Can Your Firm Benefit from Updated PPP Loan Rules?
Management companies may get a boost from more business-friendly loan rules.
On June 5, President Trump signed into law the Paycheck Protection Program Flexibility Act, which made changes to the Paycheck Protection Program (PPP) to make it more user friendly for businesses. In short, the bill makes it easier for PPP borrowers to use the loans and receive forgiveness. This may be good news for companies that manage tax credit sites and already have a PPP loan—as well as those that apply for a PPP loan by June 30.
As the COVID-19 pandemic continues, LIHTC sites are facing losses due to reduced rental payments and a slowdown in leasing vacant units. A new weekly survey created by the U.S. Census Bureau illustrates the hardships renters are facing—and passing on to tax credit sites. The Household Pulse Survey collects near-real time data on how the pandemic is impacting households across the country.
Recent results show that 48.5 percent of all respondents reported that either they or another adult in their household had lost employment income since March 13. And the survey found that 19.4 percent of all renters either were not able to pay their rent on time or deferred their rent last month.
What Is the PPP?
The PPP is a $669 billion business loan program established by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to help businesses keep their workforce employed during the COVID crisis. The program was updated with more business-friendly loan rules when the PPP Flexibility Act was enacted on June 5.
This program may help management companies and site owners through this economic crisis. Although it’s unlikely that site owners themselves will qualify for the new Small Business Administration (SBA) loan program because they typically have no employees of their own, management companies may be able to take advantage of this assistance to meet their payroll needs. To the extent management companies receive a loan under this program to pay employees at a site, the benefits could be extended to the site’s account because the site would seek a rebate or reduction in the payroll costs typically passed through to the site.
Site owners might be considering applying under the argument that since they pay the site-level employees through a management company, the employees are effectively employed by the partnership. But provisions in contracts that forbid the partnership from having employees could make this argument difficult, if not impossible, to make. It will be important to make sure that the two entities, the management company and site owner, do not attempt to claim the same employees and that credit for paying them flows through to the site owner.
We’ll spell out the specifics of qualifying and applying, and detail the new benefits.
Who Is Eligible?
To be eligible for the PPP, an applicant must be a small business, sole proprietor, independent contractor, self-employed person, 501(c)(3) nonprofit organization, 501(c)(19) veterans organization, or a tribal business. Small business applicants must have been in operation on Feb. 15, 2020, and must have either had paid employees or paid independent contractors.
The applicant and its affiliates must also:
- Have 500 or fewer employees, including its U.S. and foreign affiliates; or
- Meet the SBA’s industry size standards based on average number of employees; or
- Have a tangible net worth that did not exceed $15 million on March 27, 2020, and an average net income that did not exceed $5 million for the two full fiscal years prior the date of the PPP application.
An applicant isn’t required to demonstrate that it can’t find credit elsewhere, but it is required to certify, in good faith, that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” Also, each business may receive only one PPP loan.
How Big Is the Loan Amount?
The amount of the PPP loan is based on the applicant’s payroll costs. Payroll costs include salaries, wages, commissions, cash tips, paid leave, severance pay, housing allowance, and other compensation paid to employees. These costs are limited to $100,000 annualized per employee.
Payroll costs also include group health benefits and insurance and retirement benefits. Payroll costs include taxes withheld from employees’ wages and all state and local taxes assessed on compensation. But payroll costs don’t include the employer’s portion of Social Security tax, the employer’s portion of Medicare tax, and federal unemployment tax.
To calculate the amount of the PPP loan, the applicant calculates its payroll costs between Jan. 1, 2019, and Dec. 31, 2019. Average monthly payroll costs are calculated by dividing this amount by 12. The PPP loan amount is equal to 2.5 times the average monthly payroll costs.
Each PPP loan may not exceed $10 million. In some cases, however, each affiliate of a company is allowed to apply and receive its own PPP loan.
What’s the Application Process?
An applicant applies for a PPP loan directly with an eligible private lender, such as a federally insured bank, a federally insured credit union, or an SBA-approved lender. The SBA has a standard application form, although private lenders are allowed to use their own paper forms or electronic forms if they’re substantially similar to the standard form. An applicant has to attach documentation to support the amount of the loan applied for, such as payroll reports and payroll tax filings. If these records are unavailable, a lender could accept bank records if they sufficiently demonstrate the qualifying amount.
Applicants must make certain assertions, including that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” While a lender doesn’t need to require a business to demonstrate the basis of its certification, the SBA may do so.
Applying for a PPP loan is free to the applicant. The SBA compensates lenders for processing PPP loans. Certified Public Accountants and accounting firms are not allowed to charge businesses to prepare their applications for PPP loans; instead, the lender is permitted to, and may, compensate them directly. Nevertheless, an accounting firm is allowed to charge a business for providing advice on deciding which loan program and tax relief program would be best for the business.
Some lenders accept PPP applications only from businesses that already have a depository account at the lender. Loan applications are only accepted, and loans may only be made, through June 30, 2020.
Applications for PPP loans are accepted, approved, and disbursed in the order of first-come first-served, until the entire amount appropriated by Congress is depleted. The first appropriation of $349 billion was depleted on April 16, 2020, and the SBA stopped accepting new applications from lenders as of that date. A bill to add $320 billion of funding was passed by the Senate and the House of Representatives on April 21 and April 23, respectively, and signed into law by President Trump on April 24, and the SBA began accepting new applications from lenders on April 27.
It’s estimated that nearly $130 billion in PPP loan money is still available. Due to red tape and the short time frame, many small business owners avoided applying.
What Are the New Loan Rules?
Effective June 5, the Paycheck Protection Program Flexibility Act makes it easier for current PPP borrowers to use the loans and receive forgiveness. The act does the following:
Increases time to use loan funds. The CARES Act required borrowers to spend the loan over an eight-week period following their receipt of funds to have the loan forgiven. The PPP Flexibility Act of 2020 lets borrowers extend that period to 24 weeks (but not beyond Dec. 31, 2020). This extension applies both to existing and any future PPP loans.
Amends key deadlines. Before the update, borrowers had until June 30 to apply for a loan and to use loan funds. The new bill extends the use of funds deadline to Dec. 31 to allow borrowers to use the full 24 weeks the bill provides for loan spending. A letter of intent attached to the bill by the Senate, however, makes clear that the bill does not intend to extend the application deadline period beyond June 30. So, prospective borrowers would need to apply for a loan by June 30.
Increases loan term. The original PPP loan guidelines had a term of two years for any unforgiven principal. The PPP loan repayment period has been extended to five years from the original two while retaining the original 1 percent interest rate. This gives borrowers more time to pay off the unforgiven portion of their loan.
Amends the 75 percent payroll rule. The original PPP loan guidelines mandated that 75 percent of the amount forgiven had to be spent on payroll costs and up to 25 percent on other costs. The Flexibility Act reduces required payroll expenditures to 60 percent or more of the amount forgiven with up to 40 percent of the forgiven portion used for other costs.
For full loan forgiveness, the borrower must spend 60 percent or more of the entire loan amount on payroll and the balance on other costs, which include rent, mortgage interest, and utilities. These changes reflect complaints from many businesses that their payroll costs went down as employees were laid off but fixed costs did not.
Increases deferral period. Under the CARES Act, borrowers have an automatic six-month deferral period before they must begin to repay any unforgiven loan funds. Now, the payment deferral period is extended from six months after the end of the covered period to the date the SBA sends the borrower’s loan forgiveness amount to the lender. If the borrower doesn’t apply for forgiveness, the deferral period lasts until 10 months after the end of the covered period, according to guidance issued by the SBA.
Provides safe harbor for some Full Time Equivalents (FTE) reductions. The original PPP loan guidelines required borrowers to maintain their FTE level to secure full forgiveness of their loan. Now, there are two new exceptions to let borrowers achieve full forgiveness even if they don’t fully restore their workforce. These are in addition to previous guidance that let companies exclude workers who turned down good-faith offers of re-employment.
Borrowers can now also reduce workforce based on their inability to rehire laid off or furloughed staff and find qualified employees by Dec. 31 or if they were unable to restore operations to Feb. 15, 2020, levels due to COVID-19 restrictions—for example, if the business couldn’t return to its pre-COVID-19 level of business activity due compliance with federal guidelines related to sanitization, social distancing, or other safety requirements related to COVID-19. This provision applies both to existing and any future PPP loans.
Payroll tax deferral. Finally, the PPP Flexibility Act of 2020 lets businesses that took a PPP loan also delay paying their payroll taxes. This wasn’t allowed under the original CARES Act, and this provision applies both to existing and any future PPP loans.
The new PPP Flexibility Act:
- Gives borrowers more time to spend PPP funds and still obtain forgiveness.
- Gives borrowers 24 weeks to spend loan proceeds, up from eight weeks.
- Reduces mandatory payroll spending from 75 percent to 60 percent.
- Lets some borrowers obtain full forgiveness even without fully restoring their workforce.
- Extends the time to pay off the loan to five years from the original two.
- Does not change the June 30, 2020, application deadline.