This Briefing:

  • Provides a program update including what the SBA originally funded (and CARES Act 2.0 currently in work)
  • Primarily focuses on how clients might best manage the debt forgiveness opportunity in the Small Business Administration (SBA) Paycheck Protection Program loans including:
    • Explaining the 8-week “Covered Period” and “allowable expenses” BOTH very important concepts
    • Tips on how to maximize the benefit actually received
    • Thoughts on how to integrate this into your business planning
  • Provides some area bank’s SBA PPP lending results

Program Update as of 4/22/20:

  • The original SBA PPP Loan funding of $349 billion was fully committed by April 16th with more than 1.7 million loans approved and as of then the SBA temporarily stopped accepting new loan applications.
    • Pennsylvania based companies received commitments for 69k loans for $15.7 billion
    • New Jersey based companies received commitments for 33k loans for $9.5 billion
  • On Tuesday evening, the Senate passed an expansion of the SBA PPP Loan Program funding which is expected to be voted on by the House on Thursday 4/23/20 that would provide another $320 billion for the PPP Loan Program, with $60 billion set aside for select smaller lending institutions.
  • It is expected that any additional funds will go quickly as Lending Institutions processing the SBA loan applications have become more familiar with the rules.  Expect this to open up Friday, 4/24/20.
  • Due to the extremely short timeframe from when the law was enacted on 3/27/20 and the date the eligibility window opened up 4/3/20; that the U.S. Treasury issued additional guidance on the quickly written legislation; and different banks prioritized this program to a greater or lesser degree, the effective processing of loans varied widely among banks  so many deserving applications were not initially approved as we anticipated.
  • At the end of this briefing you can see how some of the area banks performed processing the surge of PPP loan applications.
  • Note also the Senate Bill also includes another $60 billion for SBA’s Disaster Relief funds which could  include up to another $10 billion for the Economic Injury Disaster Loan (EIDL) in which case start looking for that to re-open this Friday, 4/24/20 as this additional funding will likely go quickly if you have not already applied and are not seeking a PPP Loan.

 

Managing PPP Debt Forgiveness:

Below is a very compacted summary of the law’s provisions incorporated in Section 1106 of the CARES Act; SBA guidance; and some logical inferences:

  • Amount of debt forgiveness a function of:
    • Size of PPP loan approved
    • Covered Period: 8-week period, currently ending by 6/30/20
    • Allowable expenses
    • Pro-rata reduction for reduction in Full Time Equivalents (FTEs)
    • Pro-rata reduction for FTEs with reductions in compensation >25%
    • Documentation you submit to your Lender under a new, to be yet issued, PPP Loan Forgiveness Application
  • Size of PPP loan – what you were approved for with your SBA number
  • “Covered Period” – very important
    • Lenders have 10 days from date loan was approved by SBA to complete loan paperwork and for borrower to start drawing funds
    • Law says 8-week Covered Period starts with loan origination, interpreted as the date applicant first borrows ANY funds
    • Law permits forgiveness (i.e. grant) of allowable expenses during 8-week period for “costs incurred and payments made
      • SBA will likely be issuing clarifying guidance as this term is not clearly defined – this will be very important
      • Current belief is that payments must actually be made during the 8-week period starting when the loan was first funded.  Ideally (1) the payment will be made during the 8-week period, and (2) the payment will be for incurred costs during some portion of that 8-week period to meet the strictest definition.
      • Current belief is that there will be anti-abuse provisions to prevent paying otherwise eligible expenses for months in advance (i.e. paying 9 months of rent during 8-week Covered Period).  Current belief is that conceptually U.S. Treasury will be looking for just 2 months of allowable expenses (i.e. not more than 2 rent payments), but what ultimately matters is the guidance they issue.
  • Allowable Expenses
    • “Payroll Costs” – basically the same rules as when determining the size of the loan
      • Salary, wage, or commission (think gross W-2 pay)
      • + group healthcare benefits including insurance premiums
      • + retirement benefits (i.e. 401(k); pension)
      • + state and local tax assessed (to employer) on compensation (i.e. State Unemployment Insurance (SUI))
      • Exclusions from “Payroll Costs”
        • The portion of salary, wage or Commissions annualized in excess $100k/year
        • Compensation paid to employees with their principal residence outside U.S.
        • Qualified wages paid under the Family First Coronavirus Response Act (FFCRA) – note that these wages would be generally reimbursed to employers under that act as a payroll tax credit
    • Other costs limited to not more than 25% of the forgiven loan amount
      • Payment of “Covered Rent” (in place before 2/15/20)
      • Payment of covered mortgage obligation interest (but not principal)
      • Payment of Covered Utility Payment (service must being before 2/15/20)
        • Allowable:  electricity; gas; water; telephone; or internet
        • Also includes “transportation” but unclear yet what that means
      • Note section 1102 said interest on other debt would also be includable, but section 1106 does not identify same.  U.S. Treasury will likely clarify.
    • If you obtained an EIDL loan between 1/31/20 and 4/3/20 the $10k EIDL grant forgiveness reduces the amount of the PPP loan forgiveness.  If EIDL loan proceeds spent on payroll costs it would be considered allowable expenditures.
  • Pro-rata reduction for reduction in Full Time Equivalents (FTEs)
    • The amount of the loan that would otherwise be forgiven is reduced pro-rata if there is a reduction from the number of base Full Time Equivalent Personnel (FTE) and those during Covered Period (Remember goal of program was to keep people gainfully employed.)
    • Base Period selected by borrower from any of:
      • average number of FTE per month employed by company from 2/15/19 to 6/30/19; or
      • average number of FTE employed per month by company from 1/1/20 to 2/29/20.
    • Suggestions re: average number of FTEs:
      • For each payroll during period count number of FTE, add up the number of FTE’s per pay period, divide by number of pay periods to get Average Number of FTEs
      • U.S. Treasury doesn’t define number of hours required to constitute 1.0 FTE.  Important that the methodology for Base Period selected is consistent with that used for calculating Average Number of FTEs during Covered Period.
      • Consider U.S. Dept. of Labor requirement for Medical Coverage under Affordable Care Act (ACA) at 30 hours per week.  One person working 30 hours or more per week = 1.0 FTE.  If employee is working fewer hours than 30, then divide average number of hours by 40.  For example, part time employee works 20 hours a week, then that employee = 0.5 FTE.
      • Calculate now base period FTEs under both scenarios, use the lower number to compare to base.
    • Exemption for Re-hire – if the employer had let an employee go but then later re-hired (and likely started paying) an employee not later than 6/30/20, then the re-hired employee could be counted in the number of FTEs during the 8-week Covered Period.  It is not yet clear whether this can be a different employee, but would presume so.
  • Pro-rata reduction in FTEs for employees  with a reduction in compensation >25%
    • Similar to Average Number of FTEs, PPP loan Forgiveness may be adjusted downward if compensation paid (hours x $ rate) is lower by more than 25% of the total wages the employee received during the 1Q20.
    • Calculate average weekly pay during 1Q20, compare to average weekly pay during 8-week Covered Period and see if the compensation paid during the 8-week Covered Period dropped by more than 25% from 1Q20.
    • If employees during 8-week Covered Period averaged more than $100k annualized rate of pay they don’t need to be counted as an employee whose pay was reduced by more than 25% during the Covered Period.
    • Exemption exists for increasing compensation back to 75% or more of compensation in the base period (1Q20) during the Covered Period for those employees who had compensation reduced.
  • Documentation to submit to your lender for loan forgiveness:
    • You will basically have to document and provide support for every allowable expense during the Covered Period and calculations to demonstrate any required  FTE reductions or FTE reductions from pay reductions >25%
    • Documentation will include:
      • Payroll tax reports and government filings
      • Cancelled checks; bills; summaries
    • Certification by authorized company official/owner
  • Key Timelines:
    • Loan paperwork and funding of loan should be completed within 10 days from when your lender received SBA approval of your loan (with SBA loan number)
    • Loan Origination (i.e. first time you draw funds under loan) starts the 8-week Covered Period
    • After you have documentation for allowable expenses during the covered period submit documentation to your Lender
    • Lender has 60 days from when you submit the Loan Forgiveness Application (yet to be issued) to review your documentation and approve, using SBA guidance, and forgive that portion of the loan which is eligible to be forgiven.
    • Balance of loan not forgiven will remain outstanding until you pay it back
      •  Interest and principal payments are deferred for 6 months from when funds first drawn
      •  Interest at 1% per annum, loan expected to be amortized over remaining 18-month period (recall PPP Loan is a 2-year loan)

Tips:

  • Set up NOW a separate NEW bank account to receive PPP Loan
  • Transfer through checks or inter-bank transfers reimbursements to your payroll bank account which funded payroll and operating bank account for allowable expenses.  Conceptualize it as an expense reimbursement request against the new bank account where the PPP loan proceeds were deposited.
    • You will have to provide your PPP Lender evidence in the form of payroll reports and canceled checks that the PPP funds for which you are requesting loan forgiveness were allowable expenses and were made during the Covered Period.  U.S. Treasury/SBA will be providing more guidance later; plan now.
  • Consider setting up G/L sub-accounts
  • Determine NOW your base FTE based on the most favorable method
  • Determine NOW your average salary and wages per employee for 1Q20

 

Integration with Business Planning:

  • To get the maximum benefit ideally you would provide the maximum amount of services or produce goods (even for inventory) during the 8-week Covered Period as all or a substantial portion of that labor expense could be used toward the PPP loan forgiveness
    • Example, if economically the average business need is to run total payroll at 60% of pre-COVID-19 levels, you would likely get a better answer by having hired FTEs back and paid 75% or more of base period compensation during the 8-week Covered Period even if the business might need to later reduce the number of employees or compensation amount paid to employees after the 8-week Covered Period more than they would have otherwise reduced.  Yes, we recognize that is somewhat disruptive to employee’s own budgeting – this is a business decision.  When explained to the employee the economic benefit of these changes more might be more accepting of the change.
  • Be mindful of the date you process payroll, to extent possible try to have them run during the 8-week  Covered Period
  • If possible really try to fund medical insurance premiums and retirement contributions (Company 401k match/Pension) during the 8-week Covered Period so those allowable expenses count as eligible Payroll Costs which can be forgiven (and increase the tolerance for the 25% non-payroll related costs).
  • Consider timing of 1Q20 incentives if compensating on commissions or activity so that payment is made during 8-week Covered Period.
  • Recommend timing of rent and utility expense to ensure that 2 months of payments are actually made with checks cut with dates during the 8-week Covered Period.
  • Don’t forget the use of interns – in some cases going through with planned intern hiring would make economic sense if during all or some of the 8-week Covered Period as they would count toward FTE calculations and have their pay be added to the forgivable loan portion of the loan.  If they would otherwise be working during the summer consider changing their start date to include all of, or more of, the 8-week Covered Period.
  • The reimbursement from your payroll or operating account from a new PPP Loan Proceeds account could be after the 8-week Covered Period, but suggest that you try to make sure the payment to the employee/3rd party vendor or custodian is made during the 8-week Covered Period

 

Additional Resources:

  • SBA Paycheck Protection Program Summary here
  • SBA PPP FAQs here
  • SBA EIDL Loan Application here
  • BLBB documents on topic
    • Tips for Entrepreneurs SBA Program Benefits & Insurance Opportunities here
    • Entrepreneur Financial Mgt – Funding Sources & Financial Relief here

 

Philadelphia Area Banks Processing of PPP Applications Summary:

Below is a quick summary of how area banks performed in processing the initial PPP loan applications, as reported by Philadelphia Business Journal (4/20/20)

  • JPMC – $3.1 trillion assets, 300,000 applications, approved 26,500 loans of $14 billion
  • BAC – $2.6 trillion assets, 370,000 applications, no approval data
  • WFC – $1.98 trillion assets, no data but did announce early on that they had exhausted their $10 billion capacity due to the regulatory cap
  • BB&T/Truist – $461 billion assets, ? applications, approved 32,000 loans for $10 billion
  • PNC – $412 billion assets, 75,000 applications, approved 20,000 loans for $9 billion
  • TD – $320 billion assets, ? applications, approved 26,000 for $6 billion
  • Citizens – $177 billion assets, 35,000 applications, approved ? for $4 billion
  • KeyBank – $143 billion assets, 35,000 applications requesting $8.5 billion ? approved #? approved $?
  • M&T – $119 billion assets, 30,000 applications, approved 27,711 for $6.4 billion
  • Santander – no data
  • Fulton – no data
  • WSFS – $12 billion assets, ? applications, approved 2,400 for $775 million
  • Customers – $12 billion assets, ? applications, approved 1,216 for $384 million
  • OceanFirst – $10 billion assets, ? applications, approved 1,096 for $248 million
  • Univest – $5 billion assets, 2,850 applications, approved 1,051, for $?
  • Bryn Mawr Trust – $5 billion assets, 1,300 applications, approved 700 for $?
  • First Trust – no data
  • Republic – $3 billion assets, ? applications, approved 3,000 loans for $450 million
  • Parke – $2 billion assets, 283 applications, approved 230 for $60 million
  • Ambler Savings – $410 million assets, 116 applications, approved 106 for $14 million

 

If you have any questions about the items listed here or would like to discuss your specific circumstances, please do not hesitate to contact Doug Huntley, MBA, CPA (inactive) at 215-643-9100 or dhuntley@blbb.com. Doug is a graduate of The Wharton School of Business where he received an MBA with a focus on Finance and Strategic Planning. Doug is also magna cum laude, graduate of Bucknell University, where he received a BSBA in accounting.

 

BLBB does not provide tax advice nor practice law.  Please see your licensed tax or legal professional who is familiar with your particular facts and circumstances.  

 

[Download EFM Managing SBA’s Paycheck Protection Program Debt Forgiveness Provisions]

 
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