Paycheck Protection Program: the latest updates on forgiveness, - - PowerPoint PPT Presentation

Paycheck Protection Program: the latest updates on forgiveness, change in ownership and audits, and what’s next

October 29, 2020

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Disclaimer

All information, content, and materials contained in this publication/program are for informational purposes only. This publication/program is intended to be a general overview of the subjects discussed and does not create a lawyer-client relationship. Statements and opinions are those of the individual speakers, authors, and participants and do not necessarily reflect the policies or

• pinions of DLA Piper LLP (US). The information contained in this publication/program is not, and

should not be used as, a substitute for legal advice. No reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this publication/program and should seek legal advice from counsel in the relevant jurisdiction. This publication and the program may qualify as “Lawyer Advertising,” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome. DLA Piper LLP (US) accepts no responsibility for any actions taken or not taken as a result of this publication/program.

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Plan for our time together

1.Welcome

Federal stimulus update

• 2. Recent PPP updates

Clarifications and supplemental guidance

• 3. Forgiveness

Process and audits

• 4. Change of ownership

SBA guidance: lenders and borrowers

• 5. Closing

What’s next and Q&A

1

Mac Bernstein

Partner, Federal Law and Policy T: 202 799 4302 mac.bernstein@dlapiper.com

Michael “Mick” Helmicki

Client Development Executive T +1 703 773 4142 michael.helmicki@us.dlapiper.com

Tami Howie

Partner, Corporate T +1 202 799 4555 tami.howie@us.dlapiper.com

Presenters

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Federal stimulus update

• The PPP closed to new loans on August 8, 2020 with $134 billion of

congressionally approved funds remaining unspent

• Paycheck Protection Program (PPP) borrower focus shifts to forgiveness; on

June 16, Form 3508 (v2) and Form 3508EZ were released

• The Small Business Administration (SBA) and Treasury announce that

recipients of loans of $2 million or more should expect an audit if they apply for forgiveness; safe harbor for loans of < $2 million protects a small borrower from a PPP audit based on its good faith certification

• On August 17, SBA issues 23rd IFR that details appeals process for

businesses that disagree with SBA’s PPP loan forgiveness decision

• New guidance issued by the SBA on October 23 describes the procedures

required for changes of ownership of an entity that has received PPP funds

• Progress on a new stimulus bill, including a potential PPP2, remains slow;

Democrats proposed a $3 trillion stimulus (the HEROES Act) which was countered by the Republicans’ $1.1 trillion proposal (the HEALS Act)

PPP: by the numbers

Number of PPP loans: 5,212,128

Source: Small Business Administration and Department of Treasury statistics

$659 billion

Funds authorized

$525 billion

Net dollars loaned

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• 1. Welcome

Federal stimulus update

• 2. Recent PPP updates

Clarifications and supplemental guidance

• 3. Forgiveness

Process and audits

• 4. Change of Ownership

SBA guidance: lenders and borrowers

• 5. Closing

What’s next and Q&A

2

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Clarifications and supplemental guidance

• Amounts incurred at the end of the covered period and paid after end of covered period are included
• Amounts incurred before start of the covered period and paid during the covered period are included
• No acceleration of costs into covered period
• Cash compensation does include bonuses and commissions
• Employer paid health insurance does include dental and vision
• Business owner limitations and de minimis ownership threshold

Forgivable payroll costs Forgivable non-payroll costs

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• Amounts incurred at the end of the covered period and paid after end of covered period are included
• Amounts incurred before start of the covered period and paid during the covered period are included
• No acceleration of costs into covered period
• Related party leases and limitations
• Transportation costs

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Clarifications and supplemental guidance

• Based only on hourly rate or base salary
• Extrapolated through 24 weeks

Salary/wage reduction penalty FTE reduction penalty

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• Loan forgiveness otherwise available may be reduced based on the quotient of x/y
• x = average number of non-owner FTEs per week during the covered period
• y = average number of non-owner FTEs per week during either:

 the period beginning 2/15/19 and ending 6/30/19 OR  the period beginning 1/1/20 and ending 2/29/20

• Safe harbors and exceptions apply

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FTE calculation: safe harbors and exceptions

• No reduction to the number of employees or the average hours of paid employees between 1/1/20

and the end of the covered period

• Unable to operate between 2/15/20 and the end of the covered period at the same level of business

activity as before 2/15/20 due to compliance with…

• Borrower reduced FTE levels in the period beginning 2/15/20 and ending 4/26/20; AND borrower

then restored FTE levels by not later than 12/31/20 to its FTE employee levels in the borrower’s pay period that included 2/15/20

Safe harbors Exceptions

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• Positions for which the borrower made a good faith written offer to rehire an individual who was an

employee on 2/15/20 and the borrower was unable to hire similarly qualified employees for unfilled positions on or before 12/31/20

• Positions for which the borrower made a good-faith written offer to restore any reduction in hours, at

the same salary or wages, during the covered period and the employee rejected the offer

• Any employees who during the covered period were fired for cause; voluntarily resigned; or

voluntarily requested and received a reduction of their hours

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Special rules for business owners

Tax entity type Cap on business owner cash compensation: 8-week covered period Cap on business owner cash compensation: 24-week covered period Eligible business owner non-cash compensation C Corporation1 Lessor of $15,385 or 8-week equivalent

• f the 2019 amount

Lessor of $20,833 or 2.5 month equivalent of the 2019 amount ER-paid health ins., ER-paid ret. benefits capped at 8-weeks or 2.5 month equivalent of 2019 amount, ER-paid state/local payroll taxes S Corporation1 Lessor of $15,385 or 8-week equivalent

• f the 2019 amount

Lessor of $20,833 or 2.5 month equivalent of the 2019 amount ER-paid ret. benefits capped at 8-weeks

• r 2.5 month equivalent of 2019

amount, ER-paid state/local payroll taxes2 Partnership Lessor of $15,385 or 8-week equivalent

• f the 2019 amount3

Lessor of $20,833 or 2.5 month equivalent of the 2019 amount3 None (included in self-employment earnings)

1

These rules do not apply to C Corporation or S Corporation shareholders that hold a stake of less than 5%

2

Employer paid health insurance is excluded for this purpose since it is reflected in W-2. Employer paid health insurance for family members of >=2% S Corporation shareholder should also be excluded

3

For this purpose , the 2019 amount represents self-employment earnings (net of section 179 expense, unreimbursed partnership expenses and oil/gas depletion) multiplied by 0.9235

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Putting it all together

Payroll Health benefits Retirement benefits State and local payroll taxes Covered rent obligations Covered mortgage obligations Covered utility obligations Thresholds No more than

40%

At least

60%

Covered period (first loan disbursement) 8 weeks Sooner of 24 weeks or 12/31/20 OR Costs eligible for forgiveness Reductions in forgiveness

Reference period Covered period

• 2. Level of reduction in the average number of FTE employees
• 3. Reduction in an employee’s compensation by more than

25% (annualized salary of $100K or less)

• 1. Must meet the 60% threshold on eligible payroll expenses for forgiveness

Safe harbors and exceptions based

• n inability to

hire/rehire; return to same level of business activity

www.dlapiper.com 11

• 1. Welcome

Federal stimulus update

• 2. Recent PPP updates

Clarifications and supplemental guidance

• 3. Forgiveness

Process and audits

• 4. Change of ownership

SBA guidance: lenders and borrowers

• 5. Closing

What’s next and Q&A

3

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Loan forgiveness milestones and timelines

Borrower receives PPP loan (disbursement date)

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Borrower submits complete PPP loan forgiveness application through lender portal 24-week covered period to track use of loan proceeds

Note: Borrowers who received PPP loans before June 5, 2020 can elect to use the original 8-week covered period as an alternative

Lender provides borrower’s loan forgiveness application to the SBA

Note: Borrowers can complete a PPP loan forgiveness application before the end of the covered period until up to 10 months following the end of the covered period

60 days for lender to review borrower’s loan forgiveness application and supporting documentation SBA to remit forgiveness amount to lender 90 days for SBA to review borrower’s loan forgiveness application and supporting documentation Lender to notify borrower of SBA remittance of loan forgiveness amount (or SBA determination that no amount

• f loan is eligible for forgiveness) and, if

applicable, borrower’s first date of repayment Borrower’s first date of repayment (if applicable)

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Forgiveness application

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3508 3508EZ

• PPP Loan Forgiveness form
• Representations and certifications
• PPP Schedule A
• PPP Schedule A worksheet
• PPP Borrower Demographic Information

form (Optional)

• PPP Loan Forgiveness form
• Representations and certifications
• PPP Borrower Demographic Information

form (Optional)

The borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form (SBAForm 2483). The borrower did not reduce annual salary or hourly wages of any employee by more than 25 percentduring the covered period or the alternative payroll covered period (as defined below) compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, “employees” means only those employees who did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000) AND The borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the covered

• period. (Ignore reductions that arose from an inability to rehire individuals who were employees on February 15, 2020 if the borrower was unable to

hire similarly qualified employees for unfilled positions on or before December 31, 2020. Also ignore reductions in an employee’s hours that the borrower offered to restore and the employee refused) The borrower did not reduce annual salary or hourly wages of any employee by more than 25 percentduring the covered period or the alternative payroll covered period (as defined below) compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000) AND The borrower was unable to operate during the covered period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19

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Forgiveness amount calculation

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3508 3508EZ

Payroll and non-payroll costs Line 1: Payroll costs (enter the amount from Schedule A Line 10) Line 2: Business mortgage interest payments Line 3: Business rent of lease payments Line 4: Business utility payments Adjustments for FTE and salary/hourly wage reductions Line 5: Total salary/hourly wage reductions (enter amount from Schedule A, Line 3) Line 6: Add the amounts on lines 1, 2, 3, and 4, and then subtract the amount in line 5 Line 7: FTE Reduction Quotient (enter the number from Schedule A, Line 13) Potential forgiveness amounts Line 8: Modified total (multiply line 6 by line 7) Line 9: PPP loan amount Line 10: Payroll cost 60% requirement (divide line 1 by 0.60) Forgiveness Amount Line 11: Forgiveness Amount (enter smallest of lines 8 , 9 and 10) Payroll and non-payroll costs Line 1: Payroll costs (enter the amount from Schedule A, Line 10) Line 2: Business mortgage interest payments Line 3: Business rent of lease payments Line 4: Business utility payments Potential forgiveness amounts Line 5: Add the amounts on lines 1, 2, 3, and 4 Line 6: PPP loan amount Line 7: Payroll cost 60% requirement (divide line 1 by 0.60) Forgiveness amount Line 8: Forgiveness amount (enter smallest of lines 5, 6 and 7)

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Loan forgiveness application and process

PPP loan forgiveness application and instructions

PPP Loan Forgiveness Calculation form PPP Schedule A (unless qualified for 3508EZ) PPP Schedule A worksheet PPP Borrower Demographic Information form (optional) Supporting documents (relating to payroll, employee headcount, tax forms, business mortgage interest, rent and utility payments)

1. 2. 3. 4. Lender Portal for PPP Loan Forgiveness

• Borrowers may seek forgiveness of PPP

loans before the end of the covered period (or alternative covered period), so long as all proceeds of the PPP loan which are eligible for forgiveness have been spent

• The lender is charged with reviewing its

borrower’s loan forgiveness application, and must provide the SBA with its decision on loan forgiveness within 60 days of receipt

• f the completed application
• The lender must also notify the borrower of

its decision

• If the borrower’s loan forgiveness application

is denied, or if only a portion of the loan is forgiven, the borrower must repay the non- forgivable portion of the loan by the maturity date of the loan

• Borrowers have 30 days to appeal a denial
• f loan forgiveness, and the SBA has

indicated that it will issue additional guidance on this process

Lender review

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PPP audit focus

• The SBA Administrator will consider whether a borrower was eligible for a PPP loan under the CARES

Act and SBA rules/guidance available at the time of the borrower’s application

• SBA, in consultation with the Department of the Treasury, has determined that the following safe

harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith

• Focus on good faith certification that “[c]urrent economic uncertainty makes this loan request

necessary to support the ongoing operations of the Applicant.”

Eligibility Loan amount

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• The SBA Administrator may review whether a borrower calculated the loan amount correctly
• The SBA decided, in consultation with the Department of Treasury, that it will review all loans in

excess of $2 million; reserved the right to also audit loans in any amount at any time; and will likely spot-check loans in lower amounts

• If SBA decides to audit a loan, SBA will notify the lender in writing, and the lender then will notify the

borrower in writing within five business days of the correspondence from the SBA

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PPP audit focus

• The SBA Administrator will analyze whether the borrower used the proceeds for the purposes

Congress enumerated and in line with the CARES Act's central purpose of keeping workers paid and employed

• Proceeds will need to have been spent on allowable uses specified under the CARES Act: payroll costs,

interest on mortgages, rent, utilities, and interest on any other debt obligations incurred before February 15, 2020

Use of proceeds Loan forgiveness calculation

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• The SBA Administrator will analyze whether the subject borrower calculated its expected loan

forgiveness amount properly on its application (the SBA Form 3508, 3508EZ or a lender's equivalent form)

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• 1. Welcome

Federal stimulus update

• 2. Recent PPP Updates

Clarifications and supplemental guidance

• 3. Forgiveness

Process and audits

• 4. Change of ownership

SBA guidance: lenders and borrowers

• 5. Closing

What’s next and Q&A

4

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SBA PPP Consent Notice: changes in ownership

At least 20% of the common stock or

• ther ownership in the PPP borrower

is sold (one or more transactions)

Change in ownership event

PPP borrower sells or otherwise transfers at least 50% of its assets (one or more transactions) PPP borrower is merged with or into another entity PPP borrower must notify the lender and provide transaction documents Did borrower use all PPP loan proceeds? Borrower selling over 50% interest Did borrower submit forgiveness application to lender? Will borrower set up escrow account?

Yes Yes Yes No No No

SBA prior approval required SBA prior approval not required

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Changes in ownership: considerations

• Regardless of a change in ownership, the PPP borrower (and, in the event of a merger, the successor to the PPP

borrower) remains responsible for all of the following:  Performance of all obligations under the PPP loan  The certifications made in connection with the PPP loan application, including the certification of economic necessity  Compliance with all other applicable PPP requirements  Obtaining, preparing, and retaining all required PPP forms and supporting documentation and  Providing the required forms and supporting documentation to the PPP lender or lender servicing the PPP loan, or to the SBA upon request.

• Some changes in ownership may require SBA approval, with the SBA having 60 calendar days to review and

provide a determination of its approval

• If there is a sale of 50%+ or a merger, and the PPP note has not yet been fully forgiven or paid, one of the

requirements is that the PPP borrower establish an escrow account controlled by the PPP lender in the amount

• f the outstanding PPP loan balance
• If circumstances allow and the borrower has the ability to satisfy the loan in full or otherwise comply with the

escrow requirements, in each case prior to closing, then the SBA’s documentation and approval process as set

• ut in the Notice can be avoided

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• 1. Welcome

Federal stimulus update

• 2. Recent PPP updates

Clarifications and supplemental guidance

• 3. Forgiveness

Process and audits

• 4. Change of ownership

SBA guidance: lenders and borrowers

• 5. Closing

What’s next and Q&A

5

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A look ahead: what’s next

• A new stimulus bill containing a second stimulus check is not going to

become law in the remaining days before the November 3 election

• Focus has turned to the lame duck period from November 4 to January 19 as

the best possibility for a stimulus package before January 20, the start of the next presidential term

• Democrats and the White House have most recently proposed $2.2 trillion

and $1.9 trillion relief packages, respectively

• Despite the similar target price tags for legislation, the sides still have not

resolved disputes over testing, extra unemployment insurance, state and local government relief and liability protections for businesses, among other issues

• President Trump said in a recent press briefing, “After the election, we'll get

the best stimulus package you've ever seen,” and former Vice President Biden has published the outline of a stimulus plan of his own which includes stimulus checks for qualified Americans, more unemployment benefits and relief for small businesses

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Thank you and Q&A