Written by Jeffrey Markarian, CPA: Dedekian, George, Small & Markarian
COVID-19 has had a devastating effect on the American economy, and agriculture has been especially hard hit. To help provide economic relief, various federal legislation has been enacted, including the Coronavirus Aid, Relief and Economic Security (CARES) Act. As part of the CARES Act, the Small Business Administration (SBA) received funding and authority to establish the “Paycheck Protection Program” (PPP). The PPP is a forgivable loan program that was established as an incentive for small businesses to keep their workers on payroll during this financially difficult time. As of June 5, 2020, the SBA had received total funding from Congress in the amount of $659 billion, and had approved 4,525,081 loans totaling approximately $511 billion.
If you are one of the many small business owners in the agricultural industry that has received a forgivable PPP loan, you must apply for forgiveness of your PPP loan by submitting an SBA “Loan Forgiveness Application” to the lender servicing your PPP loan, as the loan is not automatically forgiven. As a result, it is imperative that you plan now to maximize the forgiveness of your loan.
The SBA has continued to provide additional guidance throughout the PPP in response to ongoing requests for assistance and clarity. Also, on June 5, 2020, the Paycheck Protection Program Flexibility Act (PPPFA) was enacted, which provides PPP loan recipients with increased flexibility in utilizing PPP loan proceeds. Most significantly, The PPPFA has extended the period to use funds from eight weeks after the date of receipt of loan proceeds to twenty-four weeks. Borrowers receiving PPP loan proceeds prior to June 5, 2020, retain the option to use an eight-week covered period if desired. Please note that all of the following information includes the changes resulting from the PPPFA.
The original intention of the PPP was to keep employees paid for the eight-week period beginning with the date loan proceeds are received. As mentioned above, recent legislation has extended this to a twenty-four-week period. Expenses to be paid with loan proceeds include payroll costs and specific non-payroll costs.
Payroll costs include the following:
- Salary, wages, commissions, or tips (limited to $15,384.62 per employee for the covered period)
- Employee benefits (including payments for vacation, parental, family, medical, or sick leave; allowance for dismissal or severance pay; group health care benefits; payment of retirement benefits; and state and local taxes assessed on compensation)
Non-payroll costs include the following:
- Interest on mortgage incurred before February 15, 2020
- Rent on lease agreement in force before February 15, 2020
- Utilities (including electricity, gas, water, transportation, telephone or internet) for which service began before February 15, 2020
To be eligible for full loan forgiveness, at least 60% of the loan must be used for payroll costs and not more than 40% for allowable non-payroll costs. If less than 60% of the loan is used for payroll costs, the borrower is still eligible for partial loan forgiveness. The first iteration of the PPP required 75% of the funds to be used for payroll or only part of the loan would be forgiven, but the PPPFA decreased the required percentage.
What happens if your PPP loan is not forgiven? Any portion of your PPP loan that is not forgiven will be required to be paid back over a 2-year period at 1% interest, with payments deferred for ten months from the date of the PPP loan disbursement. However, for PPP loans approved by the SBA on or after June 5, 2020, the PPP loan maturity is increased to 5-years.
On May 15, the SBA released its long-awaited PPP forgiveness form and instructions for borrowers to apply for forgiveness (please note that a modified forgiveness form is pending as a result of the PPPFA). The form also provides detailed information related to the documentation required to be provided with your loan forgiveness application. It is important to review the documentation requirements; as extensive documentation may be required to be submitted depending upon your eligible expenses submitted for forgiveness. Although the release of the form by the SBA brought with it significant changes to the interpretation of some components of forgiveness that were not previously known, additional guidance and clarity is still needed on some of the components of forgiveness. Changes were made to the following components of the program based on the release of the form:
Covered payroll periods – Under original guidance, the covered payroll period began immediately after loan disbursement and lasted eight weeks. The PPPFA has increased the covered payroll period to twenty-four weeks. For those with payroll schedules that did not align with the disbursement and covered period, this generated many questions and concerns. However, this latest guidance indicates that the eight-week period may begin starting with the borrower’s first payroll following disbursement, not necessarily on the day of disbursement. This alternative period only covers payroll costs, not other allowable expenses, although adjustments do exist for other allowable expenses.
Incurred and/or paid expenses – The CARES Act originally indicated that, for costs to be covered under PPP, they would need to be incurred and paid during the eight-week period (increased to twenty-four weeks by the PPPFA). The latest guidance, however, forgives costs that are incurred, but not paid, as long as they are paid on or before regular billing date. This expansion applies to costs such as mortgage interest, rent, utilities, and payroll incurred during the loan period. Payroll costs incurred during the last payroll period but not paid during the covered or alternative periods (mentioned above) may be forgiven if those payroll costs are paid on or before the next regular payroll date.
Full-time equivalent (FTE) employee counts and wages – The guidance also included several clarifications to the FTE employee count and wage calculations necessary for forgiveness including:
- FTE calculation can be rounded to the nearest tenth – The formula to calculate an FTE is average number of hours paid per week per employee/40, rounded to nearest tenth (differs from Affordable Care Act calculation).
- Wage reductions must be analyzed on a per employee annualized basis – Salary or hourly calculations should be done on an average annualized basis compared to period of Jan. 1, 2020, to March 31, 2020. If the average for the twenty-four week period is 25% less than first quarter of 2020, loan forgiveness will be reduced, unless the reduction is restored at equal to or greater levels by December 31, 2020, then forgiveness will not be reduced.
- Safe harbor exists for borrowers who rehire lost employees by December 31, 2020, at the same level as of Feb. 15, 2020. Forgiveness will not be reduced.
- Safe harbor exists for borrowers who made good faith written offer to rehire employees who then refused. Forgiveness will not be reduced.
- Safe harbor exists for borrowers who fired employees for cause, voluntarily resigned, or voluntarily requested and received reduction in hours. Forgiveness will not be reduced.
Here is a quick rundown of the changes made by the PPP Flexibility Act.
|Criteria||Prior Guidance||Current Guidance|
|Covered Period*||8 weeks from PPP loan disbursement||The earlier of 24 weeks from date of loan disbursement or Dec. 31, 2020.|
|Usage of Funds||Minimum of 75% of funds must be used for payroll to with a maximum of 25% for non-payroll costs to achieve forgiveness||Minimum of 60% of funds must be used for payroll with a maximum of 40% used for non-payroll costs to achieve forgiveness. If 60% of loans are not used for payroll, forgiveness is calculated on a sliding scale.|
|Extension of Safe Harbor for Compensation & FTE Reductions||Salary or hourly wage reductions must be reinstated by June 30, 2020, to avoid reduced forgiveness||Salary or hourly wage reductions have until Dec. 31, 2020, to be restored to avoid reduced forgiveness|
|Deferral of Loan Payments||6 months from loan origination date||Earlier of 10 months after the last day of Covered Period or when SBA remits the loan forgiveness funds to lender|
|Loan Maturity||2 years||Loans originated after June 5, 2020 – 5 yearsLoans originated prior to June 5, 2020 – Borrowers and lenders may mutually agree to extend the maturity date of loans to 5 years|
|Safe Harbors Based on Employee Availability, Rehiring, New Hires||None||Forgiveness would not be reduced if borrowers can document in good faith:-Inability to rehire individuals employed on Feb. 15, 2020-Inability to hire similarly qualified employees by Dec. 31, 2020|
|Safe Harbors Based on Employee Availability in Compliance with HHS, CDC, or OSHA guidelines||None||Forgiveness would not be reduced if borrowers can document in good faith the inability to return to same level of business activity as before Feb. 15, 2020, due to compliance with requirements issued by HHS, CDC, OSHA from the period of March 1, 2020, to Dec. 31, 2020|
Also of note:
- *Borrowers may elect to stick with the 8-week covered period for loans originating prior to June 5, 2020. However, it is not clear if the June 30, 2020, safe harbor deadline still applies.
- The amount of any Economic Injury Disaster Loan (EIDL) refinanced will be factored in when determining the percentage of proceeds for payroll costs.
- It is unclear whether compensation limits formerly prorated based on 8 weeks now prorated based on 24 weeks.
- It is unclear if the covered period may end prior to 24 weeks if funds have been used.
Further rules and guidance are expected to be issued from the SBA, including a modified borrower application form, and a modified loan forgiveness application that will included the changes resulting from the recently enacted PPPFA; however, please do not hesitate to contact us for further assistance with your PPP loan questions and help maximizing your loan forgiveness.
Dedekian, George, Small & Markarian Accountancy Corporation
8080 North Palm Avenue, Suite 201
Fresno, California 93711-5797