Updated June 18, 2020
June 5th Update: President Signs The Paycheck Protection Program Flexibility Act
By Nilesh Patel & Brian Sullivan I June 18, 2020 I News
On June 5, President Trump signed The Paycheck Protection Program Flexibility Act of 2020 (the “Act”). The Act provides significant changes to key provisions of the Paycheck Protection Program (PPP) utilized by many hoteliers and other business operators across the nation.
The U.S. Treasury Department is still charged with issuing any additional guidance or rules for implementing the Act’s changes. Additionally, the Small Business Administration (SBA) still remains the actual administrator of PPP funds in dealing directly with approved lenders (and ultimately, borrowers).
Some of the key changes in the Act include the following:
1. Covered Period: The Act now allows borrowers that received PPP loans before June 5, 2020 to use twenty-four (24) weeks from the loan disbursement date to spend PPP proceeds, while also allowing borrowers to elect to use the original eight (8) weeks if they so choose. This is a significant expansion from the original requirement of having to spend PPP proceeds within eight (8) weeks.
2. Loan Expenditures: The Act now requires borrowers to spend at least 60% of PPP proceeds on payroll expenses as opposed to the original 75% requirement. With this change, the remaining 40% can be used to pay eligible expenses (rent/lease, utilities, and mortgage interest).
3. Restoring Workforce: The Act now allows borrowers to restore their workforce and wages to “pre-pandemic” levels by the end of the newly expanded Covered Period (see above) as opposed to the original deadline of June 30, 2020. Additionally, the Act provides a safe harbor provision which protects a borrower’s eligible amount of loan forgiveness if restoration of the borrower’s workforce and wages cannot be adequately attained.
4. Loan term for any unforgiven proceeds: The Act now allows borrowers to pay off any unforgiven loan amount over a five-year term for all PPP loans made on or after June 5, 2020. For loans made before June 5, 2020 the term remains at two-years unless the borrower and lender mutually agree to extend the maturity to five years. The interest rate remains at 1%.
5. Payroll tax deferment: The Act now allows businesses that took a PPP loan to delay payment of their payroll taxes, a practice that was originally prohibited under the CARES Act. Borrowers should of course work with directly with their CPA or other financial professional(s) to ensure compliance and maximize their total tax deferment amount and time period.
The key changes outlined above apply to those individuals who currently have a PPP loan and to those who are looking to secure PPP funding. THLA urges all PPP borrowers to collaborate directly with their lenders if using the new provisions under the Act would be helpful.
The SBA also revised the forgiveness instructions, the forgiveness application, and created a forgiveness application for borrowers who are self-employed and have no employees; OR did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees; OR experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%. of uses of their loan.
All three documents can be found here.
Note: PPP funds are still be available to borrowers. If you have not secured PPP funding yet but think this SBA lending program could be helpful to your business operations, we urge you to contact an SBA-approved lender as soon as possible to determine your eligibility and apply.
As always, THLA attorneys are happy to assist with answering any questions regarding the Paycheck Protection Program.
Earlier Updates
May 27 update related to forgiveness: On May 24, the SBA released the first version of the Paycheck Protection Program Loan Forgiveness Application that contains information regarding the forgiveness portion of the PPP loan. This application clarifies a few questions that individuals have regarding the PPP. These clarifications include things like, a helpful calculation of both the full-time equivalent and wage/salary reduction provisions that would reduce the amount of debt forgiven, a creation of a new “Alternative Payroll Covered Period” that allows borrowers to align the 56-day period with their own payroll period and the supporting documents that will be required for submission with your application.
Payroll Documentation: Documentation verifying the eligible cash compensation and non-cash benefit payments from the Covered Period or the Alternative Payroll Covered Period consisting of each of the following:
a. Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
b. Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period:
i. Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941); and
ii. State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state.
c. Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the Borrower included in the forgiveness amount (PPP Schedule A, lines (6) and (7) on the application).
FTE Documentation (at the election of the Borrower):
a. the average number of FTE employees on payroll per month employed by the Borrower between February 15, 2019 and June 30, 2019;
b. the average number of FTE employees on payroll per month employed by the Borrower between January 1, 2020 and February 29, 2020; or
c. in the case of a seasonal employer, the average number of FTE employees on payroll per month employed by the Borrower between February 15, 2019 and June 30, 2019; between January 1, 2020 and February 29, 2020; or any consecutive twelve-week period between May 1, 2019 and September 15, 2019.
The selected time period must be the same time period selected for purposes of completing PPP Schedule A, line 11 on the application. Documents may include payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state. Documents submitted may cover periods longer than the specific time period.
Non-payroll costs Documentation: Documentation verifying existence of the obligations/services prior to February 15, 2020 and eligible payments from the Covered Period.
a. Business mortgage interest payments: Copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the Covered Period; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments.
b. Business rent or lease payments: Copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the Covered Period; or lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments.
c. Business utility payments: Copy of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks, or account statements verifying those eligible payments.
Please note that the SBA could issue additional guidance that would amend, add, or take away from what is set out in this initial application. As we continue to receive updated information, we will update you. In the meantime, if you have any questions regarding the PPP please do not hesitate to contact one of the THLA attorneys.
May 4 update: Once again, the Treasury released new guidelines for the PPP. One important piece of new guidance deals with employers attempting to rehire employees:
Question: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?
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.
On April 15th, Treasury released these new guidelines, modifying the PPP program. We updated this guide to reflect Treasury’s new rules. Hoteliers should work closely with their lenders on PPP loans, as the legal framework on the COVID-19 response is changing rapidly.
On March 27, the federal CARES Act was signed into law, providing over $2.2 trillion in federal stimulus spending to aid the U.S. economy.
One of the most important aspects is the Paycheck Protection Program (PPP). Note that the SBA is still writing regulations on the PPP. Here is what we know about the program now.
Forgivable loans: The Paycheck Protection Program (PPP)
The PPP is perhaps the most valuable program in the CARES Act for businesses with fewer than 500 employees. This SBA loan provides assistance to businesses affected by the COVID-19 crisis to help keep employees working.
If the business meets the necessary conditions of the loan, a portion of it will be forgivable. Here are the basics of what you need to know about the PPP.
Loan application periods:
Businesses can apply for a PPP loan between April 3, 2020, and June 30, 2020. For PPP loan forgiveness purposes, the “covered period” is the eight-week period beginning on the date the lender makes the initial disbursement to the borrower.
Loan eligibility:
A hotel business must have less than 500 employees and have been operating on February 15, 2020. In addition to a corporation, the “business” can also be a sole proprietor or a self-employed individual to be eligible for a PPP loan.
Loan size, term, rate, and where to get a loan:
Borrowers can calculate their total payroll costs using data either from the previous 12 months or from calendar year 2019. For seasonal businesses, the borrower uses the average monthly payroll for the period between February 15, 2019, or March 1, 2019 and June 30, 2019. If you were not in business during that time, the maximum loan is equal to 250 percent of your average monthly payroll costs between January 1, 2020 and February 29, 2020.
The absolute cap is $10 million per loan.
The loan will mature within 2 years of issue.*
The interest rate for a PPP loan will not exceed 1 percent.*
You can apply through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult with your local lender as to whether it is participating. Visit www.sba.gov for a list of SBA lenders, and you can view the loan application here.
* Note that there has been conflicting guidance on the loan term and interest rate. The CARES Act passed by Congress allows for loans up to 10 years with a maximum interest rate of 4%. The Treasury Department issued guidance indicating the loans should be for a 2-year term with a rate of 1%.
Loan forgiveness.
The best benefit of a PPP loan is that a portion of the loan may be forgivable within a year from the loan date. You can submit a request to the lender that is servicing the loan. The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage interest, lease, and utility obligations. You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on forgiveness within 60 days.
Note that at least 75% of the loan proceeds must be used for payroll costs, or the loan will not be eligible for forgiveness.
The amount of forgiveness on a covered loan is equal to the sum of the following payroll costs incurred during the covered 8-week period (8 weeks starting from the date of the first disbursement) compared to the previous year’s time period, proportionate to maintaining employees and wages (excluding compensation over $100,000 per employee). These costs include payroll costs, plus any payment of interest on any covered mortgage obligation (not including any prepayment or payment of principal on a covered mortgage obligation), plus any payment on any covered rent obligation, plus any covered utility payment. See the calculation information below.
“Payroll costs” include the sum of payments of any compensation with respect to employees, including:
- salary, wage, commission or similar compensation
- payment of cash tips or equivalent
- payment for vacation, parental, family, medical or sick leave
- allowance for dismissal or separation
- payment required for the provision of group health care benefits, including insurance premiums
- payment of any retirement benefit, or
- the employer’s payment of state or local tax assessed on the compensation of employees.
“Payroll costs” do not include the following:
- the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period (i.e. compensation above the $100,000 threshold),
- taxes imposed or withheld under Chapters 21 (Social Security and Medicare taxes, employee and employer portion), or 24 (withholding obligations from employees) of the Internal Revenue Code of 1986
- any compensation of an employee whose principal place of residence is outside of the United States
- qualified sick leave wages and qualified family leave wages, in each case, for which a credit is allowed under the Families First Coronavirus Response Act.
How to calculate loan forgiveness eligibility:
The forgivable amount is the sum of the following costs incurred during the covered eight-week period after the loan’s initial disbursement date, subject to certain exclusions. However, the maximum forgiveness amount will be reduced if the payroll is reduced. Here is how to calculate the forgiveness available.
Step (1): Add the following costs for the covered eight-week period:
- payroll costs (as previously described)
- payments of interest on any liability of the borrower that is a mortgage on real or personal property and that were incurred before February 15, 2020 (covered mortgage obligation)
- payments on any rent obligated under a leasing agreement in force before February 15, 2020 (covered rent obligations)
- payments for a service for the distribution of electricity, gas, water, transportation, telephone or internet access for which service began before February 15, 2020 (covered utility payments).
Step (2): Multiply the added costs from in Step (1) by the average number of FTEs per month (see page 7) during the covered eight-week period beginning on the loan funding date in 2020.
Step (3): Divide the figure calculated in Step (2) by either of the following (chosen by the borrower):
(a) The average number of FTE employees per month employed by the borrower during the same eight-week period in 2019, or
(b) The average number of FTE employees per month employed by the borrower during the period beginning on January 1, 2020 and ending on February 29, 2020.
The result is the maximum loan forgiveness available, but note that if your total payroll expenses on workers making less than $100,000 annually decreases by more than 25 percent in the eight-week covered period, the maximum loan forgiveness will be decreased by the same amount of payroll reductions. If you have already laid off some employees, you can still be forgiven for the full amount of your payroll cost if you rehire your employees by June 30, 2020.
Economic Injury Disaster Loans (EIDL) and the PPP
If you took out an Economic Injury Disaster Loan (EIDL) between February 15, 2020 and June 30, 2020 and you want to refinance that loan into a PPP loan, you will add the outstanding EIDL loan amount to the payroll sum. Add, notably, if you received up to a 10k cash advance under EIDL and you received a PPP loan it is possible that cash advance will be reduced from the total forgivable amount under PPP. Your lender will make this determination at the time of forgiveness.
FAQ: Below is some common questions hoteliers are asking regarding the PPP.
Can a hotel use the PPP loan proceeds to pay other expenses like insurance premiums, franchise fees, or property taxes?
If you use the PPP loan proceeds for other hotel operating expenses aside from what is eligible above, this portion of the loan will not be forgiven. The eligible items for forgiveness are noted above. When you apply through your lender for forgiveness on your loan, the application must include:
- Documentation verifying the number of employees on payroll and pay rates, including IRS payroll tax filings and State income, payroll and unemployment insurance filings;
- Documentation verifying payments on covered mortgage obligations, lease obligations, and utilities; and
- Certification from a representative of your business or organization that is authorized to certify that the documentation provided is true and that the amount that is being forgiven was used in accordance with the program’s guidelines for use.
If we are not obligated to pay back the loan for 12 months, does the loan accrue interest during those 12 months? Or does interest start to accrue after the 12-month period?
If the full principal of the PPP loan is forgiven, the borrower is not responsible for the interest accrued in the 8-week covered period. The remainder of the loan that is not forgiven will operate according to the loan terms agreed upon by you and the lender, at a 1% interest rate.
Can I receive multiple loans under the CARES ACT? (Economic Injury Disaster Loan, Emergency Grant, and PPP)?
It appears that the Emergency Economic Injury Grant recipients and those who receive loan payment relief through the Small Business Debt Relief Program may apply for and take out a PPP loan. Meaning, you could possibly obtain both if approved. Notably, the SBA lender you choose to obtain your loans through will be able to answer the specifics on what you can loan and what you cannot.
If I received money under the Emergency Injury Disaster Loan, do I have to refinance that into my potential PPP loan?
Refinancing your EIDL loan is an option and is not a requirement for the forgiveness portion. However, you would want to talk with your lender about what would make the most sense for you.
Who can show me what the terms of the loan would look like on each loan?
We highly recommend that you find a lender who will be able to offer these types of loans when they soon become available. The lender will be able to discuss the terms on each loan and what that would look like specifically for you. Lenders who can assist can be found here.