How Restaurants Can Navigate PPP Loans as Guidance Evolves

When the CARES Act was signed into law on March 27, 2020, the Paycheck Protection Program ("PPP") appeared to be a straightforward way to provide liquidity to cash-strapped businesses, including restaurants. 

Over the past few months, we've had a chance to see the PPP provisions play out in real time within the restaurant industry. .  

The SBA and the Treasury Department continue to issue rules and guidance frequently.  We've received clarity regarding a number of topics, but uncertainty still exists.  As we continue to receive updates and additional guidance, we feel that now is a good time to bring readers up to speed on where the PPP guidance currently stands through a digest of informative blog posts. 

This post serves as a digest of updates and insights regarding the PPP program and will be updated frequently.

UPDATES AS OF 8/5/2020

Summary of Significant Changes and Guidance:

SBA Releases PPP Forgiveness FAQ’s: The U.S. Small Business Administration released FAQs related to PPP loan forgiveness. Access the FAQ’s on our Selections Blog.

PPP Salary Limitation Clarification and Revised Application: Since the passage of the PPP Flexibility Act, the Small Business Administration continues to release additional guidance. On June 17, 2020, guidance was provided relating to payroll cost limitations due to changes to the covered period. In addition to this new guidance, the SBA published revised application forms to be used by borrowers to apply for loan forgiveness. Explore the revisions on our Selections Blog.

PPP Flexibility Act Initial Guidance Released: One week after the passage of the PPP Flexibility Act, the Small Business Administration released the first of what we hope will be many pieces of interpretive guidance. Readers that have been following the many iterations of the PPP program may not be surprised by the tongue-twisting title of the guidance: Interim Final Rule on Revisions to First Interim Final Rule (“the Rule”).

You can read more in our blog post “PPP Flexibility Act: Initial Guidance Released.”
Bill with Favorable PPP Changes for Restaurants: June 3, the Senate gave unanimous consent to the Paycheck Protection Program Flexibility Act of 2020 that passed the House on May 28, 2020. This stand-alone, bipartisan bill would allow more businesses to receive Paycheck Protection Program (PPP) loan forgiveness and perhaps greater liquidity afterwards. Explore the changes in a blog post featuring BDO Restaurant Industry leader Jeff Tubaugh.
New Bill Introduces Favorable PPP Changes for Restaurants: The House voted 417-1 on May 28, 2020 to pass a stand-alone, bipartisan Paycheck Protection Program Flexibility bill (H.R. 7010), which would allow more businesses to receive Paycheck Protection Program (PPP) loan forgiveness and perhaps greater liquidity afterwards. Read about the changes in the Selections Blog.
Deep Dive: PPP Loan Forgiveness Application Guidance: One week after releasing the forgiveness application, the Small Business Administration (SBA) and the Department of Treasury released additional guidance in the form of an interim final rule on loan forgiveness. While the rule provided some clarity, additional guidance is still necessary in many areas. We’ll continue to keep you up-to-date with timely and relevant posts as guidance is issued and new laws are passed, including the much-needed PPP Flexibility Act. Explore the aspects of the interim final rule on our Selections Blog.
New Bill Serves Up Additional Opportunity for the Restaurant Industry: In what would be a tremendous victory for the restaurant industry, the House is expected to vote next week on a stand-alone, bipartisan Paycheck Protection Program bill. HR 6886, introduced by Representatives Chip Roy (R-Tex) and Dean Phillips (D-Min) would change aspects of the CARES act to make them more favorable.  Read about the changes in our blog post.
First Look: PPP Loan Forgiveness Application: On Friday, May 15, 2020, the Small Business Administration (SBA) released the Paycheck Protection Program (PPP) Loan Forgiveness Application. Concurrent with the application’s release, the Department of the Treasury announced that guidance and regulations will be issued soon to further assist borrowers and lenders. Explore the application in our “First Look” blog post.
Updated PPP Guidance Brings Welcome News and Opportunities for Additional PPP Funds: The Paycheck Protection Program was created to provide relief for small businesses during the economic crisis brought on by the novel COVID-19 virus.  Restaurants that received PPP loans continue to wait for clarity around key components of the program while they work to maintain operations. Learn how new guidance brings encouraging news and opportunities for additional PPP funds on our Selections Blog.

Certification in good faith that PPP loans are necessary: The PPP loan application requires borrowers to certify in good faith that the PPP loan is necessary to support their ongoing business operations.   The new guidance clarifies that when making their good faith certification, borrowers must consider their current business activity and their ability to access other sources of liquidity when determining if the loan is necessary.  It is anticipated that the new guidance will deter large applicants from applying for PPP loans.   It may also result in more companies returning their loans, since borrowers that applied for a PPP loan prior to the issuance of this new guidance may repay their loan in full by May 7, 2020 without consequences.  ​

$10mm cap for affiliated restaurant groups: Clarification that separate legal entities within an affiliated group are each eligible to apply for a PPP loan in the maximum amount of $10mm apiece.  This assumes that the separate legal entity has its own unique EIN and is otherwise eligible to apply (i.e., uses NAICS code 72 and each physical location has less than 500 employees).

Loan Forgiveness and Payroll Tax Deferrals: Clarification that employers are eligible to defer the employer portion of Social Security tax up until the date the lender issues a decision to forgive the loan. Amounts deferred prior to forgiveness remain deferred until 2021 and 2022; payroll tax deposits and payments after that date must be made timely.   

Loan Forgiveness: Clarification that the eight-week covered period begins on the date of the first loan disbursement.  According to the SBA, the first disbursement must occur within 10 days of loan approval. 

Time period to compute “Average Monthly Payroll”: Clarification that in general, businesses can compute their payroll costs for purposes of determining the maximum amount they can borrow using either a trailing 12 months or calendar year 2019.     

Gross Payroll Costs: Clarification that payroll costs used in the determination of the maximum loan amount are calculated on a gross basis, with no reduction for federal taxes imposed on the employee or withheld from employee wages.  

Compensation over $100,000: Clarification that the exclusion from payroll costs of compensation in excess of $100,000 annually applies only to cash compensation.  Non-cash benefits are not counted in the $100,000 threshold.  Examples of non-cash benefits include:

  • Employer contributions to defined-benefit or defined-contribution retirement plans;

  • Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and

  • Payment of state and local taxes assessed on compensation of employees

Affiliation: Clarification that for purposes of determining whether an applicant has 500 or fewer employees, an applicant’s employee count is combined with the count of its affiliates in one of four circumstances:  

  • Affiliation based on ownership;

  • Affiliation arising under stock options, convertible securities, and agreements to merge;

  • Affiliation based on management;

  • Affiliation based on identity of interest.

Affiliation Waivers: Clarification that affiliation will only be waived for:  

  • Any business concern with not more than 500 employees that, as of the date the loan is disbursed, is assigned a NAICS code beginning with 72 (i.e., restaurants); 

  • Any business concerns operating as a franchise that is assigned a franchise identifier code by the SBA.  This will prevent a franchisor and multiple franchisees from having to include each other’s employee count when testing their own eligibility for a PPP loan; 

  • Any business concern that receives financial assistance from an SBIC. 

Interest Rate: Increase to 1% from .5%

Use of Loan Proceeds: New requirement that at least 75% of the PPP loan proceeds must be used on payroll costs. The remainder of the proceeds can be used for:

  • Costs related to the continuation of group health care benefits during periods of paid sick, medical or family leave, and insurance premiums;  

  • Mortgage interest payments (but not mortgage prepayments or principal payments);

  • Rent payments;

  • Utility payments;

  • Interest payments on any other debt obligations incurred before February 15, 2020;

  • Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.

Misuse of Funds: New requirement that if funds are used for unauthorized purposes, repayment will be required, and possible charges for fraud may be brought. 

Independent Contractors: Cannot be included in an employer’s payroll to determine the maximum loan amount; instead independent contractors must apply for their own loans.

Amount of Loan Forgiveness: Up to the full principal amount of the loan and any accrued interest

Loan Forgiveness: Borrowers will not be responsible for any loan payment if the borrower uses all of the loan proceeds for forgivable purposes and employee and compensation levels are maintained.  Forgivable purposes including:

  • Payroll costs (see sidebar);

  • Payments of interest on mortgage obligations incurred before February 15, 2020;

  • Rent payments on leases dated before February 15, 2020; 

  • Utility payments under service agreements dated before February 15, 2020.

Loan Forgiveness: Clarification that not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.   This aligns with the intent of the CARES Act, which is to provide a loan, 75% of which is equivalent to eight weeks of payroll.  

Loan Forgiveness: According to the Final Interim Rule, the SBA will issue additional guidance on loan 
forgiveness.  Presumably this will cover reductions in the amount of loan forgiveness due to failure to meet the 25% use test, FTE and salary reductions and the re-hire exemption. 


Definition of Payroll Costs as of 4/2/20:

Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of:

  • Salary, wages, commissions, or similar compensation; 

  • cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips);

  • payment for vacation, parental, family, medical, or sick leave; 

  • allowance for separation or dismissal; 

  • payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; 

  • payment of state and local taxes assessed on compensation of employees; 

  • and for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation

Payroll Costs do not include:

  • Any compensation of an employee whose principal place of residence is outside of the United States;

  • The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary;

  • Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and

  • Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.