COVID-19 Update on PPP Loan Forgiveness, Program Changes and More
Applying for Paycheck Protection Program Loan Forgiveness, Program Changes and a Possibility of an Extension
Cornell Cooperative Extension educators have been compiling updates on various emergency funding opportunities for agricultural businesses impacted by the COVID-19 pandemic.
In their most recent fact sheet, they provide more information about how farmers now have 24 weeks instead of 8 weeks to spend the PPP funding and get 100% loan forgiveness. Also, you can get exemptions for documented good faith efforts to keep 2020 FTE numbers at the same level as 2019 FTE – recognizing that some workers don’t want to or can’t come back to work yet, that the amount that needs to be spent on payroll has been reduced to 60% (from 75%). Additionally, though the program ended on June 30, there was still over $100 billion left and congress has voted to extend it.
By the time you read this article, the Paycheck Protection Program (PPP) will have ended. Let’s just take a moment to reflect on the federal program that has probably set a Guinness Book of World Record for the number of interim final rules and policy changes in a single Congressional year. But because there is almost $130 billion available as of today, it is unlikely to be dead yet. As we are writing this, the House and Senate just voted to extend it by 5 weeks. If you did not apply for the PPP, but now are wishing you had, stay tuned!
If you received PPP funding, you are now moving into the loan forgiveness portion of the program. According to SBA, you need to apply for loan forgiveness within 10 months after the last day of the covered period (the 8- or 24-week period during which spending PPP dollars is forgivable). At this point, the PPP loan is no longer deferred, and the borrower must begin paying principal and interest.
PPP loan forgiveness has been a moving target, and because of this it has been prudent to take a wait and see approach before applying for forgiveness, especially if you didn’t meet the original conditions to have your loan 100% forgiven (use PPP funds within 8 weeks, 75% for payroll and 25% rent, utilities and mortgage interest).
The Paycheck Protection Program Flexibility Act of 2020, which became law on June 5th, made achieving 100% loan forgiveness much more accessible to businesses. It might make the PPP worth another look if you didn’t feel like you could meet the original terms. It extended the covered period of loan forgiveness from 8 weeks to 24 weeks after the date of loan disbursement. Businesses with PPP funds can opt to use the 8-week period or spend the funds over a 24-week period. The Act also reduced the forgivable amount that needed to be used for payroll to 60% of the loan (from 75%). This increases the forgivable amount that can be used for other allowable non-payroll purposes (rent, utilities, and mortgage interest) from 25% to 40%. SBA has a new forgiveness application available. For most farms, I would recommend using the EZ form rather than the other form as it is much easier to fill out. SBA does not indicate that one form is preferred over the other or required – it is up to your lender to make that determination.
There is some flexibility in what non-payroll expenses can be forgiven. For example, SBA indicated that non-payroll costs are eligible if they were paid during the covered period or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period.
Example: A borrower’s covered period begins on June 1 and ends on July 26. The borrower pays its May and June electricity bill during the covered period and pays its July electricity bill on August 10, which is the next regular billing date. The borrower may seek loan forgiveness for its May and June electricity bills, because they were paid during the covered period. In addition, the borrower may seek loan forgiveness for the portion of its July electricity bill through July 26 (the end of the covered period), because it was incurred during the covered period and paid on the next regular billing date. The exception is that the CARES Act specifically prohibits using the funds for pre-payments of mortgage interest.
Even if you spend your PPP loan within the appropriate time frame and within the allowable percentages, there are some things that could reduce the amount of the loan that is forgiven.
- If you received and EIDL Advance, your loan forgiveness will be reduced by that
- In general, a reduction in full-time equivalent (FTE) employees during the covered period or the alternative payroll covered period also reduces the loan forgiveness amount by the same percentage as the percentage reduction in FTE
To calculate whether the borrower meets the FTE requirement, the borrower must first select a reference period and calculate the number of FTE employees they had during that time:
- February 15, 2019 through June 30, 2019;
- January 1, 2020 through February 29, 2020; or
- in the case of a seasonal employer, either of the two preceding methods or a consecutive 12-week period between May 1, 2019 and September 15,
Then, if the average number of FTE employees during the covered period (8 or 24 weeks) is less than during the reference period, the total eligible expenses available for forgiveness is reduced proportionally by the percentage reduction in FTE employees. SBA finally has defined FTE as 40 hours per week, so 2 part time workers, averaging 20 hrs. per week, is 1 FTE.
SBA does give some leeway in the amount that it would reduce loan forgiveness for documented good faith efforts on the part of employers to meet the FTE requirements. For example, the employees you laid off but then you offered to rehire are generally exempt from the CARES Act’s loan forgiveness reduction calculation, even if they refused to come back to work. This exemption is also available if a borrower previously reduced the hours of an employee and offered to restore the employee’s hours at the same salary or wages. Finally, FTE is not reduced if your workers have requested reduced hours or have quit or been terminated for cause or if you are seasonal, tried to hire and did not have enough applicants. You do need to document these events in writing.
Finally, some farmers were worried that they would be asked to pay back their PPP loan if they ended up having a good season. One concern we heard from growers was “How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?” If your PPP loan was for less than $2 million, you do not need to worry about this In their FAQ dated June 25, SBA said that any borrower that received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. SBA has determined that this is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans and they feel that it is more appropriate to audit larger loans. Given on-going economic uncertainty this makes a lot of sense.