Many manufacturers are completing their Paycheck Protection Program (PPP) covered periods and seeing their lenders launch their PPP forgiveness portals. Much like the rush to apply for loan funding this spring, borrowers are now rushing to apply for forgiveness. Before joining the rush, consider the following:
- The right time to apply for forgiveness:
According to the Paycheck Protection Program Flexibility Act (PPPFA) passed on June 5, 2020, a borrower has ten months after the last day of their covered period to apply for forgiveness.
Some manufacturers may find it advantageous to apply before the end of the ten months, for example, if they have a business situation that calls for it, such as a transition of ownership. Others may decide that waiting for additional guidance provides them with the highest level of confidence that their loan can be forgiven.
Manufacturers who have spent all their funds also might be inclined to apply before the end of their 24-week covered period. But they should be sure they have all the necessary documentation. In addition, guidance remains cloudy on certain mechanics of the calculation when applying early, so consider waiting until you are sure all aspects of your forgiveness application will comply with SBA guidance.
- Eligible costs for forgiveness:
Some manufacturers prefer to reduce the burden of documenting their expenditures by using only payroll costs for their PPP loan forgiveness application. But think about your PPP loan as a part of your business strategy, not as a standalone tool. Will applying for forgiveness using only certain expenses reduce your access to benefits from other programs?
For example, a tax credit is available to certain businesses that conduct R&D (research and development) activities. Given current guidance, it might be advisable to exclude costs from your PPP loan forgiveness application that you could use for the tax credit, thereby maximizing both PPP loan forgiveness and the tax credit. Other tax credits may interact with your PPP loan in a similar fashion.
It is important to discuss your PPP loan forgiveness with your tax preparer and other key advisors to ensure you are considering all programs available to you.
- Full-time equivalent (FTE) restoration:
FTE Safe Harbor #2 indicates that if you had a reduction in full-time equivalents (or FTEs) between February 15 and April 26, 2020, you have until the earlier of the date of your forgiveness application or December 31, 2020 to restore your FTE level so that the reduction will not affect your forgiveness amount. Some manufacturers, however, have regularly scheduled layoffs at the end of the year for maintenance, physical inventory or other operational requirements. If you are applying for forgiveness after the end of the calendar year, remember that your reduction elimination will be evaluated based on your FTEs as of December 31, 2020. Think carefully about employees who will be on your active payroll at that time, regardless of whether you intend to rehire them. Based on the mechanics of the calculation and FTE Safe Harbor #2 guidance, if you cannot prove those FTEs have been restored (based on your December 31 active payroll), you might not qualify for the safe harbor option.
- PPE eligibility for forgiveness:
Currently, expenses eligible for forgiveness are payroll costs (including certain employer paid health insurance, retirement contributions, and state and local taxes), and rent, mortgage interest and utilities as defined by the program. Neither general manufacturing personal protective equipment (PPE) nor COVID-19-specific PPE and supplies are eligible for forgiveness.
Like all program guidelines, the rule on PPE is subject to change. Proposals in Congress include allowing certain PPE costs as expenses eligible for forgiveness. However, because a borrower must follow all guidance available at the time of application, it is important to stay abreast of changes and understand what is current guidance versus what is only a proposal.
- Forgiveness applications do not guarantee forgiveness:
Economic Injury Disaster Loan (EIDL) emergency advances (or grants), issued by the SBA will reduce PPP loan forgiveness by the amount of the advance (or grant), even if the forgiveness application indicates full forgiveness of the PPP loan. Manufacturers who participated in both programs should understand their obligations under each program.
In addition, the SBA reserves the right to review all PPP loan applications for eligibility and loan amounts, as well as the PPP forgiveness applications for the forgiveness amounts. If the SBA determines you were not eligible for the loan, or if they determine that your loan or forgiveness amount was improperly calculated, you might not be granted full forgiveness. Manufacturers should discuss their concerns as they arise with their legal advisors or CPAs.
To discuss your PPP loan, its interaction with other programs, or other concerns regarding your manufacturing business, contact a member of HBK Manufacturing Solutions at email@example.com or 330-758-8613.