PPP Updates, Insights and Planning as we Await Loan Forgiveness Guidance

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.  Demand for PPP loans was high, and the original $349 billion earmarked for these loans has already been depleted.  Additional PPP funding in the amount of $320 billion is included in legislation which is expected to become law by April 24, 2020.  About $60 billion of the additional PPP funding will be set aside for businesses that do not have established banking relationships.
Over the past few weeks, we’ve had a chance to see the PPP provisions play out in real time within the restaurant industry.  While restaurants that are recipients of PPP loans have cash, it remains unclear whether they will be able to spend the cash within the current guidelines of the PPP provisions.   With state-mandated closures, restaurants may find it impossible to take advantage of one of the cornerstones of the PPP program:  loan forgiveness. 
The SBA and the Treasury Department are issuing rules and guidance daily.  We’ve received clarity regarding a number of topics, but uncertainty still exists, especially with respect to loan forgiveness.  In anticipation of impending loan forgiveness guidance, we thought this would be a good time to bring readers up to speed on where the PPP guidance stands as of today.  For a more comprehensive look at updates as they pertain to the PPP, please read our insight here.


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.   Many large companies, including restaurants, have been called out in the press for receiving PPP loans despite having other sources of liquidity available.   The new guidance clarifies that when making their good faith certification, borrowers must take into account 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.

These are just the most recent updates and guidance issued by the IRS and Treasury. For more updates and guidance on strategy, please read our insight PPP Loans: Updates, Insights, and Planning Ideas.