in-between. However, when the revised application was released on June 16, 2020, there was language that indicated that the date for the full-time equivalent (“FTEE”) and wage reduction safe harbors was the earlier of the date of the application or December 31, 2020. This led many to believe that there would be an opportunity to apply for forgiveness using a covered period between eight and 24 weeks.
The newest IFR confirms that if you have used all of the loan proceeds for which you are requesting forgiveness, you can apply for forgiveness at any time. This is welcome news for many who were going to spend their entire Paycheck Protection Program (“PPP”) loan after the eight-week period, but well before the end of the 24-week period. A company that spent all of its PPP monies by week 10 will not have to wait another 14 weeks to apply for forgiveness.
What’s The Catch?
The IFR goes on to indicate that borrowers choosing shorter than eight- or 24-week covered periods, and that have a reduction of salaries or wages of more than 25%, must calculate the forgiveness reduction over the entire eight- or 24-week forgiveness period.
“If the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25 percent, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period.”
For example, if, during a ten-week period, your calculated wage reduction for an employee is $1,000, even if you stop at week ten and submit for forgiveness, that particular employee’s wage reduction penalty would actually be $2,400 ($1,000 /10 weeks * 24 weeks). For a refresher on the wage reduction penalty, see page 3 of this FAQ document.
What Should I Be Thinking About?
Businesses should be modeling weekly from eight to 24 to identify what week will be most advantageous to file for forgiveness.
Consideration for any FTEE reduction over the coming weeks will be important as well. The application requires a borrower to account for the total spent on all eligible expenses during the covered period and then apply the FTEE reduction percentage. Over a 24-week period, a business could have significant slippage in its FTEEs resulting in an FTEE reduction percentage of less than 100%. However, because the company “outspent” its loan amount, it could still receive full forgiveness. In other words, a company that has a less than 100% FTEE reduction percentage could receive full forgiveness selecting a covered period long enough to accumulate enough eligible spending that the FTEE percentage multiplied by the total spent exceeds the loan amount.
For example, a company with a $1,000,000 loan and a 60% FTEE reduction percentage will need to spend $1,666,667 over up to 24 weeks in order to obtain full forgiveness ($1,666,667 * 60% = $1,000,000).
New Safe Harbor
The Flexibility Act provides a new safe harbor for borrowers with a reduction in FTEEs. This new safe harbor allows for 100% forgiveness despite the FTEE reduction if the borrower is able to document an inability to return to the same level of business activity as it was operating at before February 15, 2020, if such an inability is due “to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.”
What The IFR States
“The Administrator, in consultation with the Secretary, is interpreting the above statutory exemption to include both direct and indirect compliance with COVID Requirements or Guidance, because a significant amount of the reduction in business activity stemming from COVID Requirements or Guidance is the result of state and local government shutdown orders that are based in part on guidance from the three federal agencies.” (Emphasis added.)
What Does This Mean?
If a business can demonstrate that its inability to return to pre-COVID-19 levels of business activity, and presumably FTEE levels, and it was a direct or indirect result of maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19, the business would not have its forgiveness reduced related to the FTEE reduction. In other words, if a business meets this new safe harbor standard its, FTEE percentage is 100%.
The IFR goes on to describe an example of a business selling beauty products both online and at a physical store that was shut down as a non-essential business. “Because the borrower’s business activity during the covered period was reduced compared to its activity before February 15, 2020, due to compliance with COVID Requirements or Guidance, the borrower satisfies the Flexibility Act’s exemption and will not have its forgiveness amount reduced because of a reduction in FTEs during the covered period, if the borrower in good faith maintains records regarding the reduction in business activity and the local government’s shutdown orders that reference a COVID Requirement or Guidance as described above.”
What’s The Catch?
While this is simply a box you check on the application, there is significant documentation that a borrower should be preparing or obtaining now in order to substantiate this claim. The IFR repeatedly mentions the need for the borrower to keep appropriate records and documentation. We suspect that without appropriate documentation, any borrower who tries to claim this safe harbor could have it disallowed.
What Should I Be Thinking About?
The first consideration is whether your business meets these criteria:
- Operations that are less than they were prior to February 15, 2020
- The reduction in operations have resulted in a reduction in FTEE
- The reduction in operations was directly or indirectly related to COVID-19 requirements or guidance, as described above.
The second consideration is documentation. Such documentation must include copies of applicable COVID Requirements or Guidance for each business location and relevant borrower financial records. Similar to GBQ’s advice as to best practices regarding the good faith certification, we would recommend creating a memo to the file that documents the business’ good faith documentation for taking this safe harbor.
The above two changes were two of the bigger clarifications in the IFR. Stay tuned later this week as we delve into other aspects of the IFR. If you have questions, please contact a member of GBQ’s SBA team – Rebekah Smith, Dustin Minton, or Jeremy Bronson.
