June 8, 2020 

On Friday, June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (“Act”). The Act provides much-needed clarifications concerning the Paycheck Protection Program (“PPP”), and provides flexibility to PPP loan recipients. Below is a brief overview of how the relevant provisions of the Act affect the PPP.

Forgiveness Period for Borrowers Expands from Eight Weeks to Twenty-Four Weeks

Prior to the passage of the Act, forgiveness was only available for eligible expenditures made in an eight-week period after the loan was disbursed to the borrower (the “Covered Period”). The Act has expanded the options for the Covered Period that PPP borrowers may use when calculating loan forgiveness. Instead of only having eight weeks, borrowers may now choose their Covered Period to be the earlier of twenty-four weeks from the date they received their loan or December 31, 2020.  This extension of the Covered Period for PPP borrowers who have already received funding does not change the application deadline of June 30, 2020 for prospective PPP borrowers who may be interested in applying for a loan under the program.

Only Sixty Percent (60%) of PPP Loan Proceeds Need to be on Payroll Costs

The PPP originally stated that PPP loan recipients needed to use 75% of their proceeds on eligible payroll costs in order to qualify for full forgiveness of their loan. The Act has reduced that threshold for payroll costs to 60%, which allows PPP borrowers to now use up to 40% of their loan proceeds on non-payroll costs. Please note that if a borrower’s payroll costs are less than 60% of the borrower’s total loan proceeds, none of the loan will qualify for forgiveness.

Loan Maturity Date and Deferment Date Extended

Borrowers who do not qualify for forgiveness of their loan will now have a minimum of five years to repay their loan instead of two. The Act also extends the deferment date of principal and interest payments from six months to the date the borrower’s loan forgiveness amount is determined by the borrower’s lender. Borrowers who decide to either not apply for forgiveness or fail to apply within ten months from the end of their covered period (i.e. the twenty-four-week period or December 31, 2020) will have their principal and interest payments start ten months after the end of their Covered Period.

Extension on Period for Borrowers to Restore Employee & Salary Levels

PPP borrowers now have until December 31, 2020 to restore their FTE count and certain salaries to levels the borrowers had before the start of the pandemic. This is a six-month extension from the original deadline of June 30, 2020 to qualify for forgiveness. The Act also provides some flexibility for the following situations:

• An inability to rehire individuals who were employees of the eligible recipient on February 15, 2020.
• An inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020.
• Documentation of an inability to return to the same level of business activity as such business was operating at before February 15, 2020, 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.

Two-Year Employer Payroll Tax Deferrals

PPP borrowers were not permitted to defer their employer payroll portion of certain payroll taxes prior to the enactment of the Act. With the Act’s passage, PPP borrowers are able to take advantage of delaying employer payroll taxes even when they apply for forgiveness. While the IRS previously stated that PPP borrowers could only defer these taxes up to a borrower’s forgiveness date, borrowers now can defer through December 31, 2020, and pay 50% of the deferred balance on December 31, 2021 and the remaining 50% on December 31, 2022.

Walter | Haverfield is monitoring the guidance concerning this program closely and is prepared to assist businesses navigate these important, yet complex issues. If you have additional questions, please reach out to us here. We are happy to help.

May 19, 2020 

The U.S. Small Business Administration (SBA) recently released the loan forgiveness application which Paycheck Protection Program (PPP) borrowers will use to determine and report to their lender how much of their PPP loan is eligible for forgiveness. While most PPP borrowers have a top-line understanding of the program, the application provides new information, and attempts to resolve some outstanding questions that many borrowers had concerning forgiveness. The most noteworthy provisions of the application are below:

Alternative Payroll Covered Period

In order to accommodate PPP borrowers with a bi-weekly (or more frequent) payroll, borrowers now have the option on the application to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date (the “Alternative Payroll Covered Period”).  For example, if the borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26, and the last day of the Alternative Payroll Covered Period is Saturday, June 20—56 days from April 26.

This comes as a relief to many PPP borrowers, as the language of the CARES Act and the subsequent rules and regulations issued by the SBA made it appear as though payroll costs would only be eligible for forgiveness if the expenses were “paid and incurred” during the eight-week period that started the day of the first disbursement of the PPP loan (the “Covered Period”). For certain borrowers, this would have been an accounting nightmare, as their payroll schedule did not coincide with when their business received PPP funding. Borrowers now have the option to use the Alternative Payroll Covered Period for a borrower’s payroll costs, employee health insurance, retirement plan contributions, and state and local taxes assessed on employee compensation calculations if the period would better coincide with their business’s payroll schedule. Borrowers must use the Covered Period when calculating their eligible nonpayroll costs (as defined below).

Summary of Costs Eligible for Forgiveness

Eligible Payroll Costs

The application allows a PPP borrower to deduct payroll costs that were either “paid” or “incurred” during the borrower’s Covered Period (or Alternative Payroll Covered Period). Per the application, payroll costs are considered paid on the day that paychecks are distributed or when the borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee earned the pay.  Payroll costs incurred but not paid during the borrowers last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the borrower’s next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period).

The guidance also outlines that for each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the covered period. This means that no employee is entitled to earn more than $15,385 in cash compensation during the borrowers’ Covered Period of Alternative Payroll Covered Period. This $15,385 cap in cash compensation also applies to any owner-employees, self-employed individuals, or general partners of the business.

Eligible Non-Payroll Costs

Per the application, the following nonpayroll costs are eligible for forgiveness:

(a) covered mortgage obligations: payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020 (“business mortgage interest payments”)

(b) covered rent obligations: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020 (“business rent or lease payments”)

(c) covered utility payments: business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020 (“business utility payments”)

An eligible nonpayroll cost must be paid or incurred during the Covered Period and paid on or before the next regular billing date. This is true even if the billing date is after the Covered Period. Eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount. Allowing this distinction of costs being paid or incurred during the Covered Period allows some flexibility for borrowers to use their PPP funding.

Forgiveness Limitations

Average Full-Time Equivalent (FTE) Calculation

The loan amount eligible for forgiveness may change depending on whether the borrower’s average weekly number of FTE employees during the Covered Period or the Alternative Payroll Covered Period was less than during the borrower’s chosen reference period. Many borrowers have expressed concern over what constitutes the calculation of a “full-time equivalent” employee. The application provides a calculation method to determine the average FTE in either the Covered Period or the Alternative Payroll Covered Period. For each employee, the borrower shall enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. Borrowers can use a simplified method, where the borrower can use 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.

There are a few exceptions in the FTE calculation listed on the application. The application asks the borrower to indicate whether there any positions for which the borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period which was rejected by the employee. It also asks if there were any employees who during the Covered Period or the Alternative Payroll Covered Period were either fired for cause, voluntarily resigned, or voluntarily requested and received a reduction of their hours. In all of these situations, if the position was not then filled by a new employee, the borrower can include these cases as FTE in their calculation.

Salary/Hourly Wage Reduction

The CARES Act specifically states that a borrower’s loan forgiveness amount will be reduced if the borrower reduced the salary/hourly wages of eligible employees by more than 25%. The application has a Salary/Hour Wage Reduction column for borrowers to complete for employees whose salaries or hourly wages were reduced by more than 25% during the Covered Period or the Alternative Payroll Covered Period as compared to the period of January 1, 2020 through March 31, 2020. The column outlines a three-step process that borrowers will have to go through to analyze whether they are susceptible to loan forgiveness reduction.

Borrowers Who Received More Than $2 Million in PPP Funding

Borrowers who, along with their affiliates, received more than $2 million in PPP funding will have to check a box on the application stating that they received more than $2 million. As prior SBA and Treasury guidance has stated, any borrower who received more than $2 million will face audits. This box within the application will help the SBA flag PPP loans that are eligible for audit.

Conclusion

This program has rapidly evolved since its inception mere months ago, and new guidance was released multiple times. It is anticipated that the SBA will soon issue a new interim final rule (IFR) to supplement the application, which will provide additional information and guidance for borrowers on how to apply for and calculate forgiveness applications. While this could be stressful for many businesses, Walter | Haverfield is closely monitoring the guidance concerning this program and is prepared to assist businesses navigate these important, yet complex issues. If you have additional questions, please reach out to us here. We are happy to help.

May 14, 2020 

On May 13, 2020, the Small Business Administration (SBA) updated its Paycheck Protection Program (PPP) FAQ guidance to explain how it will review the necessity of a business’s PPP funds. This guidance comes as a welcome relief to many eligible small businesses, as previous SBA guidance seemed to emphasize that borrowers needed to prove the loan is “necessary to support the ongoing operations” of the borrower or face financial consequences.

The guidance states that any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will have met the required certification concerning the necessity of the loan request in good faith. The SBA gave this automatic safe harbor to borrowers who received less than $2 million because it determined that borrowers with loans below this threshold are generally less likely to have access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans.

Borrowers that received PPP loans for more than $2 million will be subject to review by the SBA for compliance with program requirements as set forth in the PPP Interim Final Rules and in the Borrower Application Form. If the SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification of the loan request, the SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from the SBA, the SBA will not pursue administrative enforcement. In addition, the guidance states that the SBA’s determination concerning the necessity of certification for the loan will not affect the SBA’s loan guarantee.

The release of this updated guidance is very timely as the SBA is giving borrowers until May 18, 2020 to return PPP funding if they no longer believe they are eligible for the program. On the other hand, borrowers who received under $2 million no longer have to debate what to do.

Walter | Haverfield is closely monitoring the guidance concerning this program and is prepared to assist businesses navigate these important, yet complex issues. If you have additional questions, please reach out to us here.

This article was updated as of 5/6/2020.

Now that the funds from the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) have started flowing to eligible applicants, businesses have two primary concerns:  (1) was it a mistake to apply for a PPP forgivable loan, and (2) how can businesses maximize the forgiveness of those loans?

In light of several large, well-known businesses receiving PPP funding, which prompted public outcry, the SBA recently updated its PPP guidance. It now states that borrowers must certify in good faith that their PPP loan request is necessary. Borrowers must also carefully review the required certification for the loan. The certification needs to demonstrate the loan’s necessity as the means to support ongoing business operations. In weighing whether to apply for a PPP loan, the SBA states that businesses need to take into account their current business activity as well as 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.

Since the release of this guidance, a significant number of larger borrowers have voiced concerns, and are worried their business could be held liable for receiving PPP funding. Treasury Secretary Steven Mnuchin added more fuel to these concerns by recently stating the SBA would audit any company that received more than $2 million in PPP loan money. The Secretary also stated any company could face “criminal liability” if it turns out the company was not eligible to apply.

While the guidance concerning this program continues to evolve,  the fundamental question is whether current economic uncertainty makes obtaining a PPP loan necessary to support a company’s ongoing business operations. This question is more easily answered in some industries than it is in others. Businesses that have already received funding through the PPP may need to reevaluate whether they have sufficient support to justify the necessity of PPP money for ongoing business operations. Any such decision should be vetted through competent legal counsel. Businesses that have had a change of heart may return the loan money by May 14, 2020 without penalty.

PPP borrowers should be prepared to answer requests for information concerning the use of the funding from both the SBA and the Department of Justice.  Fraud and abuse will be a strong focus of the government, post funding. There will be auditors and investigative task forces. Companies should keep proper documentation outlining decisions relative to the need to apply for a PPP loan. Such documentation may include  memoranda,  e-mails, and resolutions authorized by the company to enter into the loan.

If a company intends to keep the PPP funds it received and seek forgiveness of its PPP loan, there are certain steps the company should do on the front end of the loan period in order to position itself for complete forgiveness of the loan. These include accounting practices, personnel decisions, and additional record-keeping considerations.

Walter | Haverfield is closely monitoring the guidance concerning this program and is prepared to assist businesses navigate these important, yet complex issues. If you have additional questions, please reach out to us at here.

Max Rieker is an associate at Walter |Haverfield who focuses his practice on labor and employment law. He can be reached at mrieker@walterhav.com or at 216-928-2972.

April 22, 2020

Applications for the Cuyahoga County Small Business Stabilization Fund, which can be found here, will be accepted until 5pm on Thursday, April 23, 2020. The fund was created in an effort to assist small, neighborhood-based businesses, and it includes both grants and loans.

The money may be used for business-related expenses, including payroll, accounts payable, fixed costs, inventory, rent and utilities.

Grants:

One-time grants that range from $2,500-$5,000 are available to businesses that meet the following conditions:

• Business must have fewer than 20 employees
• Business must have less than $1 million in revenue
• Business must have been in operation for at least one year
• Business must have a physical establishment in Cuyahoga County
• The owner must be a resident of Cuyahoga County
• 25% of business employees must live in Cuyahoga County
• Business must have a plan to re-open within one calendar year
• Business must have experienced more than 50% of revenue disruption due to COVID-19
• Business must certify that they have applied, or are not eligible, to one of the following SBA Disaster Relief Programs through the U.S. Small Business Administration (SBA):
  • Economic Injury Disaster Loan (EIDL)
  • SBA 7(A) Loan under the Paycheck Protection Program (PPP)

The following business types will be given preference: service industries (restaurants/bars/personal care services and cosmetology), hospitality, neighborhood healthcare/grocers, general contracting, landscaping. Businesses in low to moderate income census tracts will also be given preference.

Loans:

Small businesses that employ between 1-100 employees and mid-sized businesses that employ between 101-500 employees are eligible for loans if they meet the following criteria:

• Have a physical establishment in Cuyahoga County
• Have been in operation for at least one year

Loans for eligible small businesses start at $5,000. Mid-size loans start at $10,000.

The following business types will be given preference:

Small business stabilization loans: service industries, hospitality, manufacturing, and neighborhood healthcare

Mid-size business stabilization loans: service industries, hospitality, manufacturing, neighborhood healthcare, IT, automotive, logistics and distribution, and aerospace

Ineligible businesses for both the grant and loan program include businesses that have greater than $5,000 in unpaid real estate taxes owed to Cuyahoga County, adult entertainment, banks, financial services, e-commerce, liquor stores, tobacco stores, cannabis dispensaries, and franchises which are not locally owned and independently operated.

The county will announce the grant recipients on Tuesday, April 28, 2020. Grant funds will be distributed the week of April 27, 2020. Businesses that are applying for loans will receive the loan, if eligible, after completing the loan process.

If you have additional questions, please reach out to us here.

April 21, 2020

As part of the CARES (Coronavirus Aid, Relief, and Economic Security) Act, the Federal Reserve is making low-interest loans available to qualified small and mid-sized U.S.-based businesses impacted by the COVID-19 pandemic.

The loans are part of what’s called the Main Street Lending Program. Businesses and non-profits are eligible to receive between $1 million – $150 million if it has fewer than 10,000 employees or up to $2.5 billion in 2019 revenue. Participation in the Small Business Administration (SBA) Paycheck Protection Program (PPP) does not disqualify a business from applying for a Main Street loan. It may participate in both.

The four-year Main Street loans are not subject to forgiveness and must be repaid. Principal and interest payments will be deferred for one year. Businesses that take advantage of the program must make a reasonable effort to maintain payroll and retain workers.

The Main Street Lending Program will operate through two facilities: a New Loan Facility and an Expanded Loan Facility. The New Loan Facility applies to businesses that can incur new debt under their existing agreements or have no existing credit agreements. The Expanded Loan Facility increases a business’ existing term loan that is already outstanding. Both facilities have no penalty for prepayment.

Regardless of which loan facility a business is eligible for, participating borrowers much adhere to the following conditions:

• The proceeds of the loan will not be used to repay or refinance preexisting loans or lines of credit or repay other debt of equal or lower priority (with the exception of mandatory principal payments, unless the borrower has first repaid the Main Street loan in full).
•  The business must attest that it requires financing due to the COVID-19 pandemic.
• The business must attest that it will not seek to cancel or reduce any of its outstanding lines of credit with the lender or any other lender.
• The business must attest that it will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under the CARES Act.
•  The business must attest that it meets specific EBITDA leverage conditions.

The following conditions apply to lenders:

• Lenders must attest that the proceeds of the loan will not be used to repay or refinance preexisting loans or lines of credit made by the lender to the borrower, including the preexisting portion of the eligible loan.
• Lenders must attest that it will not cancel or reduce any existing lines of credit outstanding to the borrower.

The Main Street Lending Program is not live yet, but interested businesses should contact their lenders as soon as possible to begin the process of gathering the necessary information to apply. The Federal Reserve will run the program until all appropriated funds have been spent, or until September 30, 2020.

For more information or to determine whether your business may qualify, please reach out to us at questions@walterhav.com. We’re happy to help.

April 2, 2020 

On Friday, March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act provides significant federal funding and expansions to loan programs already offered by the Small Business Administration (the “SBA”) to account for the significant economic damage caused to small businesses by the COVID-19 pandemic. In particular, the CARES Act provides $349 billion dollars to the Paycheck Protection Program, an expansion of the Section 7(a) loan program of the Small Business Act, and an additional $10 billion to the Economic Injury Disaster Loan (EIDL) Program offered by the Small Business Act in Section 7(b). Below is a brief overview of both programs.

The Paycheck Protection Program may be right for you if…

• You are looking to obtain capital to cover the cost of retaining employees.
• You already laid off employees and are looking to re-hire them. Before rehiring the employees or applying for the loan, the timing of the re-hire is important to consider for both tax and cash-flow purposes.

If you are looking for a quick infusion of a smaller amount of cash now…

• The Emergency Economic Injury Grant under the Economic Injury Disaster Loan (EIDL) Program may be right for you.

Before you decide to apply for the EIDL….

• You need to fully understand the impact of later applying for the Paycheck Protection Program loan, and whether you can refinance the prior EIDL principal.

Are you simply looking to ease your fears about keeping up with payments on your current or potential SBA loan?

• The Small Business Debt Relief Program may help, which provides immediate relief to borrowers with existing SBA 7(a) loans, 504 loans and microloans.

The Paycheck Protection Program

Basics

Begin Preparing / Finalizing 2019 Financials and YTD 2020. Under the Paycheck Protection Program, all loans are eligible to be partially forgiven if the funds are utilized for permissible uses. The SBA will compare your businesses’ payroll costs over the eight-week period commencing upon receipt of the funds to your business’ payroll costs from February 15, 2019 – June 30, 2019. We recommend that you also prepare monthly Profit and Loss statements for 2019 and YTD 2020.

The Paycheck Protection Program authorizes approved businesses to receive the lesser of: (i) 2.5x the cost of the businesses’ average monthly payroll over the preceding 12 months; or (ii) $10,000,000. Loan proceeds may be used for payroll costs, healthcare costs, interest on mortgage obligations, rent for a lease in place before February 15, 2020, utilities for which service began before February 15, 2020, and other debt obligations in place prior to February 15, 2020. A loan administered under this program shall not have an interest rate of more than 4%, the loan duration shall not exceed more than ten years, and payments on the loan may be deferred for at least six months, but no longer than one year.

Businesses Eligible for the Paycheck Protection Program

Small businesses, non-profit organizations (outside of organizations that receive Medicare expenditures), veterans organizations, and tribal business that employ 500 or fewer people, as well as self-employed individuals automatically qualify for the Paycheck Protection Program. Businesses that employ more than 500 employees may be eligible if the business either: (i) has fewer than the number of employees or has less revenue than is specified in the NAICS table for the business’ specific industry (note: the link to the SBA NAICS table is here); or (ii) falls within the NAICS code 72 classification (primarily food, beverage, and hotel enterprises) that employ 500 or fewer people at each physical location of the business.

Economic Injury Disaster Loan (EIDL) Program

Basics

The Economic Injury Disaster Loan (EIDL) Program allows approved businesses to receive a loan of up to $2,000,000 with collateral and up to $25,000 unsecured. This loan can be used for sick leave for employees unable to work due to COVID-19 as well as for payroll costs, increased material costs due to interrupted supply chains, rent or mortgage payments, repaying obligations that cannot be met due to revenue losses, and obligations that could have been paid had the disaster not occurred. The loan shall not have an interest rate of more than 3.75%, a term of less than 30 years, and no longer requires a personal guaranty on advances and loans of $200,000 or less. The CARES Act also created a new provision within the EIDL Program that allows applicants who need immediate funds the ability to request an emergency advance up to $10,000 within three days after the SBA receives the application. If the application is subsequently denied, the borrower is not required to repay the $10,000 advance.

Businesses Eligible for the EIDL Program

Similar to the Paycheck Protection Program, small businesses, non-profit organizations, veterans organizations, and tribal business that employ 500 or fewer people, as well as self-employed individuals, automatically qualify for the EIDL Program, along with ESOPs and cooperatives (including sole-proprietors and independent contractors).

Economic Injury Disaster Loan Program

1. Apply Online. Unlike the Paycheck Protection Program, the SBA directly oversees the EIDL. You can apply for an Economic Injury Disaster Loan through the SBA website. Click here to access the online application.
2. Assemble Financial Information. The online application will ask you to provide the following:

1. Completed application (SBA Form 5)
2. IRS Form 4506T for applicant, principals and affiliates
3. Complete copies of the most recent Federal Income Tax Return
4. SBA Form 2202 – Schedule of Liabilities
5. Personal Financial Statement (SBA Form 413)

For certain applicants, the SBA may also ask for:

1. Personal tax returns for all principals
2. Year-End Financial Statements
3. Current year-to-date Profit & Loss Statement
4. SBA Form 1368 (Monthly Sales Figures

Walter | Haverfield is Here to Help

We are currently facing an economic crisis that is virtually unparalleled in American history. The attorneys at Walter | Haverfield know that many businesses have questions concerning these programs. We are ready to provide you with any legal assistance you may need concerning your business’ eligibility for these programs and the operations of your business. We can also provide you with corporate documents that we have on file for your business, and assist you with any updates to your corporate governing documents. Walter | Haverfield is here to help you and your business successfully navigate through these difficult times.