Working Through the Pandemic: What Are Plastics Firms Doing?

Date August 3, 2020
Authors Amy M. Reynallt
Categories

As businesses look for ways to weather the COVID-19 pandemic, many firms in the plastics industry have had a unique role as essential businesses, providers of personal protection equipment, or suppliers of single use products. Despite this, industry firms find themselves battling many of the same concerns affecting the general business community. Discover some of the ways the plastics industry is navigating the COVID-19 crisis.

Following Guidelines
Like all businesses, plastics companies must follow the evolving health and safety guidelines set by government entities and health departments, including enforcing social distancing, wearing masks, and monitoring employee health status then taking specific actions if an employee is diagnosed with COVID-19. There are other safety, health and business guidelines to comply with as well, such as those from OSHA, the EEOC, and Department of Labor. More information can be found at state and federal websites including:


Evolving safety guidelines have led to changes not only in the workplace but to industry events. Trade shows and conferences, including MD&M East, the Society of Plastics Engineer’s ABC 2020 Conference and the Plastics Industry Associations’ Equipment and Moldmakers Leadership Summit are among many events that have been postponed or cancelled. Events that have occurred as scheduled have generally been staged virtually.

Using Economic Relief Options
Plastics News reported that plastics firms have received over $1.6 billion dollars of Paycheck Protection Program (PPP) funds. Funds are still available, and those that have not received a PPP loan but are interested should contact their advisors or lenders as soon as possible. The Small Business Administration (SBA) will no longer approve PPP loans after August 8.

Other key economic relief options available to plastics firms include:

  • Economic Injury Disaster Loans (EIDL) available through the SBA. For more information, visit sba.gov/disaster.
  • Main Street Lending Program (MSLP) loans available through lenders. Visit https://www. federalreserve.gov/monetarypolicy/mainstreetlending.htm for more information.
  • Deferral of payment of the employer’s share of Social Security taxes.
  • Employee Retention Credit available to operations that were partially or fully suspended due to a COVID-related shut down order, or that suffered a significant decline in revenue (available only to businesses that did not receive a PPP loan).
  • Families First Coronavirus Response Act (FFCRA) tax credits available to offset the cost of employee leave programs.
  • State and local relief programs, including grants and loans.

As well, Congress is negotiating additional stimulus funding, which is expected to include funds for some small businesses, though it is unknown what new relief options may be available for plastics businesses.

Shifting Business Operations
To navigate the COVID-19 pandemic, plastics firms have shifted their operations in many ways, including:

  • Supporting PPE Needs. While some plastics firms considered essential operations have seen little to no business downturn, others have shifted operations in order to maintain business levels or employee counts or to help with the country’s need for personal protective equipment. Where operations allowed, many plastics businesses used excess capacity and available machine or labor time to produce N95 masks, ventilators, medical tubing and protective face shields.
  • Focusing on Cybersecurity. Many plastics firms have historically dedicated their technology budgets to operations, but risks of cybersecurity breaches have grown significantly, especially for those firms with employees working remotely. Ensuring proper training to prevent phishing attacks, reviewing the company’s IT infrastructure, and assessing security protocols for suppliers or customers where EDI or other connections exist have become critical projects for IT departments.
  • Evaluating Supply Chains. The industry continues to rely substantially on foreign sources for plastic resins, specialty compounds, molds and tooling, and equipment. Supply chain concerns have escalated due not only to the pandemic but also to turbulence in international relations and the threat of trade wars. Some businesses are re-evaluating their supply chains, considering not only cost and quality, but their ability to get critical goods during the pandemic or other crises. Meanwhile, others have found opportunities to expand their product or service offerings due to increasing demand for domestically produced goods.
  • Considering Diversity. Through the Great Recession a decade ago and now during the COVID-19 pandemic, plastics firms have watched some end-user industries thrive while others contracted. Many businesses in industries impacted by both global events are struggling to create sufficient cash or financial reserves to survive. Plastics firms limited to one industry and one or two customers are under increasing pressure to diversify to ensure their longevity.

Innovating to Improve Safety and Health
The pandemic has impacted many businesses’ views of public health, and plastics firms are among those considering how technology can improve the safety and health of employees, customers, and others who visit their facilities. While we are still uncertain whether the coronavirus can live on surfaces, some plastics firms have considered reducing their use of paper or other shared items. Similarly, they are considering touchless technologies established through automation. They are also increasingly using virtual meetings to maintain customer and vendor relationships, reduce travel, and ensure social distancing.

Moving forward, firms may consider using antimicrobial additives, especially if those additives can reduce the transmission of viruses, bacteria or other microbes. They might also consider continuous improvement opportunities, such as the use of additives or other redesigns, to make their products safer or easier to disinfect. Similarly, single-use plastics, including bags, bottles, utensils, straws and containers that have been outlawed in some areas due to environmental concerns have regained popularity due to their perceived safety over reusable products. It will be interesting to watch how human safety and health concerns are balanced with environmental concerns as the pandemic continues.

Planning Ahead
As plastics firms continue to navigate the COVID-19 pandemic, they can consider several actions:

  1. Ensure safety protocols for employees, customers and other facility visitors are met. Continually evaluate changing protocols and compliance.
  2. Determine what actions to take if an employee is diagnosed with the virus. This may include asking other employees to be tested or to quarantine, cleaning or disinfecting affected areas of their facility, and developing a backup plan for others to take over critical duties that cannot be performed by the affected employee.
  3. Understand the availability of economic relief options. Review the programs carefully and consider using those that will best support the business’s needs.
  4. Evaluate whether to make changes to product or service offerings. Are the firm’s offerings and customer base diverse enough to ensure the company’s longevity? Reevaluating strategic business plans, forecasts, and budgets may be necessary to ensure ongoing operations.
  5. Consider whether cybersecurity measures are appropriate, especially if the firm has employees working remotely. Companies should also consider discussing cybersecurity insurance options with their business insurance providers or requesting external evaluations from professionals who specialize in cybersecurity insurance.
  6. Assess supply chains. Does the firm have a backup plan to obtain critical goods or services if current vendors are unable to supply?
  7. Consider innovations that improve the safety and health of employees, customers and other visitors to the facility, including reducing or eliminating paper and adding touchless technologies.
  8. Consider innovations that can help customers use the firm’s products more safely, including changes to materials, surface finishes and product designs.
  9. For support in navigating the ongoing pandemic, contact a member of the HBK Manufacturing Solutions Group at 330-758-8613 or manufacturing@hbkcpa.com

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Federal Loan Programs Available to Nonprofit Organizations

Date July 21, 2020
Authors Amy M. Reynallt
Categories
July 21, 2020 UPDATE: The Federal Reserve announced that the Main Street Lending Program has been modified to allow participation from eligible nonprofit organizations including educational institutions, hospitals, and social service organizations. Eligible organizations must meet the following eligibility criteria:
  • In operation at least 5 years
  • Have at least 10 employees
  • Have total non-donation revenues equal to or greater than 60% of expenses from 2017 through 2019
  • Have 2% or more operating margin in 2019
  • Have at least 60 days cash on hand
  • Have a current debt repayment capacity of at least 55% measured by a ratio of cash, investments, and other resources to outstanding debt and certain other liabilities
  Learn more regarding the Main Street Lending Programs available to nonprofit organizations   Nonprofit organizations are among the organizations affected by the COVID-19 pandemic. While several relief programs are available through the federal government, determining when your organization is eligible for each program can be confusing, due to differing criteria. Here, we explore three loan programs offered through federal government programs or federal legislation due to the COVID-19 crisis and the eligibility of nonprofit organizations to apply. Economic Injury Disaster Loans The Small Business Administration’s (SBA) Economic Injury Disaster Loan (EIDL) is a program, administered through the SBA, that is available to eligible organizations suffering economic injury due to a declared disaster. Because COVID-19 is considered a declared disaster, these loans are available in all 50 states as well as Washington D.C., Guam, the Virgin Islands, Puerto Rico, the Northern Mariana Islands, and American Samoa. Loans awarded to nonprofit organizations are up to $2 million, carry a 2.75 percent interest rate, and are amortized over a period of up to 30 years. Payments are deferred for the first year. The following nonprofit organizations are eligible to apply:
  • Private nonprofit organizations that are non-governmental agencies or entities that currently have an effective ruling letter from the IRS granting tax exemption under sections 501(c), (d), or (e) of the Internal Revenue Code of 1954,
  • Private nonprofit organizations that have satisfactory evidence from the State that the non-revenue producing organization or entity is a non-profit one organized or doing business under State law, or
  • Faith-based organizations. (For more information regarding faith-based organizations, please visit the SBA’s Faith-Based Organizations FAQs page).
  In addition to the loan, applicants may apply for an emergency advance (or emergency grant) of up to $10,000, based on the organization’s employee headcount. While this advance or grant awarded does not need to be repaid (even if the applicant declines the loan), it will reduce forgiveness on the Paycheck Protection Program loan, which is discussed further below. Currently, the EIDL program is only accepting new applications from agricultural enterprises due to funding limitations. It is unknown whether additional applications from other organizations, including nonprofit organizations, will be accepted in the future. Organizations who already applied for this program may check on the status of their application by contacting the SBA’s Customer Service Center at 1-800-659-2955 (TTY: 1-800-877-8339) or DisasterCustomerService@sba.gov. June 15, 2020 UPDATE: The SBA is once again accepting applications from all eligible organizations. It is unknown how much funding is still available, but applicants are awarded funds on a first-come, first-served basis. Interested organizations should visit sba.gov/disaster. Paycheck Protection Program The Paycheck Protection Program (PPP) is a loan program created through the CARES Act which was passed by Congress and signed into law on March 27, 2020. Unlike the EIDL program, the PPP is administered by lenders such as banks. The program offers eligible organizations loans equal to roughly 2.5 months of 2019 payroll costs (up to $10 million in total loan proceeds), to be used on specified payroll costs, rent, mortgage interest, and utilities. If borrowers spend the funds in accordance with the guidelines and maintain employee headcount and salaries and wages, the loan may be forgiven up to 100 percent. Loan proceeds not forgiven will be subject to a 1 percent interest rate and 2-year amortization period. Some nonprofit organizations are eligible to apply for PPP loans. Specifically, CARES allows 501(c)(3) nonprofit organizations, 501(c)(19) veterans organizations, and certain tribal business concerns to apply. Note that the organization must have under 500 employees (or otherwise meet the SBA Size Standard for its NAICS code), as well as agree to certifications that can be found on the PPP application and PPP forgiveness application. Funding is still available for this program and nonprofit organizations can still apply. Interested organizations should contact their lender to begin the application process. Note that guidance on this program continues to evolve, and the latest updates on both the loan process and the forgiveness process can be found at https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses. In addition, as Congress continues to negotiate changes to the program applicants and borrowers should watch for changes or stay in touch with their advisors to ensure they are complying with the latest program guidelines. June 15, 2020 UPDATE: While funds remain, loans will only be issued through June 30, 2020. Interested organizations should contact their lender to begin the application process. Main Street Lending Program The Main Street Lending Program (MSLP) offers loans to eligible small and medium-size businesses affected by COVID-19. The program offers loans, starting at $500,000 based on the business’s debt structure and 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA). According to the program’s Frequently Asked Questions, nonprofit organizations are currently not eligible for this program. The document states: “While non-profit organizations are not currently eligible under the Program, the Federal Reserve acknowledges the unique needs of non-profit organizations, many of which are on the front lines providing critical services and research to fight the pandemic. EBITDA is the key underwriting metric required for the [loan program]. The Federal Reserve recognizes that the credit risk of non-profit organizations, as a matter of practice, is generally not evaluated on the basis of EBITDA. The Federal Reserve and the Treasury Department will be evaluating the feasibility of adjusting the borrower eligibility criteria and loan eligibility metrics of the Program for such organizations.” For more information on this program, visit https://www.federalreserve.gov/monetarypolicy/mainstreetlending.htm. June 15, 2020 UPDATE: The Federal Reserve announced that it is seeking feedback through June 22 on its proposal to expand this program to small and medium-sized nonprofit organizations. If approved, eligible nonprofits may include organizations that:
  • are considered a tax-exempt organization under section 501(c)(3) or 501(c)(19) of the Internal Revenue Code
  • were in sound financial condition before the coronavirus pandemic and could benefit from additional liquidity to manage through this challenging period
  • employee a minimum of 50 and maximum of 15,000 employees
  • have operational history of at least five years
  • have endowments of no more than $3 billion.
  Additional financial thresholds based on operating performance, liquidity, and ability to repay debt may apply. In addition, the Main Street Lending Program has also been expanded for all organizations with a new minimum loan size of $250,000. To learn more regarding the proposal to expand the program to nonprofits, visit the Federal Reserve’s press release at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200615b.htm. For additional information about general program changes, visit https://www.federalreserve.gov/monetarypolicy/mainstreetlending.htm.   For more information about relief options available to nonprofit organizations, contact your HBK Advisor.

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Main Street Lending Program FAQs Updated

Date July 17, 2020
Authors Amy M. Reynallt
Categories

On July 15, an updated FAQ document was released on the Main Street Lending Program (MSLP).

Key updates include:

Revised Definition of Ineligible Businesses
A recently released definition of ineligibility provided by the SBA and Treasury for the Paycheck Protection Program has been adopted for the Main Street Lending program. Ineligible businesses include those where “an owner of 20 percent or more of the equity of the applicant is presently incarcerated or, for any felony, presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of, pleaded guilty or nolo contendere to, or commenced any form of parole or probation (including probation before judgment) for, a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance within the last five years or any other felony within the last year”.

In addition, a sole proprietor who is not otherwise established as a “business” as defined by the program is not an eligible borrower under the Main Street program.

Borrowers are expected to review all criteria for eligibility and ensure they make a reasonable, good-faith effort to determine their eligibility.

Clarification on loan terms
Certain terms of the Main Street Loan have been updated, including:

  • Lenders may charge certain fees to borrowers, and fees may be included in the principal amount of the loan.
  • While the interest rate is calculated based on LIBOR, LIBOR floors are not permitted.
  • Borrowers who were established before March 13, 2020, but who cannot produce sufficient financial history to establish their financial condition before the COVID-19 pandemic may not be eligible for a Main Street loan. However, those entities with clear predecessors or subsidiaries may be permitted to use the financial records of these predecessors or subsidiaries.
  • The program generally prohibits using the funds for the benefit of the borrower’s foreign parents, affiliates, or subsidiaries, or to refinance or pay existing debt, nor can the loan funds (or any funds) be used to pay dividends, distribute capital, repurchase equity, pay compensation over certain thresholds or repay debt ahead of schedule, unless otherwise specified in the program terms. Borrowers or prospective borrowers are encouraged to review all loan terms and ensure compliance with the provisions for using the funds.

Clarifications to capital distribution restrictions
The CARES Act provides specific restrictions on compensation, stock repurchase, and capital distributions for borrowers of a Main Street Loan. However, these restrictions do not apply to “distributions made by an S Corporation or other tax pass-through entities to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings or distributions made by a tribal business to a tribal government owner.” Additional information pertaining to tribal businesses is provided in FAQ H.15.

To review the latest FAQ document as well as term sheets and other program information, please visit https://www.federalreserve.gov/monetarypolicy/mainstreetlending.htm.

If you have questions about the Main Street Lending Program or other COVID-19 relief options, please contact your HBK Advisor.

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EIDL Emergency Advance Funds Are Depleted

Date July 13, 2020
Authors Amy M. Reynallt
Categories

The Small Business Administration announced on July 11 that its Economic Injury Disaster Loan (EIDL) emergency advance funds, allocated through the CARES Act, and subsequently, the Paycheck Protection Program and Health Care Enhancement Act, have run out. EIDL funds to small businesses of $1,000 per employee up to $10,000, also referred to as emergency grants, do not need to be repaid, though they reduce forgiveness for borrowers with Paycheck Protection Program loans.

While emergency advance or grant funds have been expended, Economic Injury Disaster Loans remain available to eligible organizations to support working capital needs generated by the COVID-19 crisis. Loan terms include an amortization period of up to 30 years, and a low interest rate of 3.75 percent for small businesses and 2.75 percent for non-profit organizations.

For more information on eligibility and loan terms, visit sba.gov/disaster.

If you have questions about an Economic Injury Disaster Loan, the related emergency advance or other COVID-19 relief options, please contact your HBK Advisor.

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PPP Revised Forgiveness Applications Released, Interim Rules Revised

Date July 1, 2020
Authors Amy M. Reynallt
Categories

On June 17, 2020, the Small Business Administration (SBA) and Treasury released two new Paycheck Protection Program (PPP) forgiveness applications.

  • The first application, the Paycheck Protection Program Loan Forgiveness Application Revised June 16, 2020, is similar to the original application that was released in late May. Changes have been made to account for the program changes allowed by the Paycheck Protection Program Flexibility Act (PPPFA), enacted on June 5, 2020. In addition, the instructions for this application are now contained in a separate file.
  • The EZ Application, also called the Paycheck Protection Program PPP Loan Forgiveness Application Form 3508EZ, is available to borrowers who meet one of three criteria. These criteria are available in a checklist on the separate EZ application instruction file. In summary:
    1. The Borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form.
    2. The Borrower did not reduce annual salary or hourly wages of any employee by more than 25%, and the Borrower did not reduce the number of full-time equivalents (FTEs) between January 1 and the end of the covered period.
    3. The Borrower did not reduce annual salary or hourly wages of any employee by more than 25%, and the Borrower was unable to operate at the same business level due to compliance and guidance from Health and Human Services, the CDC, or OSHA, related to COVID-19.

    Borrowers using the EZ Application are not required to submit documentation regarding their annual salaries/hourly wages; however, they are required to maintain it. In addition, these borrowers are required to submit or maintain information regarding their full-time equivalent employees, depending on the checklist item they choose and certifications that they make.

    It is expected that more guidance will be released that will help Borrowers determine if they are eligible to use the EZ Application.

Other key notes from the applications and related guidance include:

  • An alternative payroll covered period is available for Borrowers using either the 8-week or the 24-week period. The alternative payroll covered period begins on the first day of the Borrower’s first pay period following their PPP Loan Disbursement Date.
  • S-corporation owner-employees may not include employer contributions for employee health insurance since these payments are already included in their compensation.
  • For a 24-week Covered Period, owner compensation is capped at 2.5-month equivalent of their compensation in 2019, up to $20,833. For an 8-week Covered Period, owner compensation is capped at 8 weeks of 2019 compensation, or $15,385, whichever is lower. S-corporation and C-corporation owners are considered owner-employees. Other owner-employee restrictions may apply.
  • For employees not considered owner-employees, cash compensation is capped at $15,385 for an 8-week Covered Period, and $46,154 for a 24-week Covered Period.
  • According to the Interim Final Rule, a borrower may submit a loan forgiveness application any time on or before the maturity date of the loan – including before the end of the covered period – if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness. The borrower must account for the excess salary reduction for the full 8-week or 24-week covered period if they reduce employee’s salaries or wages more than 25%. However, it is unknown how the borrower will account for FTE reductions in this scenario or how the borrower will make certifications verifying activity in the “Covered Period”. As a result, Borrowers may consider approaching this option cautiously, since guidance is expected to provide clarification.

In addition to updates covering the PPP forgiveness provisions, other general news about the PPP include:

  • On June 19, the SBA and Treasury released a statement noting that in order to provide public transparency and fiduciary responsibility associated with the use of taxpayer funds, the SBA will disclose the business names, addresses, NAICS codes, zip codes, business type, demographic data, non-profit information, jobs support, and loan amount in ranges for borrowers with loans over $150,000. For those with loans under this amount, SBA will list loan totals aggregated by zip code, industry, business type, and other demographic categories.
  • On July 4, 2020, President Trump signed legislation that extends the deadline for the SBA to issue Paycheck Protection Program loans to August 8, 2020. Previously, under the CARES Act, the SBA was only authorized to approve loans until June 30.

Questions still remain regarding the PPP and the forgiveness applications, and additional guidance is expected. For questions regarding your PPP loan or help regarding your forgiveness application, please contact your HBK Advisor.

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Watch: Paycheck Protection Program – A Guide to the Forgiveness Applications Released June 17

Date June 23, 2020
Authors
Categories

Frank Turocy, MSA, CPA and Amy Reynallt, MBA discuss the Paycheck Protection Program Loan Forgiveness Applications that were released on June 17.  Learn about the impacts of the PPPFA on the application, instructions on how to complete the application, and questions that remain unanswered.

Download the materials:
Presentation

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Unanswered Questions about PPP Loans Create Confusion, Anxiety

Date June 16, 2020
Authors Amy M. Reynallt
Categories

On June 8, the Small Business Administration and U.S. Treasury issued a joint statement indicating that guidance and a new PPP Loan Forgiveness Application would be released “promptly.” While we wait, borrowers are confused and anxious. Some of their most frequent asked questions:

Should I choose the eight-week period or the 24-week period?
We believe this will be an individual business decision. No clarity has been forthcoming on the Paycheck Protection Program Flexibility Act (PPPFA) provision, including when or how a borrower must make this election. Similarly, because the revised PPP Loan Forgiveness Application has not been released, questions remain as to how the application and related guidance may affect a borrower’s decision to select the eight-week or 24-week period.

Will my loan be on my books at the end of the year?
It’s possible. While we expect guidance on when borrowers can apply for forgiveness, we know forgiveness will need to be approved. Borrowers may find their balance sheets reflect their PPP liability at the end of the calendar year.

Have any definitions been clarified?
Unfortunately, there has been no guidance that provides clarity on definitions such as “owner-employee,” “transportation” as an approved utility, or for other terminology that has not been defined. Further, there is no indication of which definitions might be clarified in the coming weeks.

Are borrowers previously charged with certain crimes eligible for PPP loans?
On June 12, a new Interim Final Rule was released to loosen the eligibility criteria for these borrowers. It states that borrowers are ineligible if “an owner of 20 percent or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance within the last five years or any other felony within the last year.”

While we wait for more guidance, or with any of your questions or concerns about the Paycheck Protection Program, the Paycheck Protection Program Flexibility Act, or your business’s loan, please contact your HBK Advisor.

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SBA Accepting EIDL Applications from Small Businesses

Date June 16, 2020
Authors Amy M. Reynallt
Categories

On June 15, the Small Business Administration announced it was again accepting applications from small businesses for its Economic Injury Disaster Loan (EIDL) and EIDL Advance. The program was closed to new applications in mid-April due to a lack of funding, but the Paycheck Protection Program and Health Care Enhancement Act passed on April 24 appropriated an additional $60 billion to the program. In late April, the SBA began accepting applications again, but only from agricultural businesses, which had been excluded from eligibility in the initial round of funding.

The program provides loans of up to $2 million for recovery from economic injury resulting from COVID-19. The loans support working capital and may be used to pay fixed debts, payroll, accounts payable, and other bills that would otherwise have been paid if the COVID-19 crisis had not occurred. Loans are awarded on a first-come, first-served basis.

The loans come with an amortization period of up to 30 years. Loans to small businesses carry a 3.75 percent interest rate; for non-profit organizations, the rate is 2.75 percent. An emergency advance or grant of up to $10,000 will be provided to borrowers who request it. While the advance does not need to be repaid, it will reduce forgiveness on the borrower’s Paycheck Protection Program loan if the borrower is using both programs. Loans over $25,000 may require collateral, and loans over $200,000 may require personal guarantees.

To apply for an EIDL or learn more about eligibility criteria and program terms, visit sba.gov/disaster. To discuss relief options for your business, please contact your HBK Advisor.

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PPPFA Creates New Guidelines for PPP Loans

Date June 9, 2020
Authors Amy M. Reynallt
Categories

On June 5, President Trump signed the Paycheck Protection Program Flexibility Act of 2020 (PPPFA) into law. Meaningful changes to the Paycheck Protection Program (PPP) include:

  1. Extends covered period from eight to 24 weeks.
    The PPPFA defines the “covered period” as “beginning on the date of the origination of a covered loan and ending the earlier of the date that is 24 weeks after such date of origination or December 31, 2020.”  This extension gives borrowers a longer period to spend their PPP loan proceeds on allowable uses.

    A PPP FAQ previously defined the covered period as beginning on the date the lender makes the first disbursement of PPP funds to the borrower. We assume this commencement date still applies, despite the extension of the length of the covered period. Additionally, the “alternative payroll covered period” allowing borrowers to align the covered period with their own payroll period was established via the PPP Loan Forgiveness Application, not by legislation. We await guidance and/or changes to the PPP Loan Forgiveness Application on whether or not borrowers can continue to use this alternative period.

  2. Adjust spending limitations for forgiveness.
    Previous guidance and the PPP Loan Forgiveness Application encouraged borrowers to spend 75 percent of loan proceeds on payroll costs and no more than 25 percent on non-payroll costs as part of what is required for 100 percent loan forgiveness.

    However, the PPPFA states that borrowers “shall use at least 60 percent of the covered loan amount for payroll costs.”  On June 8, the SBA and Treasury released at joint statement that clarified that if a borrower uses less than 60% of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60% of the loan forgiveness amount having been used for payroll costs.

  3. Moves safe harbor dates to December 31, 2020.
    The CARES Act states that borrowers who had a reduction in full-time equivalent (FTE) headcount or average annual salary or hourly wages of employees between February 15 and April 26, 2020, could eliminate those reductions by June 30, 2020 and the corresponding reductions in forgiveness.

    PPPFA changes the June 30, 2020 date in the safe harbor calculations to December 31, 2020. It is expected that the PPP Loan Forgiveness Application will be updated to reflect this legislative change.

  4. Provides additional exceptions to FTE headcount.
    The PPP FAQs, Loan Forgiveness Application, and Interim Final Rule on Loan Forgiveness indicated that borrowers would not be penalized by reductions in forgiveness for FTE reductions associated with employees that were fired for cause, voluntarily resigned, voluntarily requested and received a reduction in hours, or rejected an offer to be rehired at the same hours and rate of pay.

    Borrowers would need to properly document these FTE reductions and would need to report employment rejections to the applicable state unemployment office. However, if all guidelines were followed, borrowers could count the FTE reduction (assuming they were not replaced by a new hire) as an “FTE reduction exception” and forgiveness would not be negatively affected.

    The PPPFA adds other exceptions to the FTE count calculation. Forgiveness will not be reduced for the following situations:
    • The Borrower’s inability to rehire individuals who were employees on February 15, 2020
    • The Borrower’s inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020
    • The Borrower’s inability to return to the same level of business activity as of February 15, 2020, due to compliance with guidance issued by the HHS, CDC, or OSHA between March 31 and December 31, 2020, related to sanitation, social distancing, or other safety measures applicable to employees or customers

  5. Changes loan terms.
    Most PPP loans were issued with 2-year amortization period. For loans issued after June 5, 2020, PPPFA indicates that loan amortization periods must have a minimum maturity of five years. Borrowers whose loans were issued before June 5 can negotiate with their lender to adjust their terms accordingly.

    In addition, most loans were issued with six-month payment deferral periods. The PPPFA states that lenders must allow the deferral of principal, interest, and fees until the date on which the amount of forgiveness is remitted to the bank. If a borrower fails to apply for forgiveness within 10 months after the last day of their covered period, they will not be required to start payments of principal, interest, and fees until 10 months after the last day of that covered period.

  6. Allows for deferral of employer payroll taxes.
    Lastly, PPP borrowers found only a limited benefit from a provision in CARES Act Section 2303 allowing employers and self-employed individuals to defer payment of the employer’s share of Social Security tax (6.2 percent). However, PPP borrowers could only defer deposit and payment of the tax from March 27, 2020, through the date the lender issued a decision to forgive the PPP loan.

    The PPPFA removes that restriction. Borrowers may now defer through December 31, 2020, regardless of whether or not they have had a loan forgiven. Half of the deferred tax must be paid by December 31, 2020; the other half by December 31, 2021.

We recommend that PPP borrowers watch for additional guidance, including an updated PPP Loan Forgiveness Application. In addition, borrowers are encouraged to ensure they are maintaining thorough employment and expense related records and documentation as suggested in current guidance and the Application.

For questions about your PPP loan or related forgiveness, please contact your HBK Advisor.

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President Trump Signs Paycheck Protection Program Flexibility Act

Date June 6, 2020
Authors Amy M. Reynallt
Categories

On Friday, June 5, President Trump signed the Paycheck Protection Program Flexibility Act of 2020, which was passed by the House of Representatives on May 28 and by the Senate on June 3. The bill loosens restrictions on the Paycheck Protection Program (PPP) and allows for changes including the following:

  • Extends the covered period from eight to 24 weeks, ending no later than December 31, 2020.
  • Reduces the requirement for the covered loan amount to be used on payroll costs from 75 to 60 percent.
  • Allows businesses that receive PPP forgiveness to defer payroll taxes.
  • Provides additional exemptions based on employee availability.
  • Extends the deferral period for loan principal, interest, and fees.

PPP borrowers should continue to watch for additional guidance from the SBA regarding their loan and its forgiveness. If you have questions about your PPP loan or its forgiveness, please contact your HBK Advisor.

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