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7 Important PPP Questions Answered

Smart Summary

  • You’re required to spend at least 75% of your loan on payroll costs, but there are creative ways to get it done if you’re struggling.
  • If you haven’t spent your PPP funds yet and your 8 weeks is running out, you could have major problems getting forgiveness because of FTE calculations.
  • You can use a cash or accrual basis for loan purposes, but cash is recommended to be safe.

So much has changed since the applications for Paycheck Protection Program (“PPP”) loans opened up on April 3. After nearly two months of government-ordered lockdowns, many business owners are preparing to open their doors as states around the country roll out their plans for reopening the economy. But as businesses prepare to re-open, there are still many outstanding questions surrounding PPP loans. We’ve compiled answers to 7 of the most common questions we’re frequently fielding about PPP loans and best practices for businesses that have already secured PPP funding.

  1. Am I required to spend 75% of my loan amount on payroll costs?
  2. What happens if I don’t spend 75% on payroll costs?
  3. How can I get to the 75% spending requirement if I’m behind?
  4. I received my PPP loan 6 weeks ago and haven’t spent it because I’m just now able to open up. Am I in trouble?
  5. How do I calculate FTEs for forgiveness calculations?
  6. Are “permitted expenditures” over the 8-week period based on a cash or accrual basis?
  7. When I applied for the loan, my business was uncertain, but has actually performed quite well since I received my money. Should I give the money back?

Am I required to spend 75% of my loan amount on payroll costs?

Yes. Under Interim Final Rule 1 issued by the U.S. Small Business Administration (“SBA”) and the U.S. Treasury Department (“Treasury”), it is clear that spending 75% of your entire loan amount on payroll costs is a required use of the loan funds.

Interim Final Rule 1 details permitted uses of the loan funds, which include:

  • payroll costs;
  • costs related to employee benefits;
  • rent payments;
  • utility payments;
  • interest payments on any other debt obligation incurred prior to February 15, 2020; and
  • refinancing an EIDL loan received between January 31, 2020 and April 3, 2020.

But it is also important to distinguish this mandate from spending 75% of the PPP funds on payroll costs for purposes of forgiveness. Importantly, after outlining the permitted uses, Interim Final Rule 1 clarifies that “at least 75 percent of the PPP loan proceeds shall be used for payroll costs.” Therefore, using 75% of the PPP proceeds on payroll costs is not only a requirement to have an amount forgiven, but it is a mandate on the use of loan proceeds.

What happens if I don’t spend 75% on payroll costs?

This could potentially be construed as using PPP funds for unauthorized purposes. If you are deemed to have misused the PPP funds, the SBA will direct you to repay those amounts. In the event you knowingly use PPP proceeds for unauthorized purposes, you may be subject to criminal penalties, including fraud.

How can I get to the 75% spending requirement if I’m behind?

Fortunately, the only limit on spending the PPP loan proceeds is that no individual employee may be paid more than $15,384 over the 8-week period after the borrower receives its funds. That means a borrower can spend the money on payroll costs by giving bonuses to various employees in amounts that allows the business to get to 75% of the loan proceeds. As of the writing of this article, there is no restriction on bonuses.

Further, it is important to note that there are no limitations on non-cash benefits, such as employer contributions to health plans, insurance premiums, etc. Therefore, a business could pay its employees up to $15,384 in cash and spend the rest on non-cash benefits. Other creative solutions can help here as well, and my colleagues and I have outlined those in a previous article.

I received my PPP loan 6 weeks ago and haven’t spent it because I’m just now able to open up and bring employees back. Am I in trouble?

Potentially. Your problem is actually twofold:

  1. Because you have not spent any money over the first six weeks of your 8-week period, you have the practical issue of spending the mandated portion of your loan amount over a 2-week period.
  2. You are going to have issues receiving full forgiveness. This is because your average FTE count will likely be lower than that of your historical period. FTEs are calculated based on monthly averages over the 8-week period. Therefore, you will have an entire month of 0 FTEs and another pay period in the second month of 0 FTEs. If you do not hire back your entire workforce before June 30, you will likely have your forgiveness amount drastically reduced.

How do I calculate FTEs for forgiveness calculations?

This is still a bit unclear. In the past, the IRS has based FTEs on a 40-hour work week or a 30-hour work week. You should be prepared to base your calculation on either method.

Are “permitted expenditures” over the 8-week period based on a cash or accrual basis?

Again, this is unclear. The CARES Act itself authorizes forgiveness for an amount equal to the sum of “costs incurred and payments made during the covered period” toward covered expenses. This language would seem to suggest that a cash basis would be permitted because both costs are incurred and payments are made toward expenditures on this basis.

However, this language also seems to permit accrual basis payments (for payroll specifically) because, for example, if a payroll cost covers a pay period that occurred before the covered period, it would not be a cost incurred during the covered period, but it would certainly be a payment made toward payroll costs during the 8-week period.

Best practice here is likely to use a cash basis, but there is a strong argument for the accrual basis, if needed.

When I applied for the loan, my business was uncertain, but has actually performed quite well since I received my PPP loan. Should I give the money back?

Although this depends on your specific circumstances, the answer is likely no. The SBA and the Treasury issued guidance that permitted those businesses who misunderstood or misapplied the statutorily required certification made at the time of their loan application to return the funds by May 14, 2020. The certification was “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

In determining whether the loan was “necessary,” the SBA and the Treasury specifically indicated that borrowers should evaluate: (1) current business activity, and (2) ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. In making your decision as to whether to return the funds because they were not “necessary,” it is important to understand that the certification was made at the time of the application.

How your business actually performed since your application is not relevant. You should try to place yourself in your shoes at the time of your application and then consider both the state of your business activity and your ability to access capital markets (lines of credit, etc.). If you think you may be audited or challenged, you should take appropriate action to document your findings based on the two factors identified by the SBA and the Treasury. If, after evaluating those factors, you feel as though you made the certification in good faith, then you are justified in keeping the money, regardless of how your business actually performed since your application.

And if your loan amount was under $2 million, the SBA just offered you a new safe harbor. In an FAQ released earlier today, the SBA announced that the necessity of the loan will be assumed for any borrower who received less than $2 million. This means you will not have to substantiate a “good faith” basis for receiving the funds, regardless of your economic condition. The SBA also clarified that any business receiving more than $2 million in loan funds that is unable to substantiate the necessity of the loan will not face penalties or criminal prosecution, as many feared, but will instead simply be required to repay the loan with no forgiveness.

Cody Myers is a business lawyer with Kegler Brown, working with clients on their funding strategies during the pandemic, including optimizing PPP and SBA EIDL funds. He can be reached directly at [email protected] or (614) 462-5495.

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