The Paycheck Protection Program loan forgiveness form is now available.
In this virtual chat, attorney Mike Zahrt of Foster Swift talks about the next steps you need to take to ensure forgiveness for your PPP loan.
Transcript:
Julie: Good morning. Thanks for joining us live today. I’m Julie Holton and I’m joined by Foster Swift Attorney Mike Zahrt. Mike thanks for joining me this morning.
Mike: Hey thanks for having me back.
Julie: Yeah so Mike we talked just a few weeks ago about the paycheck protection program. We were just saying it feels like it was just yesterday that you were talking about what it would take for businesses to apply for this loan program. Now here we are talking about the next steps in this program. So for those who are kind of tuning in let’s first talk through what the paycheck protection program is and then why these next steps are so important.
Mike: Sure. Yes, so when we last talked the program just became available and we suggested that pretty much every small business should apply for this right now because at the time it was billed as free money who doesn’t love free money. That’s still the case so it’s a loan available through the SBA that you can use primarily for payroll costs. You can use it for other things like rent, utilities, mortgage, interest payments, but it’s primarily designed to give you an eight-week bridge loan to use to bring people back off of a layoff and get them back receiving their paycheck. So that’s the primary advantage of the program and then the incentive of taking out this loan is that if you spend it the way you’re supposed to spend it’ll be forgiven. The SBA will pay off your loan in full and that is essentially free money. Obviously, the big catch then is making sure that you jump through all those forgiveness hoops to make sure that it’s truly forgiven.
Julie: Okay so let’s talk through that a little bit. So the SBA just put out the application. So if a business was granted you know applied for and was granted this PPP loan that’s not where their process ends, they still need to go through this next step in the process. So what is this next step, Mike?
Mike: Right so the next step now is you know you’re everyone’s usually in their covered period by now and some of you might be a long way through right we’ve got a couple of people are into their fifth or sixth week of the eight-week quote on quote covered period that you have to spend the money in. So I guess one thing to address upfront is that if you want full forgiveness of the PPP loans you’ve got to spend the whole thing in that 8 weeks covered period and the Secretary of Treasury is very clear that they’re not going to extend any relief on that. There’s been some chatter about maybe we can get this stretched out, there’s still congressmen talking about that, but as things stand right now if you want the whole thing forgiven you’ve got to spend it in the whole 8 weeks and if you’re one of the people that were early to apply for this you’re probably over halfway through the program. So you’re really in the process now of forecasting out you know how many employees do we have? What are we paying them? Am I satisfying these three tests? Which we should probably talk about what those three tests are. So there’s the 10,000-foot view here we’ve got three of them. We have an employee census, we have a weight-reduction test, and what I’m calling the 75% test. The first test looks at the number of full-time equivalent employees you had previously you get to pick your period there are two measuring periods, but you essentially go back either 2019 or the beginning of 2020 and you look at how many full-time equivalent employees do I have? So if I’ve got somebody working over 40 hours a week that’s one I’ve got somebody working 20 hours a week they count for half. You do this calculation for every employee and then you forecast you’re covered period. How many people do I have now? Have I laid off people? Have I furloughed people? And the whole purpose of this first test is to incentivize you to bring those folks back off of layoff get them back on payroll and the idea is that if you don’t they’re going to reduce your eligible forgiveness amount by essentially the percentage of people you didn’t bring back. So if I’ve got a hundred employees and I leave 25 of them on layoff that’s you know 75 percent of my previous FTE level. I’m only going to be eligible for 75 percent loan forgiveness on my PPP loan that remaining 25 percent it’s going to be a true loan, not going to be forgiven. So that’s the purpose of the first test, get people back off of a layoff, back off of furlough, get them back on the payroll. They have a second test that it’s kind of a hedge against employers bringing people back but really dialing back their wages right. So they say okay well we’ll bring you back to work but you know I was paying you 20 dollars an hour now I’m only going to pay you 15 an hour. Well, they don’t want that either. They want people you know it’s the Paycheck protection program right they’re not protecting your paycheck if you’re on making you know less than you were. So that’s this the 7th of this wage reduction test. This is kind of a similar concept to the first steps. We look back at what people were making during the first quarter of the year we look at their hourly rate, we look at the hourly rate that they’re receiving now and if it’s below a certain threshold it reduces your forgiveness dollar for dollar. So if I bring you back, but I cut your pay in half there’s this formula you apply and it’s going to reduce my eligible forgiveness amount by essentially the exact same dollar amount that I should have paid them to make them equal to what they’re being paid before. So it’s essentially just preserving the status quo and if you reduce it too much we’re going to penalize you and treat it as a loan instead of forgiveness. So that’s the second test and then the third test wasn’t actually in the statute it came out in the interim final rules. It’s this requirement that 75% of your loan proceeds have to be spent on payroll costs. Payroll costs are not just wages and things like health insurance premiums, employer contributions to retirement plans, those types of things. So it’s a pretty big bucket. So reaching 75% shouldn’t be too much of an issue, but the idea is you’ve got to hit 75% to achieve full forgiveness. The good news there is that the application clarified that this isn’t a cliff. It’s not an all-or-nothing test which is previously how it was written there was you know if you spent seventy-four percent on payroll costs, sorry you’re just completely ineligible for forgiveness and I think the outcry there was that’s too harsh of the rules. When they came out with the application they softened to the requirements a bit and essentially came up with a sliding scale or if you don’t hit 75% that’s fine but it’s going to reduce the amount that you can get forgiven on those non-payroll processes like utilities, your electric bill, and that type of thing. So it was good news out of this application, but you know that’s the 10,000-foot view of this. It’s important to keep in mind that those tests do operate independently. So just because you do know really well-bringing people back to work. If I bring everybody back and I’m at a percent of what I was before but I’ve really throttled back their wages it doesn’t matter that I did great on the employee headcount test, I’m still going to get dinged on the wage test and they operate independently. So if I don’t do a good job with bringing people back off the layoff and I throttle back their wages of people I do bring back. I’m going to get doubled dinged. So it’s important to keep those in mind just because you did really well on one doesn’t mean that you can just stop paying attention to the rest of these.
Julie: Okay so obviously Mike those three factors are key to figure this out. What resources are available to help business owners as they sort through this and see where they are.
Mike: Yeah so this is really going to be a team effort of all of your business advisers. I realize it’s self-serving of the lawyer to say don’t DIY this, but this is you know this is the difference between having free money and having a loan and you’re not just going to be paying the interest if you get this wrong, it’s this is a loan. So if you got $100,000 and you really screw this up instead of having a hundred thousand dollars of free money you’ve got to pay back a hundred thousand plus interest. So you want to get this right if your goal is full forgiveness and the people you turn to are I can think of three at least. You know you’re going to be working closely with your banker because the bank is actually the person that forgives the loan right. They’re going to process your forgiveness application, they’re going to be the ones telling you what documentation you need to produce and it’s just the SBA comes in and pays off your bank. That’s really their only role for most of these small loans. So work closely with your banker because they’re going to be the ones actually forgiving your loan. The second it’s going to be your CPA this requires a lot of documentation to prove to your banker that you satisfy these forgiveness tests. So are you talking about bank statements, pay registers, payroll tax filings, and there’s a lot of stuff that goes into proving you know we paid these payroll costs, we’ve paid enough payroll costs and it’s typically going to be your CPA that’s got access to that information or at least can help you compile it in an organized fashion and then the third, of course, is your attorney because you want to make sure you’re applying these tests correctly. We covered just the very basics of it here, but you go to the SBA website pull up the application, you can see that you know the test are tricky, they’re not very well worded, they give you a formula, but you want to make sure you’re applying those formulas correctly. There are carve-outs for the headcount test, there are carve-outs for the weight reduction test. So if you find yourself in any of those situations that are unique to your business that’s really where you want to be working with your attorney to make sure that you understand the rule correctly and that you are applying it correctly. Another thing that attorneys can help you with is the actual application process to get your loan forgiven. So the application does a nice job of telling you the information you’ve got to fill out. What goes on what line, what supporting information you need to provide, but where an attorney can provide value to you is making sure that that talks to the statute, that’s your bankers is going to be looking at and essentially organizing that in a manner that’s really easy for your banker to read. So you essentially want to hold your banker’s hand, walk them through it and say look you know here’s where I satisfy the first test, here’s right satisfy the second test, here’s where I satisfy the third test, here’s line entitled the full forgiveness of my loan and you want to make it easy for them right because if you remember when you applied for this PPT loan, it was kind of a feeding frenzy. Everybody wanted to get in before the money ran out and most people are going to be within the same week or two windows when it comes time to forgiveness. So just like your banker was really treading water on the front end, he’s going to be in the exact same situation on this back end. So make it easy on them it’s going to be easy for you to qualify for that full loan forgiveness too and I guess with all that mind I want to take a moment to shamelessly plug our webinar that’s coming up Thursday at 10:00 a.m. We are hosting, yes there it is, our webinar you can see the link to our website there and on that landing page, you’ll see a link to register. Registration is free you can ask questions in advance. So if you have specific questions on the application process for forgiveness you know to make sure that you’re submitting those we did a good job with trying to work those into the presentation last time. We plan to do that again this time. If you attended our last one, it was a bit more high-level information on just what are the rules? How do we think they’re going to resolve some of these ambiguities? Now with this new forgiveness application, we have some resolution to those ambiguities. So I think the way we are going to do this one is more of a case study kind of a sample company and walk you through what their forgiveness application is going to look like and then use those to kind of highlight the changes in what the statute says the rule is versus what the applications kind of changed the rule to be because they don’t perfectly match up. So I think that’s a webinar that would be worthwhile for a lot of people that are trying to do that forecasting, making sure they achieve full forgiveness.
Julie: This will be so helpful Mike. So again free webinar Thursday at 10:00 a.m. and if you have questions in fact if you have questions feel free to ask them now. Mike, we do have a question from Vicki Hamilton Allen. So I’m going to go ahead and ask you this now because I think this is a great question. She’s asking aren’t these assessments and forgiveness terms finalized now or are they still fluid informing?
Mike: Great question. They’re very much still fluid. We do not have any new interim final rules that talk about how these rules should apply. So the way we’re looking at these new requirements in the application and new formulas for how to apply these forgiveness reduction rules. We are essentially treating them with the force of law, even though they’re not. It’s just an SBA form. What we think it is a foreshadowing for rules that should be hopefully forthcoming soon, but you know the way this process is work its information is kind of trickled out. There hasn’t been just you know kind of every so often a big new rule that makes a lot of clarifications. They might issue one or two FAQ’s one day and a small interim final rule the next day and the information sort of trickles out. So it’s very much not finalized yet. I mean the application is so I think that you’re safe to rely on that when you’re making your forecasts, but the application was not resolved all the ambiguities. So if your business finds itself in a situation where you know the application is still unclear on the issue, you want to be making sure that you’re tracking it and checking in with your lawyer every so often to see if there’s been any update on those items.
Julie: Such a great time to emphasize. Mike, you talked about it earlier, but kind of having that full business fair to me know business is really right now is looking to you the guidance from their attorney, the CPA, from their banker. Of course, this is a time when you really need that care team to help us through this. So Mike what happens if a business doesn’t get full forgiveness?
Mike: Yeah you know it’s not the end of the world. I mean you know still make sure that you’re doing your absolute best and some of that is just making sure I understand the terms. So we’ve had people that have thought that payroll cost is just wages and they’re really worried that you want you to pull forgiveness and just the realization that it says more than wages that’s health insurance premiums and all this other stuff, that alone is kind of a relief. So just making sure you understand the rules goes a long way, but even if you do that you’ll apply all of the rules and you just got money left over that’s fine. You know you’re not achieving full forgiveness is not the end of the world. Yeah, I think having a good attorney and other business advisors in their corner might be able to do some creative planning you might be able to you know pay some costs you might not have thought of to achieve full forgiveness, but let’s say you don’t. I mean you have two options really. I mean one is you keep the money and it’s a cheap line of credit right and for some businesses that’s great. It’s 1% interest payable over two years, there’s a six-month deferment before payments begin. So when you’re not going to find financing options through a bank that you. So if you have to keep it and use it as a loan, that’s you know it’s not the end of the world. The other option is that there is a six month with deferment period and you can prepay you’d be loan without penalty. So if you get to the end of your forgiveness period and you didn’t use it all, just pay the rest back. No, it’s not going to penalize you to say and I got a hundred-thousand-dollar loan, I spent eighty-five thousand dollars of it and I just you know didn’t have the expenses for the rest of the 15. Pay it back early, you know they’re not going to ding you extra for giving the money back. So don’t think that you need to lose sleep at night trying to come up with additional expenses or you know if you’ve already got the rule satisfied. Don’t hire staff you don’t need or spent expenses that are going well past you know this eight-week covered period just for the sake of using up your long proceeds. You got to think the big picture here and it’s not that killing you if you don’t get the whole thing forgiven.
Julie: This is so helpful Mike and I imagine that more case studies like these are exactly what you’re going to be talking about on Thursday. I’m going to go ahead and put this graphic up one more time and we’ve got the details for you for those of you who are watching in the post. Webinar on Thursday so today mike has really given us this big-picture overview answering some of these key questions about how to ensure forgiveness of your PPP loan. On Thursday Mike Zahrt and Taylor Gast will be together for this webinar really diving into some more of these details to help you have a better understanding. If you have specific questions you can email Mike. Mike, what’s a great way to get a hold of you if people have questions that they’d like to have you include for the webinar?
Mike: Yeah email or phone call is fine. You know if you go to our firm web page it’s very easy to search for professionals. It’s got all of my contact information there. So a phone call or email works great.
Julie: Okay Mike thanks so much for taking the time this morning to talk through this.
Mike: Yes, thanks for having me.
Julie: Absolutely and we will see you back here on Thursday at 10 a.m. for the webinar. Alright, thanks, Mike. Take care.