PPP Loans: Forgiveness, Timeline, Implications, and Next Steps

Image: calculating the costs and benefits of PPP loan forgiveness

We are at a moment in time that economists, historians, journalists, psychologists, the medical profession, and politicians will be writing about and discussing for decades to come.

The sudden and precipitous economic collapse was not caused by a supply and demand imbalance or financial deleveraging as in previous recessions but by an epidemic quickly turned pandemic that caused the world’s economy to shut down. This was a scenario that was resident previously only in disaster scenario planning but has never been experienced as a reality until now.

The Federal Reserve, using broad based tools developed and derived from previous financial crises, moved rapidly to inject liquidity and backstops into the system to keep it from collapse. Congress also moved swiftly to enact a dizzying array of relief packages to individuals, both large and small businesses, states and municipalities, hospitals, health and human services and other too many to list

As a part of that, the Paycheck Protection Program, otherwise known as the PPP, was enacted to provide a direct incentive for small businesses to keep their workers on the payroll, which included a provision for partial loan forgiveness.

Intent and Implementation

On March 27, 2020 the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law with overwhelming bipartisan support to address the economic fallout from COVID-19. The intention of the CARES Act was to provide fast and direct economic assistance to workers, families, and small businesses. A significant component of the CARES Act was the Paycheck Protection Program (PPP). The purpose of the PPP was to provide small businesses with the resources they needed to maintain payroll and employees.

PPP was implemented by the Small Business Administration (SBA) with support from the Department of the Treasury and initially funded with $349 billion. Within days of funding, lenders participating in the program were overwhelmed by companies requesting loans and the SBA website was overloaded by applications. After 13 days the total amount funded was exhausted. To meet the overwhelming demand for these loans, Congress authorized an additional $310 billion in funding for the program in late April.

Updates and Further Guidance on PPP Loan Forgiveness

During this time, controversy surrounding PPP loans erupted regarding public companies receiving PPP funding that was intended for primarily small businesses with little access to sources of capital.  In addition, some lenders were accused with playing favoritism and promoting PPP loans primarily to their largest customers. The result was a threat by the Department of Treasury to audit borrowers’ representations regarding the economic necessity of applying for these loans and to take legal action against those that could not provide adequate support. Many businesses responded by returning their PPP loan proceeds. This action by the Treasury was also blamed for a significant drop in the volume of applications. The subsequent drop in the number of applications forced the SBA to issue a de minimis exception related to the audit threat: borrowers who received less than $2 million in PPP loans were deemed to have certified an economic necessity in good faith to be able to apply for and receive these loans.

While applications were pouring in, there was very little guidance on the mechanics surrounding the rules of the program. All that was known was that eligible borrowers could receive 2.5 months of their eligible payroll costs in the form of a potentially forgivable loan guaranteed by the SBA. On April 1, 2020, the SBA issued the first of many Interim Final Rules on the PPP, followed by the first of what would be many FAQ’s two days later.

On May 15, 2020, the SBA issued its first form for borrowers related to applying for loan forgiveness. The issuance of this form and application finally provided some clarity on some key terms and definitions associated with loan forgiveness process, including accounting for eligible payroll or non-payroll related costs. Borrowers learned that these costs could be either paid or incurred during the covered period of the PPP loans, assuming the costs met the specific definition of incurred, the SBA’s definition of a full-time equivalent employee (FTE) and how to calculate those FTE’s. Further, specifics were provided on exemptions and safe harbors from salary and wage reductions that could otherwise reduce the forgivable amount of a PPP loan.

At 12 pages, many of which included very detailed calculations, the application has proved to be daunting. As a Forbes article stated that “the biggest problem with the new guidance is that you will likely need a lawyer, accountant, and advanced degree in mathematics to figure out how to calculate the forgivable portion of the loan.”

Three areas of specific contention that arose after the loan forgiveness application was released were:

  1. the percentage of proceeds that borrowers were required to use for eligible payroll costs to receive forgiveness
  2. the time period over which the reimbursable costs had to be paid or incurred, and
  3. the safe harbor date for restoring headcount and salaries or wages

As written in the First Interim Rule by the SBA and the US Treasury, and as further defined in the loan forgiveness application, the program required borrowers to use 75% of the loan amount for eligible payroll costs over an eight-week covered period. Many borrowers were struggling to meet this requirement as their business were closed or operating at reduced capacity due to COVID-19 restrictions, resulting in reduced staff levels while other expenses such as rent remained fixed. The initial guidance also used June 30, 2020 as a safe harbor date to restore FTE reductions or salaries and wages. However, many businesses were concerned that June 30 was an impossible safe harbor target date as restrictions and closures related to COVID-19 lingered and economic activity continued to be anemic.

The PPP Flexibility Act of 2020

In response to the criticisms, the PPP Flexibility Act of 2020 was passed and signed into law on June 5, 2020, again with overwhelming bipartisan support. The Flexibility Act:
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  • increased the covered period from 8 weeks to an optional 24 weeks
  • reduced the eligible payroll cost requirement from 75% to 60%
  • changed the exemption and safe harbor date through the end of 2020
  • changed the maturity on all loans approved after June 5, 2020 to five years, as opposed to the two years in the original legislation.

Following passage of the Flexibility Act, the SBA issued a revised loan forgiveness application, a new EZ loan forgiveness application, and multiple revisions to its Interim Final Rules. The revised loan application reflects the changes and splits the actual form and instructions into two separate documents, though combined they are still 12 pages and remain no simpler.

A significant change in the revisions to the Interim Final Rules is that borrowers no longer need to wait until the end of the covered period to file the loan forgiveness application, thus allowing for a covered period of less than 24 weeks. There is a catch, however – if a borrower has employees with a salary or wage reductions greater than 25%, the amount by which the reduction exceeds 25% must be extrapolated over the entire 24 weeks and subtracted from the potential forgiveness amount.

Current Situation: PPP Loans Extended

On June 30, 2020, after more than 20 Interim Final Rules or revisions to Interim Final Rules, revising and issuing new loan forgiveness applications, and 48 FAQs, the deadline for submitting loan applications passed with approximately $130 billion in funds remaining available in the PPP program. However, with four hours left to go before the June 30, 2020 application deadline, the Senate, in a surprise move, unanimously approved a five-week additional extension to the program. The House of Representatives subsequently passed the extension legislation on July 1, 2020 and the President signed it into law on July 4, 2020, thus making the new deadline for submitting PPP loan applications August 8, 2020.

Considerations When Moving Forward

In addition to the inherently complicated nature of PPP loans, there is much that borrowers should consider regarding the impact of COVID-19 and the loan forgiveness process when making business decisions. Not only should business leaders take into consideration the unique circumstances of staying afloat during a global pandemic, but the long-term strategic impacts must not be neglected.

Whether your company needs tactical advice regarding your PPP loan or you are seeking strategic business management approaches, vcfo is here to help. Click here to request your free consultation.




Here are some another resource you may find valuable:

Webinar: Your PPP Loan – Further Updates and Expectations

Information presented is subject to further change as additional guidance may be released by the SBA, the US Treasury Department, the Internal Revenue Service or other governmental authorities. Information presented does not include all scenarios or situations that may apply. Information included here does not represent legal advice. vcfo recommends further discussion with legal counsel regarding legal questions related to the information presented. Please contact us should you have further questions.