Episode 3 | Forgiveness is Divine: Looking at the 2021 PPP - Frantz Ward Partner Melissa Jones provides insight on the new rules and regulations of the 2021 version of the PPP and gives some ideas as to how your company's participation in the PPP might help your bottom line.
Podcast First Aired: February 16, 2021
Guest & Host
- Click here for the US Treasury Department's bank of all PPP and EIDL-related forms, FAQs, applications and inforamtion released by the SBA.
- Click here for the SBA depository for information and forms regarding the PPP.
- Click here for the SBA 1/29/21 additional FAQs.
Mike Smith: Welcome to another episode of Frantz Ward's podcast series, Shoveling Smoke. I'm Mike Smith, a partner at Frantz Ward, and your host for today's podcast. As we all know, there have been some significant efforts by the federal government to help businesses through the financial hardships presented by the COVID pandemic. Perhaps most important is the Paycheck Protection Program.
Today we're shoveling away some smoke to get some clarity on the new rules and regulations of the 2021 version of the PPP. And to give you some ideas as to how your company's participation might help your bottom line. Here today to provide that clarity, and give us a much needed insight is my partner, Melissa Jones.
Melissa focuses her legal practice in multiple disciplines of creditors' rights, including commercial credit management and enforcement remedies. She provides comprehensive representation of businesses nationwide, in all phases of multifaceted recovery claims. Melissa's also highly skilled in lean management and foreclosure, within the construction industry. Melissa also spends a good deal of her time with family and in her community of Hudson, Ohio. She has three school-aged children, actively involved in various music programs. And Melissa herself is chair of the Hudson High School Music Association. She was also recently appointed as a member of the City of Hudson's planning commission. And when she gets some free time, Melissa tries to get out riding on one of her three horses.
Melissa Jones: Hello. How are you today?
Mike Smith: Good, congrats on the planning commission appointment. I assume that'll be a new adventure for you.
Melissa Jones: It will. I've been a resident of Hudson for over 18 years, and I'm honored to be a part of the planning commission and be involved in the growth and the development process of the city. It'll be a wonderful opportunity.
Mike Smith: It's great to hear that. Hudson's a great community. So let's turn to the PPP. And before we talk about 2021 and the changes, can you highlight for us briefly what the first Paycheck Protection Program accomplished?
Melissa Jones: Certainly. The first round of the PPP supported the employment of over 51 million American workers, in over 80% of the small business payroll, all across all 50 states and territories. More than 80% of the loans have been for $150,000 or less, with an average loan size of about $101,000, which demonstrates that the PPP has been successful in reaching even the smallest businesses. And interestingly enough, more than 70% of the PPP loans have been made to businesses with fewer than 10 employees.
Mike Smith: So it seems like Congress finally got something to work right in targeting the small businesses, huh? That's great.
Melissa Jones: They did. Not with a lot of confusion and continuing developments, but it has been a successful program.
Mike Smith: So for 2021, how much money is the federal government making available?
Melissa Jones: Well, in December of 2020, Congress and the government passed the Coronavirus Response and Relief Supplement Appropriations Act of 2021, a very long mouthful, but that includes the Economic Aid Act, which provides an additional $284 billion in additional PPP funds. It's available to both first and second time PPP borrowers, which is a shot in the arm to small businesses who have already borrowed, and exhausted, their first round of PPP funds. They now have the opportunity to borrow additional funds.
Mike Smith: So, can you outline for us how all this is going to work? Who's eligible? Is it different than the first time around? How do they apply?
Melissa Jones: Certainly. Well, we can break it down into whether the borrower is a first time borrower, meaning they did not receive previous PPP funds, or a second time borrower. As for first time borrowers who can apply, it's eligible small entities, and those are defined by the SBA. There is a size limitation. The entities, with their affiliates, must have 500 or fewer employees. Nonprofits, veterans organizations, tribal concerns, and self-employed individuals, including sole proprietorships, and independent contractors, are included in entities that are eligible to receive PPP funds. However, entities with more than 500 employees, in certain industries that are defined by the SBA, may also be eligible. It really just depends on what type of business that the small business concern is actually running.
Mike Smith: Are there permissible uses for the draw funds? Or limitations?
Melissa Jones: There are. So like the first round, the first draw PPP loans can be used to help fund payroll costs, including benefits. They can help pay for mortgage interest, rent utilities. But unlike the first round, the second round of funds can also be used to fund worker protection costs related to COVID-19, PPE equipment, a lot of Ps going around here. We have PPPs and PPEs. Uninsured property damage costs, caused by looting or vandalism in 2020, and also certain supplier costs and expenses for the small business' operations.
Mike Smith: So you've talked a little bit about what the permissible uses are for the first draw funds, what about forgiveness of the first draw loans?
Melissa Jones: The first draw PPP loans made to eligible borrowers qualify for full loan forgiveness, if during the eight to 24 week covered period, following the loan disbursement, the employee and compensation levels are maintained, the loan proceeds are spent on payroll costs and other eligible expenses, and at least 60% of the proceeds are spent on payroll costs. And that's very similar to the first round of the PPP under the CARES Act.
Mike Smith: And are the second draw borrowers subject to those same conditions?
Melissa Jones: Yes. They are generally subject to the same terms and conditions as the first draws. Second draw funds are available to eligible businesses, nonprofits, housing cooperatives, news organizations, 50(c)(6) organizations. So it expands a little bit on the list of borrowers who are eligible for the first round. The second draw borrowers include nonprofits, housing cooperatives, news organizations, 50(c)(6) organizations, sole proprietary, self-employed workers, and independent contractors, similar to the first round.
Mike Smith: Do the second draw borrower requirements differ than the first draw requirements?
Melissa Jones: They do. In that the second draw borrowers must have 3,300 employees or fewer, per location. The borrower has used, or will use the full amount of its first PPP loan. And the borrower demonstrates at least 25% reduction in the gross receipts in the first, second, or third quarter of 2020, when compared to the same corresponding 2019 corridor.
Mike Smith: And are there limits on how much the second draw can be?
Melissa Jones: Yes. The second draw loan cannot be greater than $2 million, and the second draw borrowers may receive one PPP second draw loan, not to exceed 2.5 times their average monthly payroll costs, in the one year prior to the loan, or the prior calendar year. However, what's interesting is food service and accommodation industry borrowers, hotels, restaurants, any businesses that are classified with a NAICS number beginning with 72, those are eligible for loans for up to 3.5 times their average monthly payroll.
Mike Smith: And what are some of the features of the second draw loan application?
Melissa Jones: It's generally similar to the first draw loan application. You generally have to provide the same documentation that was provided previously. However, no additional documents are required to substantiate payroll costs. If the applicant used calendar year 2019 figures to determine its first draw PPP loan amount, if the borrower used calendar year 2019 figures to determine its second draw PPP loan amount instead of the calendar year 2020, and if the lender for the applicant's second draw PPP loan is the same lender that made the applicant's first draw loan. However, for loans at are in a principle amount greater than $150,000, the applicant must also submit documentation adequate to establish that the applicant experienced a revenue reduction of 25% or greater in 2020 relative to the same quarter as 2019.
Mike Smith: So I'm also hearing that there are certain certifications about business activities that the borrowers must make now. Can you explain what that's all about?
Melissa Jones: Definitely. There was a certification that was required in the first draw application, and that certification is also included in the second draw application. However, second draw applications require some additional certifications, including that the borrower has not, and will not receive another second draw PPP loans, you're only limited to one PPP second draw loan, that the borrower has realized a reduction in gross receipts and excess of 25% in 2020 compared to the same quarter of 2019, and it is not a business concern or entity that's created or organized under the laws of China or Hong Kong. Additionally, small businesses that are engaged in lobbying are not permitted to receive second draw loans. And the borrower must certify that their business is not engaged in lobbying.
Mike Smith: So the second draw loan forgiveness, how does that work?
Melissa Jones: So, what's interesting about the second draw is it expands what is determined to be forgivable non payroll costs. Those now include costs for worker protection expenditures, such as PPE, costs for software, Cloud computing, human resources, accounting needs, any type of business administration issues that had to be addressed due to COVID. For example, many businesses have employees that are now working from home, so businesses had to adjust their infrastructure accordingly. Costs not covered by insurance due to property damage or vandalism, caused by public disturbances in 2020, is also a forgivable non-pay cost, and then supplier costs, which are essential to the borrowers operations. For example, if a restaurant purchased perishable goods, those are essential supplies. Those are also now considered forgivable non payroll costs.
Mike Smith: And so from a timing perspective, what are we talking about in terms of when the program is open? When people should act by?
Melissa Jones: Yeah, the program is open now, and it closes on March 31st. So it's coming up fast. So if a borrower is interested, in applying for a second draw PPP loan, or even a first draw PPP loan, it needs to get its application in prior to March 31st, 2021.
Mike Smith: I know there's been some special concern for specific groups, like minority own businesses. Can you explain how that fits in with what the government's doing with the PPP?
Melissa Jones: Absolutely. The SBA and the government is making a very concerted effort to make PPP funds available for smaller businesses, minority owned businesses, veteran own businesses, women owned businesses, businesses that are located within moderate income or lower income communities. And how they're doing that, there's a lot of ways they are doing that, but for example, they are making $35 billion available for new first draw PPP borrowers, and those funds are being specifically earmarked for the minority owned businesses. And $15 and $25 billion are available for first and second draw PPP loans, respectively, for borrowers with a maximum of 10 employees or less. So they are earmarking funds to make sure they fall into the hands of the smallest businesses, which need the assistance the most.
Mike Smith: So, sounds like there's lots of documentation and constantly changing rules and regs. So let's talk about some resources listeners can go to get some more information.
Melissa Jones: If you just go to the US Treasury Department website, right at the front page you'll see Small Business Relief. You click on that, and there's a wealth of information, and there's a lot of updates that are coming out. There's new application forms that have come out within the last week. For example, there's now a one page forgiveness application for loans that are $150,000 or less, that's form 3508S, we don't need to get into the form names, but that certainly simplifies the process for obtaining loan forgiveness for businesses that are receiving loans less than $150,000.
Mike Smith: So one of the forms that I'm hearing a lot of chatter about is the Loan Necessity Questionnaire, where borrowers have to prove that they truly needed these funds to survive. What can you tell us about that?
Melissa Jones: Sure. So the Loan Necessity Questionnaire will be issued to all the borrowers who receive loans of $2 million or more. So if you received a loan that's less than $2 million, you don't need to worry about this questionnaire. But for those borrowers who have received loans of more than $2 million, the SBA will be issuing a form for you to complete. And it must be returned within 10 days of the borrowers receipt of the form from their lender. It's causing a lot of angst because the questions are directed at explanations and documentation, proving your business operations, how you used the funds. Did you genuinely need the funds? How were the funds used? Were the funds used to make capital distributions? Were the funds used to perhaps pay off some preexisting debt, that would not be covered by the forgiveness qualifications?
However, the SBA did clarify in response to the angst that this questionnaire is causing, they clarified in one of their FAQs that a request to complete the questionnaire does not mean that the SBA is challenging a borrower's certification. And they will be, they being the SBA, will be reviewing and assessing the borrower's certification based on the totality of the borrower's circumstances through a multifactor analysis. And what they really are trying to get at, they being the SBA, they just want to ensure that PPP loan recipients made their good face certifications at the time of the loan application. So even if subsequent developments resulted in the loan no longer being necessary, or perhaps the business did not experience the losses that it anticipated, if at the time that the loan was made, the certification for the necessity loan was made in good faith, that will satisfy the SBA certification requirements.
Mike Smith: So have you got any tips for our listeners as to how to complete this questionnaire?
Melissa Jones: Sure. So there's over 29,000 borrowers that will be asked to complete this questionnaire. That's a lot. So, it's going to be an endeavor for the SBA to be reviewing each of these questionnaires. My recommendation is make it as easy as possible for the reviewer to stamp his or her approval. Gather your facts. Get all your documentation to support your answers. Present all of your facts. Tell your story. There's an optional section that's included on the questionnaire, there's a 1,000 character max, that you have to tell your story, but fill that out. Even if you don't think you need to fill that out, provide as much information as possible. Provide as much detail as possible. You can include certain things, such as what level of cash reserves was sufficient to support the ongoing business operations. What factors were present to allow a business to accurately predict revenues? Just basically tell the story so that the individual at the SBA who's reviewing your questionnaire, it's very easy for them to stamp their approval, and move on.
Mike Smith: That's great advice. So last question, really, is we always have to deal with the dreaded tax consequences of this kind of thing, so anything we should be aware of there?
Melissa Jones: Yes. The IRS recently came out with some clarifications, that the borrower may deduct ordinary business expenses made with their PPP loan proceeds, and that employers can claim the ERC employee retention credit on any qualified wages that aren't counted as payable costs in obtaining PPP loan forgiveness. So any wages that could count towards eligibility for the ERC or PPP loan forgiveness can be applied to either of those two programs, but not both. You just can't double dip. So, that was a very helpful clarification that has been issued by the IRS. And I anticipate additional IRS clarifications will be forthcoming.
Mike Smith: That's great to hear. So, as part of our podcast series, what we're trying to do is have our listeners take away two or three really important points as take away points. Can you sum up two or three points for us, before we leave today?
Melissa Jones: Certainly. The SBA, the IRS, the Treasury Department, the government, they're continuing to regularly disseminate information and clarifications. It's on a regular basis, so be sure to be monitoring updates. Just be aware that things are constantly changing. They're constantly moving. I don't anticipate that the changes will be as fast and numerous as we experienced within the last nine months, but still be aware, and be aware of all updates. Keep in mind the March 31st, 2021 deadline to get your application in for either first or second draw PPP funds. Don't assume anything when you're completing any of the forms, any of the documentations in any step of the process. Your words matter. Review what you're signing. Make sure that you are providing ample documentation, sufficient facts to support your positions, and that your information is correct. It doesn't mean that mistakes can't be made, but make sure everything is as clear and clean as possible.
Mike Smith: Okay, great. Melissa, thanks for your time today. And to recap, the three takeaways from today's discussion. The landscape is changing daily as the government is constantly coming out with clarifications and additional information. So be aware of those, and the March 31 deadline. Second, there are big differences between being a first draw borrower and a second draw borrower, so know which one you are and know the rules. And third, understand what you're signing in terms of certifications and questionnaires, and get professional help in getting those completed. And we will be posting links to some of the resources Melissa mentioned today up on our website. Again, thanks Melissa, and enjoy the next horse ride once it warms up.
Melissa Jones: Great. Thank you very much.
Mike Smith: So, that wraps up another episode of Shoveling Smoke.
Shoveling Smoke is a production of Evergreen Podcasts. Our producer and Audio Engineer is Sean Rule-Hoffman. Thanks for listening.