Paycheck protection loan forgiveness: The next chapter

Bill Airy
Owner, Lendio Denver

Many Colorado business owners have taken advantage of the Coronavirus Aid, Relief, and Economic Security Act Paycheck Protection Program loans to keep their employees on the payroll, pay rent or mortgage, and maintain operations through the COVID-19 pandemic and current economic uncertainty.

During the initial round of the $349 billion disbursement of PPP funds, more than 1.6 million businesses across the country received loans (an average loan of $206,000). The second round of PPP funding at $310 billion was a relief for business owners who missed out on the first round of funding or who had a subsequent need for assistance.

On June 5, the president signed the Paycheck Protection Program Flexibility Act into law. While the act offers some clarity after weeks of uncertainty, the forgiveness process and documentation and eligible costs remain a challenging obstacle for many. With the recent guidance, business owners/borrowers, lenders, financial and legal professionals now are turning their attention to what’s next.

Here are a few of the important highlights of the Paycheck Protection Program Flexibility Act.

• “Covered period” extended from eight weeks to 24 weeks, or until Dec. 31.
• Period extended in which an employer may rehire or eliminate a reduction in employment, salary or wages that would otherwise reduce the forgivable amount of a paycheck protection loan.
• Nonpayroll expenses cap extended from 25% to 40% with 75% payroll expenses cap lowered to 60% for maximum forgiveness.
• Small businesses eligible to take a PPP loan and qualify for a separate, recently enacted tax credit to defer payroll taxes.
• Loan terms for any unforgiven portions to be repaid extended from two years to five years at 1% interest.
• Loan forgiveness period extended from within six months to within 10 months of the last day of the covered period, before it must start making interest and principal payments. Under the new bill, PPP loan interest and payment of principal and fees will be deferred until the loan is forgiven by the lender.

So, what do business owners need to focus on now?

We recommend working with your lender, accountant and/or attorney to understand how to prepare for loan forgiveness, staying up to date on the latest Small Business Administration guidance and considering future uses of funds. We also recommend that borrowers maintain receipts for the following business expenses paid during the covered period:

• Payroll records and proof of payment (cancelled checks or automated clearing house transmission confirmation);
• Health insurance receipts, retirement plan funding and other benefits;
• Mortgage statements and proof of payment of interest paid and/or lease agreements; and
• Utilities bills and other receipts such as phone, internet and travel expenses.

The SBA has provided a detailed Loan Forgiveness Application (Form 3508) for borrowers to submit to their lender as it relates to eligible costs, including payroll and nonpayroll costs and full-time equivalency employee records. The application is available at: https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness-Application.pdf and includes the following sections:

• Loan Forgiveness Calculation Form;
• Schedule A;
• Schedule A Worksheet; and
• Borrower Demographic Information Form.

As business owners in the real estate industry begin to dig in further to PPP loan forgiveness, documentation and future implications, Colorado-based AVL Growth Partners CEO Chris Schwalbach also offers the following forward-thinking advice:

1. Understand how to balance between optimizing your loan forgiveness today and reserving PPP loan proceeds for a longer downturn over the next year or more.
2. Build a cash forecast contingency plan including clear thresholds for additional expenditure reductions.
3. Reserve cash for taxes as the forgiven portion PPP expenses have been deemed not tax deductible by the IRS.

These recommendations hit on some critical areas for consideration as it relates to financial planning, tax prep and forecasting for all types of businesses. We encourage business owners to begin working on documentation, connect with their lender and/or legal or financial professional on the latest factors determining forgiveness and turn their attention to planning efforts to skillfully navigate the current economic climate and set the compass for future success.