A key deadline for organizations that received a Paycheck Protection Program (PPP) loan is fast approaching. The PPP has a safe harbor for bringing back Full Time Equivalent (FTE) headcount that is measured on Dec. 31, 2020. Employee headcount is vital to determining PPP loan forgiveness applicability since the purpose of the COVID-19 stimulus program was to help organizations retain their employees. Organizations looking to take advantage of the safe harbor will have to be mindful of their FTE numbers, particularly when completing their PPP loan forgiveness application, which also has stringent timeline guidance. PPP loan forgiveness applications must be submitted to the PPP lender within 10 months of the end of the Covered Period (an 8-week or 24-week tracking period of the PPP loan).
The process for receiving PPP loan forgiveness has been difficult because a number of complicating factors have been delaying PPP lender submissions of the forgiveness applications to the Small Business Administration (SBA). One of those complications may be soon resolved. The SBA recently announced it was going to create a Loan Necessity Questionnaire to help the SBA evaluate the good-faith certification regarding how loan recipients report expenses covered by PPP loans.
This new questionnaire is currently in the comment and review period, and is expected to be finalized soon. Thereafter, the PPP lenders will send the finalized version of the PPP Loan Necessity Questionnaire to PPP borrowers with loans of $2 million or greater. The questionnaire will need to be completed and returned within 10 days of receipt. This additional step will be critical for PPP loan recipients with PPP loans of $2 million or greater; one of the reasons banks may not have submitted loan forgiveness applications to the SBA already pertains to the fact that it was unclear who was responsible for certifying the information submitted by the applicant.
A Quick Recap of Where the PPP Stands
After its initial roll out in the spring, a number of small fixes for the PPP came with the Paycheck Protection Flexibility Act (PPPFA) passed in June. The PPPFA provided more flexibility over the amount of non-payroll related expenses that loan recipients can use the PPP loans to cover. Loan recipients can use up to 40% of their PPP loan for qualified non-payroll expenses with a minimum of 60% of the loan allocated for qualified payroll costs.
Legislators have expressed concern that unless thresholds are observed when qualifying costs, no amount will qualify for loan forgiveness. This has been referred to as the “cliff effect,” and appears to be unintended, yet some still believe further legislation may be needed to clarify and resolve this issue. The amount of guidance banks are looking for plays into the skepticism still hovering over the forgiveness eligibility touted by the COVID-19 stimulus program, and even encourages some borrowers to pay back the loan instead of applying for forgiveness.
Safe Harbor Summary
The PPPFA created a safe harbor for rehiring employees who were laid off due to shelter-in-place or other stay-at-home orders. Loan recipients that can demonstrate they were unable to hire a similarly qualified employee on or before Dec. 31, 2020 are still eligible for forgiveness, but this safe harbor will require detailed documentation to provide a reasonable forgiveness calculation.
Loan recipients that cannot return to full operational capacity may also have additional relief. The PPPFA waives the headcount requirement for organizations that can demonstrate they are unable to resume full operations as a result of guidance from a public health agency, including:
- Centers for Disease Control and Prevention (CDC)
- Department of Health and Human Services (DHHS)
- Occupational Safety and Health Administration (OSHA)
The Covered Period for the loan program is the earlier of 24 weeks after the PPP loan’s origination date or Dec. 31, 2020, and includes headcount calculations relevant before Feb. 15, 2020.
SBA Development and its Impact on Not-For-Profit Organizations
A notice from the SBA released on October 26 signals it will collect additional borrower information in order to evaluate the necessity of PPP loans exceeding $2 million and assist with good faith certification based on the information provided in the original loan application. This information will be captured with two Loan Necessity Questionnaires ‒ one specifically phrased for for-profit and one specifically phrased for not-for-profit borrowers. It is unclear what the final version of the form will be because the SBA is still circulating templates for comment.
The draft Loan Necessity Questionnaire for not-for-profit borrowers includes a set of gross receipts comparisons and questions related to government and voluntary shut-downs of operations, business activity, and liquidity assessments tailored to the eligible types of not-for-profit borrowers. In anticipation of the final form, not-for-profits should begin assembling information to quantify their loan as well as their use of the funds. Clear projections of business activity before the loan was received will be critical in the overall evaluation of necessity of the PPP loan along with a clear assessment of how funds were used and if any other stimulus was provided to the organization under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This will be especially relevant for organizations that used a portion of the funding to cover expenses outside of payroll costs.
Next Steps
Details on timing remain uncertain, but the expectation is that borrowers may have additional paperwork to determine the necessity of their PPP loan. Having detailed records prepared ahead of time will help expedite the process when the SBA comes out with additional guidance. Intentionality will be very important in considering overall forgiveness thresholds, with transparency highly valued in terms of coming to an accurate determination in how the PPP loan was utilized. The PPP borrowers may also want to consult with legal counsel before finalizing and submitting the PPP Loan Necessity Questionnaire.
For more information about the PPP lending program, please contact us.
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Jake is a Director for CBIZ MHM, LLC. in the Philadelphia office. He can be reached at
610.862.2202 or jwmcdonald@cbiz.com.
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