ppp loans: guidance on use of proceeds and forgiveness

The Paycheck ProtectionProgram Flexibility Act of 2020: Impact on the

Use and Forgiveness of PPP Loan Proceeds

Andrew KoblenzExecutive Vice PresidentLegal and Regulatory AffairsNADA

Douglas I. GreenhausChief Regulatory CounselEnvironment, Health and SafetyNADA

DISCLAIMER PART I

• This webinar will focus on the Paycheck Protection Program established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as amended by the Paycheck Protection Program Flexibility Act (PPP Flexibility Act), and on guidance issued by the Small Business Administration (SBA) and the Department of Treasury (Treasury).

• Since additional guidance from the government is expected, the analyses, information and recommendations presented in this webinar are likely to change over time.

• Monitor NADA’s Coronavirus Hub for new or updated information.

DISCLAIMER PART II• This webinar neither provides nor constitutes legal advice. All content

and materials are for general information purposes only.

• As necessary, dealers should consult an attorney familiar with dealership operations and the federal, state and/or local laws at issue for advice with respect to specific legal matters.

• Dealers also should consult with accounting and banking advisors to evaluate how the analyses, information, and recommendations presented in this webinar may apply to their specific circumstances.

THE USE AND FORGIVENESS OF PPP LOAN PROCEEDS

• The Paycheck Protection Program (PPP) is complex.

• There are unresolved issues on several topics, but the focus today is on the impact of the PPP Flexibility Act.

• SBA/Treasury’s guidance to date answers some, but not all, questions.

• NADA has developed and distributed extensive guidance.

KEY QUESTIONS FOR TODAY• What are the key elements of the PPP to consider when thinking about forgiveness?

• How does the PPP Flexibility Act affect each of these elements:

– What uses of PPP loan proceeds are allowable;

– What uses of PPP loan proceeds may be forgiven;

– Will my anticipated forgiveness be reduced; and

– Can I avoid any reduction in my anticipated forgiveness.

• What other changes were made by the PPP Flexibility Act?

• What are the key forgiveness application considerations?

THE KEY ELEMENTS OF THE PPP TO CONSIDER

• Element 1: What uses of PPP loan proceeds are allowable?– Substance– Timing

• Element 2: What uses of PPP loan proceeds may be forgiven?– Substance– Timing

THE KEY ELEMENTS OF THE PPP TO CONSIDER

• Element 3: How might my anticipated forgiveness be reduced?– 60%/40%– Pay Level – Headcount

• Element 4: How can I avoid any reduction in anticipated forgiveness?– Headcount– Pay Level– New PPP Flexibility Act safe harbor

KEY QUESTIONS FOR TODAY• What are the key elements of the PPP to consider when thinking about forgiveness?

• How does the PPP Flexibility Act affect each of these elements:

– What uses of PPP loan proceeds are allowable;

– What uses of PPP loan proceeds may be forgiven;

– Will my anticipated forgiveness be reduced; and

– Can I avoid any reduction in my anticipated forgiveness.

• What other changes were made by the PPP Flexibility Act?

• What are the key forgiveness application considerations?

FOR WHAT EXPENSES MAY PPP LOAN PROCEEDS BE USED?

• Substantive uses (not changed by PPP Flexibility Act)

– Payroll Costs.– Salaries and commissions excluded from Payroll Costs.– Rent, including rent under lease agreements.– Utilities.– Interest on any “mortgage” obligation. – Interest on “other debt” obligations incurred before 2/15/20.– Other purposes generally allowed under SBA Section 7(a) programs.

• Timing (changed by PPP Flexibility Act)

– Allowable expenses incurred from 2/15/20 through 12/31/20.

KEY QUESTIONS FOR TODAY• What are the key elements of the PPP to consider when thinking about forgiveness?

• How does the PPP Flexibility Act affect each of these elements:

– What uses of PPP loan proceeds are allowable;

– What uses of PPP loan proceeds may be forgiven;

– Will my anticipated forgiveness be reduced; and

– Can I avoid any reduction in my anticipated forgiveness.

• What other changes were made by the PPP Flexibility Act?

• What are the key forgiveness application considerations?

WHAT ALLOWABLE USES ARE FORGIVABLE?• General consideration

– Forgivable uses narrower than allowable uses.

• Substantive uses (not changed by PPP Flexibility Act)

– Payroll Costs.– Rent, including rent under lease agreements.– Utilities.– Interest on any “mortgage” obligation.

WHAT ALLOWABLE USES ARE FORGIVABLE?• Timing (changed by PPP Flexibility Act)

– Originally, to be forgivable, expenses had to be incurred during the 8-week “Covered Period” immediately following disbursement of the loan.

– Under the PPP Flexibility Act, expenses are forgivable if incurred during the Covered Period beginning on the disbursement of the loan and ending on the earlier of (1) 24 weeks or (2) 12/31/20.

• In the alternative, borrowers as of 6/5/20 may elect to retain the original 8-week Covered Period.

WHAT ALLOWABLE USES ARE FORGIVABLE?

• Timing (continued) (changed by PPP Flexibility Act)

– Impact of change

• Most dealers electing a 24-week Covered Period will have sufficient forgivable Payroll Costs to exhaust all PPP loan proceeds.

• As a practical matter, whether floorplan interest payments are forgivable will no longer be relevant.

– Critical decision: the 24-week vs. 8-week Covered Period election.

KEY QUESTIONS FOR TODAY• What are the key elements of the PPP to consider when thinking about forgiveness?

• How does the PPP Flexibility Act affect each of these elements:

– What uses of PPP loan proceeds are allowable;

– What uses of PPP loan proceeds may be forgiven;

– Will my anticipated forgiveness be reduced; and

– Can I avoid any reduction in my anticipated forgiveness.

• What other changes were made by the PPP Flexibility Act?

• What are the key forgiveness application considerations?

HOW MAY THE AMOUNT OF FORGIVENESS BE REDUCED?

• Why are there limits on amount of forgivable loan proceeds?

– To put and keep people back on the payroll, even if there is no work.

– Loan forgiveness is tied to Payroll Costs for the Covered Period and may be reduced based on certain payroll-related calculations.

HOW MAY THE AMOUNT OF FORGIVENESS BE REDUCED?

• Types of loan forgiveness reduction

– 60%/40% Reduction Basis (changed by PPP Flexibility Act)

– Pay Level Reduction Basis

– Headcount Reduction Basis

• Order of Application

HOW MAY THE AMOUNT OF FORGIVENESS BE REDUCED?

• 60%/40% Reduction Basis (changed by PPP Flexibility Act)

– Originally, SBA/Treasury required that at least 75% of forgiveness had to be for proceeds used to pay Payroll Costs and imposed a partial reduction in forgiveness to the extent that Payroll Costs represented less than 75% of the forgiveness.

– The PPP Flexibility Act provides that unless 60% or more of loan proceeds are applied to Payroll Costs, there will be no loan forgiveness.

• This appears to set up an “all or nothing” rule.

• However, SBA/Treasury have indicated that if less than 60% of the loan proceeds are used to pay Payroll Costs, borrowers will only be subject to a pro rata reduction in forgiveness.

HOW MAY THE AMOUNT OF FORGIVENESS BE REDUCED?

• Pay Level Reduction Basis (not changed by PPP Flexibility Act)

– Applies to specific employees.

– If employee compensation goes down during the Covered Period relative to an earlier measuring period, forgiveness will be reduced.

HOW MAY THE AMOUNT OF FORGIVENESS BE REDUCED?

• Pay Level Reduction Basis (continued) (not changed by PPP Flexibility Act)

– Calculation

• Generally, compare each covered employee’s average compensation rate during Q1 2020 with the employee’s average compensation rate during the Covered Period.

• If the average rate goes down by more than 25%, forgiveness is reduced dollar for dollar by any resulting pay reduction in excess of the 25%.

HOW MAY THE AMOUNT OF FORGIVENESS BE REDUCED?

• Pay Level Reduction Basis (continued)

– Post-PPP Flexibility Act considerations

• Try to maintain average compensation rates during the Covered Period at or near the compensation rates during the measuring period.

• However, note that the new Covered Period during which Pay Levels need to be maintained to avoid reduction is much longer than before (24 weeks vs. 8 weeks).

HOW MAY THE AMOUNT OF FORGIVENESS BE REDUCED?

• Headcount Reduction Basis (not changed by PPP Flexibility Act)

– Generally, if average employee Headcount is lower during the Covered Period relative to an earlier measuring period, it will result in a pro rata forgiveness reduction.

– Does not apply to specific employees.

HOW MAY THE AMOUNT OF FORGIVENESS BE REDUCED?

• Headcount Reduction Basis (continued)

– Post-PPP Flexibility Act considerations

• Try to keep on payroll during the Covered Period the same number of full-time equivalent (“FTE”) employees as in the measuring period; this may involve re-hiring previously terminated employees.

• However, note that the new Covered Period during which Headcount needs to be maintained to avoid reduction is much longer than before (24 weeks vs. 8 weeks).

KEY QUESTIONS FOR TODAY• What are the key elements of the PPP to consider when thinking about forgiveness?

• How does the PPP Flexibility Act affect each of these elements:

– What uses of PPP loan proceeds are allowable;

– What uses of PPP loan proceeds may be forgiven;

– Will my anticipated forgiveness be reduced; and

– Can I avoid any reduction in my anticipated forgiveness.

• What other changes were made by the PPP Flexibility Act?

• What are the key forgiveness application considerations?

HOW MAY REDUCTIONS TO ANTICIPATED FORGIVENESS AMOUNTS BE AVOIDED?

• The CARES Act, as amended by the PPP Flexibility Act, provides three means (“safe harbors”) to avoid the Headcount Reduction Basis or Pay Level Reduction Basis forgiveness reductions.

• The CARES Act recognizes two “paths” in which otherwise mandated forgiveness reductions will be avoided if Headcount or Pay Level reductions made during the period beginning on 2/15/20 and ending on 4/26/20 are eliminated not later than a specified date.

• Originally, that date was 6/30/20.

• The PPP Flexibility Act changed that date to be 12/31/2020.

HOW MAY REDUCTIONS TO ANTICIPATED FORGIVENESS AMOUNTS BE AVOIDED?

• For borrowers facing loan forgiveness reductions based on both Headcount and Pay Level, both forgiveness reduction avoidance paths must be present to fully benefit.

• The PPP Flexibility Act added a further means/safe harbor to avoid the loan forgiveness reductions that could result under the Headcount Reduction Basis.

HOW MAY REDUCTIONS TO ANTICIPATED FORGIVENESS AMOUNTS BE AVOIDED?

• Forgiveness Reduction Avoidance Path One: Headcount

― Count the number of FTEs on the payroll on 2/15/2020 (“2/15 Number”).― Confirm that, at some point during the period beginning on 2/15/20 and

ending on 4/26/20, the number of FTEs fell below the 2/15 Number.― Ensure that the number of FTEs on the payroll is equal to or greater than

the 2/15 Number by no later than 12/31/20.― If, by no later than 12/31/20, the number of FTEs on the payroll is equal

to or greater than the 2/15 Number, the borrower is not subject to any forgiveness reduction based on Headcount.

HOW MAY REDUCTIONS TO ANTICIPATED FORGIVENESS AMOUNTS BE AVOIDED?

• Forgiveness Reduction Avoidance Path Two: Pay Level

― Determine what the rate of pay for each employee was on 2/15/2020.

― Confirm that the rate of pay for that employee was reduced sometime during the period beginning on 2/15/20 and ending on 4/26/20.

― Ensure that, by no later than 12/31/20 the rate of pay for that employee (if still on the payroll) is equal to or greater than the rate of pay on 2/15/20. If so, the borrower is not subject to a forgiveness reduction based on Pay Levels.

HOW MAY REDUCTIONS TO ANTICIPATED FORGIVENESS AMOUNTS BE AVOIDED?

• New Employee Availability Safe Harbor (added by the PPP Flexibility Act)

― The Employee Availability Safe Harbor provides that forgiveness will be calculated without regard to the Headcount Reduction Basis if a borrower can document that:

― it is unable, on or before 12/31/20, both to rehire terminated employees employed on 2/15/20, and to replace them with other, similarly qualified individuals; or

HOW MAY REDUCTIONS TO ANTICIPATED FORGIVENESS AMOUNTS BE AVOIDED?

• New Employee Availability Safe Harbor (continued) (added by the PPP Flexibility Act)

― from 3/1/20 through 12/31/20 it was unable, due to its compliance with COVID-19 related safety, sanitation, or social distancing requirements or guidance established by the HHS, the CDC, or OSHA, to return to “the same level of business activity” it had achieved prior to 2/15/20.

― Unresolved: how or when the “level of business activity” should be measured or determined.

KEY QUESTIONS FOR TODAY• What are the key elements of the PPP to consider when thinking about forgiveness?

• How does the PPP Flexibility Act affect each of these elements:

– What uses of PPP loan proceeds are allowable;

– What uses of PPP loan proceeds may be forgiven;

– Will my anticipated forgiveness be reduced; and

– Can I avoid any reduction in my anticipated forgiveness.

• What other changes were made by the PPP Flexibility Act?

• What are the key forgiveness application considerations?

OTHER KEY CHANGES MADE BY THE PPP FLEXIBILITY ACT

• Allows for the deferral of PPP loan payments otherwise due until when forgiveness remittances are made to lenders, so long as the borrower files its forgiveness application within 10 months after the end of the Covered Period.

• Establishes that new PPP loans (and existing loans where the parties so agree) with a remaining balance after applying any forgiveness shall have a 5-year minimum and a 10-year maximum maturity from the date on which a borrower applies for forgiveness.

• Repeals the CARES Act provision that barred PPP forgiveness recipients from deferring employer payroll taxes.

KEY QUESTIONS FOR TODAY• What are the key elements of the PPP to consider when thinking about forgiveness?

• How does the PPP Flexibility Act affect each of these elements:

– What uses of PPP loan proceeds are allowable;

– What uses of PPP loan proceeds may be forgiven;

– Will my anticipated forgiveness be reduced; and

– Can I avoid any reduction in my anticipated forgiveness.

• What other changes were made by the PPP Flexibility Act?

• What are the key forgiveness application considerations?

FORGIVENESS APPLICATION CONSIDERATIONS

• The PPP Flexibility Act triggers several important considerations for borrowers thinking about filing applications for forgiveness:

– When can I file my forgiveness application?

• “Not later than” vs. “as of” in determining availability of forgiveness reduction Avoidance Paths.

• Unresolved: whether a borrower subject to forgiveness reduction under either the Pay Level Reduction or Headcount Reduction Basis must wait until after 12/31/20 to file a forgiveness application to avail itself of one or both of the forgiveness reduction Avoidance Paths.

FORGIVENESS APPLICATION CONSIDERATIONS

– When can I file my forgiveness application? (continued)

• Guidance will be required to determine whether those Paths require that the stated circumstances need to be satisfied “as of” 12/31/20 – which will result in borrowers having to wait until after 12/31/20 to file for forgiveness – or simply “on or before” 12/31/20 – in which case applications will be timely when the stated circumstances are fully satisfied.

• Borrowers seeking to avail themselves of the new Employee Availability Safe Harbor will, by its terms, need to wait until after 12/31/20 to file their forgiveness applications.

FORGIVENESS APPLICATION CONSIDERATIONS– Should I elect the 8-week or the 24-week Covered Period?

• Degree to which forgiveness has been maximized during original 8-week period.

• Expectation of whether Headcount and Pay Levels can and will be maintained, if not increased, during the 24-week period.

– Will I be able to make my election after the expiration of the 24-week period?

• Assuming that SBA/Treasury does not mandate an earlier election cutoff, the 10-month payment deferral should provide sufficient time.

FORGIVENESS APPLICATION CONSIDERATIONS

• Submit forgiveness applications to lenders, not to the government.

• Generally, hold off on applying for loan forgiveness until further guidance and a revised Forgiveness Application is issued by SBA/Treasury.

• SBA/Treasury lists many of the documents that must be submitted with forgiveness applications.

• Required documents must be preserved and retained for 6 years after a PPP loan is fully forgiven or paid in full.