Guidance for Using PPP Loan Funds

April 23, 2020
Many businesses are starting to receive funds from the first round of Paycheck Protection Program loans and questions are arising on how to appropriately use PPP funds in accordance with the CARES Act and to maximize loan forgiveness. Recipients of PPP loans should keep the following in mind:

1.     Maintaining Records.  It is essential for businesses to maintain detailed records of expenditures of PPP funds as well as employee and payroll records. Some businesses may choose to deposit PPP funds into a dedicated account in order to track expenditures, and while this is not required, it may be helpful in keeping records organized. At the time loan forgiveness is requested from a lender, it is expected that businesses will need to provide adequate proof that PPP loan funds were used appropriately and maintaining good record keeping practices should make that process easier. 
 
2.     Limit Expenditures on Non-Payroll Costs . Although some provisions of the PPP are still unclear, the SBA has continually maintained that no more than 25% of PPP loan funds should be used for non-payroll costs. If a business uses more than 25% of PPP funds for non-payroll costs, this amount will not be forgiven and must be repaid with interest as provided in the PPP loan documents, so long as these costs still fall within the permitted expenditures identified by the SBA. Using funds for expenses not permitted by the CARES Act will result in penalties. 
 
3.     Stay Up to Date on SBA Guidance.  Many aspects of the PPP are still to be reviewed and are subject to ever changing updates and guidance from the SBA and even amendments from Congress, so it is important for businesses to stay informed with any new regulations or information.

Most notably, practitioners and businesses highly anticipate further guidance on many of the loan forgiveness aspects of the PPP. For example, the CARES Act uses the term "full-time equivalent employees" or "FTE" on numerous occasions but fails to provide a definition. Although not an explicit definition, there is one reference in the CARES Act text to a provision of the Affordable Care Act that discusses "full time equivalent employees." This has led some practitioners to assume that the PPP will use the Affordable Care Act definition of an FTE as “an employee who is employed on average at least 30 hours per week” and an FTE as “a combination of employees, each of whom individually is not a full-time employee because they are not employed on average at least 30 hours per week, but who, in combination, are counted as the equivalent of a full-time employee.” Under this definition of an FTE, two part-time employees who each work 15 hours per week will be deemed one FTE or "full time equivalent."

Maintaining consistent numbers of FTEs during the covered period and restoring numbers of FTEs by June 30, 2020 are important factors in determining loan forgiveness and businesses and lenders will need an accurate definition of FTEs in order to asses forgiveness. Future guidance is also expected to address other aspects of the reductions in loan forgiveness results from (a) reductions in FTEs and (b) reductions in employee salaries in excess of 25% from pre-COVID-19 levels, including specific details on calculations. 

4.     Pay Attention to Timing Issues.  Once the PPP funds are received, the clock starts on an eight-week period in which the funds must be used for the approved expenditures, and any failure to use the funds timely could result in a reduction of forgiveness. Currently, the PPP also has a safe harbor provision that provides businesses with the opportunity to restore employee headcount and salaries by June 30, 2020 in order to avoid potential reductions in forgiveness during the eight-week covered period. This outside date may be later adjusted as economic conditions continue, but businesses should be sure to keep aware of this important date. 
 
5.     Stay in Contact with Lenders.  Businesses that have not yet received PPP loans should continue to proceed in the application process with lenders to ensure that they are in the best position at the time additional PPP funding is approved by Congress. After receiving PPP loans, it is also advisable for businesses to stay in contact with lenders to ensure they receive potential correspondence and information from the lenders as they become available. Businesses are also advised that because PPP loan applications involve federally insured lending institutions, any material misstatement on the loan application could result in an investigation and prosecution for fraud. If a business discovers a mistake or misstatement on a loan application, it is advisable to promptly contact the lender to correct the error.
Please contact   Ken Fleisher Gary Zlotnick Scott Goldstein  , or
Anya Morrison Davis  to discuss these programs and any
other small business related questions:

Ken Fleisher (  kjfleisher@zarwin.com )
Gary Zlotnick (  gazlotnick@zarwin.com )
Scott Goldstein (  segoldstein@zarwin.com )
Anya Morrison Davis (  amdavis@zarwin.com )
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