As many already know, we have new developments regarding the Paycheck Protection Program (PPP) loans and the associated forgiveness aspect. Below is a brief summary of a few of the more recent updates. For more information, please visit our COVID-19 Resource Page.
Update 1 – Self Employed Individuals
The SBA provided some much-needed guidance relating to Self-Employed PPP loan applications and forgiveness. Generally, the PPP loan amount is calculated as 2.5 months of average monthly payroll expenses. However, since many Self-Employed Individuals do not have payroll, their loan amount is based on 2019 net profit divided by 12, to get a monthly average net profit. Multiply this number by 2.5 to get the PPP loan amount. Self-Employed Individuals with other employees may also receive additional PPP loan amounts following the same calculations as other businesses.
The forgiveness calculation for Self-Employed Individuals is also different. Instead of spending the loan proceeds on payroll, Self-Employed Individuals get an automatic forgiveness amount equal to eight weeks’ of 2019 net profit. No need to spend anything. This is called “owner compensation replacement”. Mathematically, this is almost 75% of the loan amount that gets automatically forgiven. The remaining 25% of the PPP loan may be spent on utilities, rent, and mortgage interest expenses to be forgiven.
The compensation limit (in this case Net Self-Employment Income) is still limited to $100,000, as with the other payroll calculations in the PPP loan. For Self-Employed Individuals with no employees, the maximum PPP loan is therefore $20,833, with $15,384 automatically eligible for forgiveness as owner compensation replacement. The remaining $5,449 can be forgiven if spent on the approved expenses over the 8 weeks of the PPP.
Update 2 – Is your PPP Loan Necessary?
The SBA has made a concerted effort to show emphasis, and clarification, regarding the certification that “….the loan request is necessary…”. This guidance has been released via the SBA’s Frequently Asked Questions (FAQs), which can be found HERE.
FAQ’s 31 and 37 address the qualification for the PPP loan for private and public companies with enough resources to continue operations without the loan. The guidance set forth by the FAQ states, “Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” This puts the pressure on each business as to whether or not they feel they can justify the loan.
FAQ’s 39 and 43 identify that PPP loan applications over $2 million will be audited, in addition to other loans as appropriate. This raises the question of what the meaning of the words “necessary to support the on-going operations of the applicant” actually mean. If the loan is found not to be “necessary,” criminal fines of up to $1,000,000 and imprisonment for up to thirty years can be imposed.
The confusion about what “necessary” means is kicked back to the answer that created it in the first place in the April 29th update, and no official clarification has been offered since. Despite the confusion, the SBA has announced a grace-period for businesses that do not “need” the loan—according to the SBA, they can return it by May 14th (extended from May 7) to avoid any criminal consequences related to taking a PPP loan unnecessarily.
Given the uncertainty created by these recent FAQ’s, BiggsKofford is currently advising clients to gather documentation and be prepared to support the reasons for obtaining the PPP loan. For many companies, these reasons are obvious (business was disrupted, closed, etc.). In other cases, “supporting ongoing operations” may mean preparing for a future downturn caused by the economic disruption.
Update 3 – Coordinate with Unemployment
Lastly, FAQ 40 identifies that a borrower may exclude an employee from loan forgiveness calculations if the borrower made a good-faith, written offer of rehire and also documented the employee’s rejection of that offer. The new FAQ, however, warns that employees could be banned from receiving unemployment benefits if they turn down a reemployment offer.
For more information on these topics and updates, or to discuss how to best navigate these circumstances, visit our Resource Page.