Dear Clients and Friends,
As we previously communicated, the Treasury Department released some guidance (PPP Guidance) related to the Payroll Protection Program (PPP) on Tuesday, March 31. As part of the release, it communicated that the application process would open today and that it would be on a first-come, first-served basis. Although the guidance released on Tuesday did address some of the uncertainty related to the PPP, several questions remained unanswered, namely the required documentation and level of due diligence required by the banks processing the loans. Despite the uncertainty, banks and interested applicants, together with their attorneys and CPAs, have been working at a rapid pace to prepare for the application process.
In a dramatic move, last evening the Treasury Department released further guidance, which we have attached. Below is a highlight of the key provisions of the new guidance:
- New Application – A revised version of the application is now available, which is attached. Although similar to previous versions, we recommend that you review the new application. (Revised Application)
- First-come, First-served – The guidance specifies explicitly that the loans are “first-come, first-served”. While we believe it is prudent to complete and submit an application to your bank as soon as possible, banks will also need time to process this new guidance, as a considerable portion of it pertains specifically to them. We understand that several banks have already communicated to their clients that they will be unable to process loans today.
- Independent Contractors – Both the new guidance and instructions to the application have been clarified to explicitly exclude compensation paid to independent contractors from the definition of “payroll costs”, as well as from the calculation of the forgivable portion of the loan. Payroll costs used to calculate “Average Monthly Payroll” should therefore be limited to the organization’s W-2 employees.
- “Average Monthly Payroll” Period – This remains an area of uncertainty. The new guidance contains no reference to seasonal employers or new businesses that were not operating throughout 2019. It also provides a step-by-step method for calculating “Average Monthly Payroll” that involves totaling aggregate payroll costs “from the last twelve months” and dividing by 12. However, this is inconsistent with the instructions provided in the application itself (paragraph 2, page 3) which still states, “For purposes of calculating ‘Average Monthly Payroll,’ most Applicants will use the average monthly payroll for 2019…” Given the conflicting directions, we would suggest you have a defensible position under either methodology, though we will generally lean toward the method prescribed within the application itself.
- EDIL Loans – If you have outstanding principal on an Economic Injury Disaster Loan made between 1/31/20 and 4/3/20, that outstanding principal is added to the maximum loan amount, effectively increasing the PPP loan value dollar-for-dollar.
- Interest – It appears that interest will begin to accrue at the time funds are distributed, and that the maximum loan forgiveness amount includes both principal and any accrued interest. So a loan that is 100% forgivable will have both the principal and any accrued interest forgiven. Interest will also be at a flat rate of 0%, which differs from the amount prescribed in the previous borrower fact sheet (0.5%).
- E-signatures – E-signatures are expressly accepted.
- Non-payroll Costs – Whereas the previous guidance suggested requests for forgiveness where > 25% of forgivable costs were non-payroll related (e.g., rent and utilities) may not be entirely forgivable, this guidance eliminates any of the uncertainty. Payroll costs must comprise no less than 75% of the balance of a loan forgiveness request.
Please contact us if you have any questions or require any assistance with the application.