SBA Clarifies Its PPP Loans in 4 Important Ways

With the release of its Paycheck Protection loan forgiveness application, the U.S. Small Business Administration sheds light on several long-standing questions

SBA Clarifies Its PPP Loans in 4 Important Ways

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Hundreds of thousands of small businesses that took Paycheck Protection loans finally have a path to getting their loans forgiven, but much delayed guidance released by the federal government is nowhere near final.

On Friday, the U.S. Treasury and Small Business Administration released an 11-page loan forgiveness application with instructions on how to complete it. While the document clarifies a number of administrative queries, such as when, exactly, does the eight-week covered period begin, it fails to address several key issues. Those include whether bonuses can count as cash compensation, and how quickly forgiveness will work. The agencies also noted that the SBA would “soon” issue regulations and guidance to further assist borrowers and lenders. There’s no timeline for this next release.

The good news is, there’s no need to rush to apply for forgiveness, says Ami Kassar, the founder and CEO of MultiFunding, a small-business loan adviser based in Ambler, Pennsylvania. “You won’t be able to apply for forgiveness for at least 56 days after you received your PPP disbursement,” he says, “and in many cases, it will not make sense to apply until after June 30,” the date for when the covered period ostensibly ends.

In the meantime, here are four ways the application provides more clarity for business owners with PPP loans.

1. Shows a more flexible view of the eight-week covered period

The eight-week, or 56-day, covered period begins as soon as the loan funds reach a borrower’s account. But in practice that doesn’t always make sense–particularly for businesses whose pay periods may not correspond to that loan disbursement date. The forgiveness application allows some wiggle room. For “administrative convenience,” the SBA says borrowers can now elect an “alternative payroll covered period,” which would be timed with the first day of the next pay period following their PPP loan disbursement date.

For example, the SBA notes that if a business owner received her PPP loan proceeds on Monday, April 20, and the first day of her company’s next pay period begins Monday, April 27, that constitutes the first day of the alternative payroll. Note that the alternative payroll covered period does not apply to non-payroll costs.

2. Affirms that costs incurred–but not paid–during the covered period count toward forgiveness

Businesses don’t have to contort their normal bill-paying and payroll processes to conform with PPP. For business owners who pay rent on the first of the month, but don’t get their PPP disbursement until mid-month, this next point should be reassuring. The forgiveness loan application says eligible, non-payroll costs must be paid during the eight-week covered period or incurred during that time and paid on or before the next regular billing date, even if the billing date is after the covered period. Similarly, eligible payroll costs incurred but not paid during the eight-week period are covered if paid on or before the next regular payroll date.

3. Clarifies the timing of when a PPP loan must be spent

Prior to the application’s release, it wasn’t clear if a business owner had to spend the full amount of her PPP loan within the eight-week covered period to receive any forgiveness. Indeed, strict interpretations held that loan forgiveness depended on a business owner’s ability to spend 75 percent of a loan’s proceeds on payroll costs within the eight-week covered period.

That’s not the case. Instead, the application confirms that any amount spent during the covered period on allowable expenses, like payroll costs or rent, may be forgiven. But not all of a loan’s proceeds must be exhausted during the eight-week period. “There’s still a significant incentive to have the money spent over the eight weeks” to get a loan forgiven, says Chuck Morton, partner and co-chair of the corporate group at Venable, a Washington, D.C.-based law firm. “What this says now is that at least it’s not all or nothing.”

4. Confirms the level of reduced loan forgiveness for noncompliance

If a company’s head count or payroll costs don’t match pre-crisis levels, the amount of forgiveness will fall in most cases. Prior to the current application’s release, however, accounting firms were merely guessing about how much forgiveness would be reduced if a business failed to meet those two requirements. The actual calculation is based on a number of factors such as employee head count, if lower than pre-crisis levels, and employee pay, if wages drop by more than 25 percent for workers who earned $100,000 or less in 2019.

“The penalty discussion is new,” says Kassar, and “it’s not something you can just explain in five minutes.” Indeed, there’s a complicated worksheet for calculating forgiveness, but at least now the numbers are firm and businesses can ascertain what their level of forgiveness might look like in their own unique situations, he adds. 

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