As I’m sure you’ve heard, there’s a new PPP Loan law that created some significant changes. The details of which we discussed here and here. With new rules come new questions, and the one that keeps coming up from clients is should I still use the 8-weeks or use the 24-weeks? Or can I use any time period in between?
At first glance, having more time and using that time to spend whatever is left of the loan seems to make more sense, however there are a few things to consider.
With the change to 60% instead of 75% for payroll, how does that change your potential forgiveness during the 8-weeks? Could you get most of it forgiven by including more rent, utilities, and other allowable nonpayroll costs than you previously could? Keeping in mind the timing of these costs, which there is some flexibility as discussed here and in the interim final rule on loan forgiveness (page 4 of 7, item number 4a provides a good example).
The big question is what do you think is going to happen with your FTE numbers and wages over 24-weeks versus 8-weeks? Could something happen that would cause you to reduce your FTE count or wages that isn’t covered by one of the safe harbors? Also keeping in mind you may have already spent the PPP proceeds, so you won’t have those funds to keep people through the entire 24-weeks. An example would be if you work with a government entity like ODOT and were working through backlog for most April and May, but looking ahead you’re seeing softer demand and fewer bid opportunities because of budget cuts. In that case, would it make more sense for you to keep the 8-week period?
Another consideration is with a possible drop off in FTEs later this year, if it is due to being shut down because of government requirements then that may not negatively affect you. There is a new safe harbor if you can’t return to the same level of business activity because of requirements from specific organizations. From the law - “Due to compliance with requirements established or guidance issued 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 during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.” This wording is limited and doesn’t include your local or state authorities, however if state or local governments model their rules off guidance issued by these organizations then the impact of their rules should count in this assessment. However, if there isn’t as much work because of state budget cuts, then that likely isn’t going to be covered under this safe harbor. We will see what further guidance says about this safe harbor as it creates questions on what counts and what doesn’t, especially concerning state and local rules limiting your ability to operate.
UPDATED AS OF 6/17/2020 - Consider that the safe harbors as of or before June 30, 2020, increasing FTEs and correcting wage reductions, are now pushed back to on or before December 31, 2020. So, you could use the 8-weeks but have more time to get your FTE numbers back up (say by early August for example) and file once you do that. With the release of a new forgiveness application on June 16, 2020, it has become clearer that you will list your FTE equivalents as of the date you file the application OR December 31, 2020, whichever is sooner. For this safe harbor it is one of those two points in time per the application if there is no further guidance, so even if you had higher employment levels at the end of June, but don’t file until later this year, you can’t go back and use those higher employment levels on your application for this safe harbor. Also, based on the calculations in the application, this safe harbor is all or nothing, so you either have as many or more employees on one of those two dates and it applies, or you don’t. It appears there is no partial credit for restoring some positions if you didn’t restore all of them for this safe harbor based on the application calculations. Something to consider if you had restored employment before June 30, 2020.
The other unknown is if you can use any period between 8-weeks and 24-weeks. Right now, based on the wording in the law as written, it would seem to be one or the other. But a similar issue arose with the change to 60% of costs being spent on payroll instead of 75%. Initially, the law read like it was all or nothing, but Treasury clarified that was not the case, you could still get forgiveness even if payroll wasn’t 60%, so this may be a similar situation. As Treasury issues guidance it may clarify this and allow any period up to 24 weeks, which would make sense to provide some flexibility and remove some of the uncertainty mentioned above.
While we wait on guidance or further changes, we would recommend considering the items above and determining if 8-weeks may suit your company better than 24-weeks. Maybe you will conclude there’s too much risk with potential forgiveness penalties if you wait the 24-weeks, or the potential for risks with additional changes that may come from Congress. Keep in mind that if some of these factors may not affect you or you’re unsure which may be the best course of action, it sounds like you could wait and then choose either the 24-weeks or the 8-weeks after considering some of these factors.
UPDATE AS OF 6/23/2020: Based on the recently released interim final rule (“Interim Final Rule on Revisions to Loan Forgiveness Interim Final Rule and SBA Loan Review Procedures Interim Final Rule”) you can file your forgiveness application before the 24-week period is up and use however much time has passed (12-weeks, 16-weeks, etc.). Also, this interim final rule provides some additional guidance on the safe harbor concerning reduced business activity and provides an example, but it still isn’t completely clear what would qualify. We will continue to look for new guidance on this.
If you want to talk through your individual situations in relation to this or need assistance with modeling out which approach may be better, please contact us.