Downtown Fresno SBA district office via interiorintervention.blogspot.com
Written by Frank Lopez
President Donald Trump signed the Paycheck Protection Program Flexibility Act into law in June, bringing some significant changes to the terms of federal relief loans favorable to borrowers.
So far, $669 billion has been distributed during the two rounds of funding for the Paycheck Protection Program (PPP), with $126.5 billion in funding remaining, according to the Small Business Administration.
The relief measures created by the CARES act were designed to usher in a quick economic recovery, but these latest changes (and more anticipated on the horizon) recognize a different reality.
“The way this PPP program was initially designed was with the thought of things recovering really fast,” said Cassidy Jakovikas, president and CEO of MBS Accountancy Corp. in Fresno, “for businesses that still have not been able to open back up to full capacity.”
Remedied under the new terms was the amount of time a borrower had to incur costs to become eligible for forgiveness, which many business owners felt was a short window.
Under initial PPP terms, borrowers had until June 30 to restore reduced staffing and/or salary levels.
The new terms give borrowers until Dec. 31, and it applies to workers and wage reductions made from Feb. 15 through 30 days after CARES ACT was signed into law on March 27.
Another major change comes to the maturity period of a PPP loan being extended from a two-year deadline to five years. This only applies to PPP loans made after the flexibility measure was passed. However, borrowers and lenders will be able to make a deal to extend existing loans.
Jakovikas said in conversations with clients — especially those in restaurants, hotels and even some health care professions — he wasn’t expecting many of them to get their loans forgiven with the short time given to incur costs.
With this timeframe extension, Jakovikas said that he expects a majority of his clients will get their loans forgiven. He said business owners were scrambling for ways to incur costs to make the loans eligible for forgiveness before the end of the 8-week period.
Now, borrowers may also defer principal and interest payments on PPP loans until the U.S. Small Business Administration pays back lenders for any forgiven amounts, rather than the previous six-month deferral period. Borrowers that do not apply for forgiveness now have at least 10 months after the program expires to start making payments.
With the new terms, a borrower who documents they were unable to return to normal business levels from before Feb. 15 due to having to follow federal requirements for sanitization or social distancing will be covered.
Adjustments to the ratio borrowers are allowed to spend on payroll and other expenses should also help businesses deploy funds where they are most needed, but it could also create a cliff for borrowers.
Prior to the term changes, for a borrower to get their loan fully forgiven, they would have had to spend at least 75% on payroll costs, with 25% being allowed to go to other non-payroll costs. Any amount over 25% that was spent on non-payroll costs would have been the amount reduced in a borrowers forgiveness rate.
Under the new terms, payroll requirement costs were lowered to 60%, with non-payroll allowances raised to 40%.
On June 8 the Treasury announced that 60% requirement would not be a cliff for borrowers–meaning that if a borrower spends less than 60% of the funds on payroll they will still get some forgiveness. There was some worry before the announcement that a borrower would not get any forgiveness if they didn’t spend at least 60% of the PPP on payroll costs.
While the economy is opening back up, some industries, such as restaurants, hospitality and entertainment are having trouble either getting back to their old levels of business or rehiring their staff.
Under the new terms, borrowers that document that they were not able to rehire their workers employed as of Feb. 15, or find similarly qualified workers, will still keep the same forgiveness amount.
Spending on unneeded things
Adam Blitz, founder of Streamline CPA Accountancy Corp. in Fresno, is advising clients who have been awarded loans to think long and hard about spending the money.
“I still expect more changes. I still expect more clarification from the Treasury,” Blitz said. “What I’m telling my clients is that if they don’t need to use the money, hold on to the money. Until we get it forgiven, I’m not comfortable with having spent the money.”
But Blitz said that it’s almost impossible for a business to not spend the money.
Blitz said that businesses that paid their employees to stay home during the pandemic rather then putting them in the unemployment system made a big mistake to “virtually stay at home.”
Blitz said that most of the employees probably would have rather have been collecting unemployment knowing that they would be receiving enhanced benefits and then returning to their job in some capacity later on.
With an employer taking out a PPP loan for payroll, employees will not be able to request unemployment for that specific period, and with business picking up again, employers might not have the capital or liquidity to bring back full employment, but just enough to meet the needs of their clientele.
“Anybody that actually spent the money on things that they didn’t need — as in employees sitting at home doing nothing, are really going to be in trouble,” Blitz said.
Modern corporate culture stresses the importance of taking care of employees, Blitz added, but at some point employers need to understand that if there is no business, there is no employee.
Blitz said it is also important for business owners to remember that the IRS will not allow them to deduct wages paid and other expenses that are covered by the loan and forgiven.
“Stay conservative,” Blitz advises. “Personally, I don’t think this is turning around in 2021 — I think its going to be a longer-term issue. There were things that were considered necessities to your customers before this. Those things have been scrapped. If you’re going to make changes to your business, they’re going to have to be long term, and you’re going to have to be ok with that.”
The SBA stated in a press release that, in consultation with Treasury, it will soon issue rules and guidance, a modified borrower application form and a modified loan forgiveness application that implement the new changes.
Dawn Golik, director of the SBA’s Fresno District office, said that the modifications to the PPP terms give business owners more options to help them keep their doors open and pay off their loans.
“As more businesses reopen in Fresno, and around the Valley, these changes will help local companies keep employees, make payroll, and stabilize their operations. They also now have more time to spend PPP funds, and a longer recovery period before any payments are due which is good news,” Golik said.