Newport LLC, an Advisory Firm Serving Middle Market Companies, Releases Paycheck Protection Program Loan Forgiveness Guidelines

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Now that you have your PPP Loan, make sure you follow the rules

The Program is designed to help small and midsized businesses through this challenging time and a PPP loan could be the difference between survival or bankruptcy.

For those of you that have not yet received a PPP loan, do not be discouraged. On April 23rd Congress approved over $300B of additional funding. If you are in the queue, congratulations. If not, you should be working with your bank and submitting an application to the Paycheck Protection Program before this second release of funds runs dry.

For those who received funds, your next challenge is how to properly administer those funds. Remember, the Program rules were simple, but there are significant penalties for personal liability and fraud as they relate to determining need, the loan amount, and the use of proceeds. The intent of the program is to support companies for 8 weeks, beginning from when you receive the loan. If the rules are followed, there is no personal liability for the loan and there is no collateral required to secure the loan.

The rules regarding forgiveness of the loan are tied to how you spend the money. This is not a case of free money, and we expect that in most cases, not all of the loan amount will be forgiven based upon the fact that the loan amount was granted based on effectively 10 weeks (1 month average payroll in 2019 x 2.5) and the borrower only has 8 weeks to spend the money to qualify for loan forgiveness. Plan accordingly, and remember that Newport partners are fully prepared to support you on this, if needed.

There may be additional guidance from the SBA over the next few weeks, but as of now, here is what we know and see as best practices.

First, place the proceeds into a separate bank account from which you control all disbursements. Permitted uses of the funds are – payroll, utilities, and pre-existing rent and mortgage interest obligations. Some of our clients have appointed a dedicated person to manage all activities pertaining to this account.

Remember, you will have to document how you used the funds when you seek forgiveness. The expectation is that at least 75% of the loan amount will be used to support payroll.

Next, remember that not all payroll costs qualify for forgiveness. We believe that the loan forgiveness rules will track the same rules used to calculate the loan amount. So, just as your loan amount calculation excluded some items that are part of your payroll - like annualized cash compensation above $100k - forgiveness will have the same exclusions. Plan to recreate the same paper-trail for disbursements as you created for your loan application.

The SBA issued guidance on how to treat headcount changes or pay cuts, so it is not as simple as “payroll is payroll”. If your headcount or compensation policies have changed recently, pay attention to this guidance. In particular headcount reductions have a big impact on forgiveness. Make sure you have an advisor who understands how your decisions affect loan forgiveness.

Use of proceeds for rent, mortgage interest, and utilities are a bit more straightforward, but again, document everything. When in doubt, seek clarification from your bank.

One final note. There will be after-the-fact review of your business activities. The purpose of the PPP is to support employment, not facilitate distributions to owners or business expansion. Anything you do over the next two months may be subject to review and criticism later. Be prepared.

You can seek forgiveness after June 30th. Once you provide documentation, your bank has 60 days to determine how much of your loan qualifies for forgiveness. Avoid surprises. Talk to your banker frequently and well in advance to make sure you are both prepared.

Finally, the amount not forgiven will be a loan due in the 2nd quarter of 2022, bearing an interest rate of 1%.

And don't be discouraged by the paperwork. The Program is designed to help small and midsized businesses through this challenging time and a PPP loan could be the difference between survival or bankruptcy.

Lynn Lednicky is a partner in the Houston Office of Newport LLC.

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