Let’s Talk Forgiveness

The Payroll Protection Program money is finally flowing into the small businesses who need it, but with the money comes an impending sense of dread and confusion.

What expenses can be forgiven? What if I don’t spend all the money? What if the forgiveness calculation doesn’t equal the total loan? What about the employees who refuse to come back to work now that we are ready to get going again? Will that mess up my forgiveness calculation?

I am not an attorney. I am sharing my opinions and thoughts on an extremely complicated situation. To Illustrate the convoluted nature of what we are dealing with we have to track the bill from the beginning. The CARES Act was introduced and passed by the House and sent to the Senate for approval. The Senate passed the bill and it was sent to the President for signature and now we have a law. The administration of the law is then turned over to the different administrative organizations of the federal government, and here is where it gets dicey. The Small Business Administration now has the authority to create and enforce the rules of the road. Once the SBA has set in place interim rules, they send them out to the banking industry who in turn must interpret those rules and put them into place. Bankers by nature are a cautious bunch who like to mitigate risk and interpret the rules based on their desire to avoid risk. Now throw in all forms of media and misinterpretation of the rules from different sources and you have yourself a full-blown panic inducing situation.

That is where we find ourselves 42 days after the law was enacted with our small businesses finally getting the relief that they need. But if you thought getting the money into the hands of small businesses was convoluted, buckle up for the cacophony of “guidance” that is coming from every source possible. I have read the CARES Act, yep all 800+ pages, listened to at least a dozen webinars from the American Bar Association, the National Association of Enrolled Agents, the National Association of Tax Preparers, the Michigan Chamber of Commerce, and Thomson Reuters and still find myself searching for more answers everyday on the SBA.gov website and any other reputable source I can find. The answer that I receive most often is “we need more guidance on this.” Trust me, you are not alone in your confusion or trepidation in this situation.

Take a deep breath, grab a cup of tea and let’s work through what we do know from the SBA.

The SBA is updating the information on the Frequently Asked Questions for the Payroll Protection Program Loans on a daily basis. Although FAQs cannot be used as primary source of authority, they are the best we have for right now. Here are some highlights for you.

Question #6 – What are “payroll costs”? “Under the Act, payroll costs are calculated on a gross basis without regard to federal taxes imposed or withheld…” In essence, you are looking at gross wages + state unemployment tax.

Question #20 – When does the 8-week period begin? The date you get the money

Question #32 – Does housing allowance or other stipend provided to employee count toward payroll costs? Yep, only subject to the $100,000 annual compensation limit.

Those are the easy ones. Question #31 was added at the end of April and caused quite a stir. This one addresses the elephant in the room, big companies who have adequate sources of cash to not need the funds. A safe harbor was created for these companies to return the funds to their lender by May 14^th to avoid an investigation by the SBA. Generally, these companies are going to be publicly traded and owned by other large companies that have access to cash. Most small businesses do not need to worry about this issue. I would just encourage all to consider the certification that was made that the “[c]urrent economic uncertainty makes this loan request necessary to support ongoing operations of the Applicant.” I am just going to leave that here.

Question #40 is a doozy and much needed for employers who find themselves with employees who refuse to come back to work. In order to avoid these employees affecting your Full Time Equivalent calculation when it is time to request forgiveness, the SBA has outlined the steps that must be taken. Please note that these steps apply only to the FTE calculation for forgiveness, this is not a legal response to any employee situation. If you find yourself with additional questions or concerns, please contact an employment law attorney.

“Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.” (emphasis added)

I have spoken to many clients who are facing this situation and while it is not a legal answer by any means, this is great guidance for the FTE calculation when it is time to look at forgiveness. As you begin to bring back employees that were laid off, be sure to make the offer in writing to ensure it can be included in the documentation sent to the lender.

Now that we have a little guidance, how is your mind-set? What are you thinking regarding the funds? What is your ultimate goal? While most people would agree that 100% forgiveness is the ultimate goal, what happens if you have money left over or if the forgiveness calculation does not come up to 100%? Believe it or not, most lenders expect that some balance will be leftover for the majority of borrows. The CARES Act even stipulates the terms of any unforgiven portion of the PPP Loan. If forgiveness does not equal 100% after the lender completes their calculation you have two options. The first is to simply pay the balance back and walk away. The second option is to keep any unused funds and agree to the terms of the loan, which are 2 years at 1% interest.

If you choose option 2, not only will you benefit from a very low interest rate, you will also still have two months before you need to make a payment. The CARES Act stipulates that you do not have make any payments for the first six months of the loan period. Your forgiveness period is 8 – weeks, roughly two months down; the lender has 60 days to respond about forgiveness, we are still only at the 4-month mark leaving you two months before any payment will be required.

I hope this information helps to quell some of the trepidation that seems to be a part of our daily lives. I’ll check in next week with more guidance as it is received.

~Amy