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The PPP's Loan Forgiveness Provision Leaves Out Many Companies That Need it the Most

April 16, 2020 6 Min Read Business Strategy, Business Tax
Mario O. Vicari, CPA
Mario O. Vicari, CPA Director, Family-Owned Businesses Group Co-Leader, ESOP Group Leader

The New Lease Accounting Standard and the Impact on Loan CovenantsThe Paycheck Protection Program (PPP) is a vital element of the CARES Act passed by Congress to provide economic assistance to companies in the current economic shutdown. The PPP is designed as a loan which becomes a grant for borrowers who meet certain loan forgiveness criteria and tests. The program will help many companies, however, we have identified gaps in the rules that will drastically reduce the program's loan forgiveness benefits for some of the hardest-hit companies.


While these gaps, as we explain in further detail below, will likely not come as a surprise to the affected companies, we felt it was important to acknowledge the situation. If legislators do not act quickly to revise the current loan forgiveness rules, our fear is that those companies that are hardest-hit by this economic crisis will be put in an even more difficult position. While we hope that Congress is aware of this situation and is actively working toward a resolution, we would encourage you to reach out to your local representative to highlight the extent of the issue and the likely impact it will have.

Over the last several weeks, we have assisted hundreds of private and family-owned companies in making loan applications to the SBA for much-needed PPP funding in this time of crisis. Now we - and they - have begun to turn our attention to the borrower criteria for PPP loan forgiveness.

Current guidance on loan forgiveness states that in order to qualify, a company must spend the loan proceeds on certain allowable costs in the 8-week period subsequent to the loan. This 8-week period is called the "covered period." Allowable costs include:

  • Payroll costs (as defined)
  • Rent
  • Utilities
  • Certain interest payments

The non-payroll portion of these costs cannot exceed 25 percent of the total costs during the covered period. If the funds are not fully used for allowable costs during the covered period, the borrower will have a loan that has to be repaid based on the amount of the funds that were not properly used. Those funds that are used to fund allowable costs are subject to two additional tests that could reduce the amount of loan forgiveness:

  1. Retention of Employees - The SBA will reduce the amount of loan forgiveness based on the ratio of full time equivalent employees (FTEs) during the covered period compared to a prior period. If you don't maintain FTEs at the same level in the covered period as in the earlier period, your loan forgiveness amount will be decreased. There is an exception if you re-hire workers by June 30, 2020.
  2. Reductions in Salaries and Wages - The SBA will also reduce the amount of loan forgiveness if you reduce compensation of any employees (with annualized wages below $100,000) by more than 25 percent during the covered period as compared to the most recent full quarter. There is an exception if you reinstate wage and salary levels by June 30, 2020.

The problem with these two additional tests is that the hardest-hit companies will likely not meet the requirements for Paycheck Protection Program loan forgiveness.

These companies are those that were required to shut down partially or completely because they were considered "non-essential" businesses. Many saw their revenues disappear and had to either lay off or furlough most, if not all, of their workers immediately. We have a number of clients in this position.

Even after the  government allows these companies to reopen, the road back is going to be a long and tough one. Most will not resume normal operations overnight, and it may take many months, if not years, for their revenues to recover. These companies will not be in a position to rehire all of their workers because many will not rebound to the same level of revenues they had before the crisis.

For these reasons, it is highly unlikely that these companies will be able to return to regular operations within 8 weeks of receiving their PPP loan (the period of time that determines loan forgiveness). In fact, some of these companies receiving loans may not be able to reopen their businesses during the 8-week period at all, let alone think about maintaining employment and wage levels.

If Congress's goal in creating the PPP was to provide funding that ensures employees will have a business to return to, then we believe that the companies that were most impacted should be able to use PPP loan proceeds for their survival while they work to get restarted. We suggest the following changes to the PPP loan forgiveness rules for those companies that had some form of business closure:

  1. Expand the Use of Funds for Allowable Costs - In cases where a company was forced to close or make substantial layoffs, we believe the rules should be amended to expand the list of allowable costs for which companies can use the funds, including costs just to keep the business going and costs to reopen such as marketing and advertising - even if employees cannot return to work because of the closure.
  2. Remove the Limits on Allowable Costs for Payroll and Non-Payroll Costs - By removing the 25 percent cap on non-payroll-related costs and reducing the requirement that 75 percent of the costs be used for payroll costs, companies that are struggling will have more latitude to spend the funds on things they need to keep their businesses afloat.
  3. Extend the "Covered Period" of Time to Spend the Funds - The companies that were the hardest hit will need more than 8 weeks to recover and restart their businesses. We suggest that the covered period be extended to provide businesses more time to recover and still be eligible for loan forgiveness.

We don't believe this oversight was intentional on the part of Congress, but it is clear that the current loan forgiveness rules will leave out a large number of the companies that were hurt the worst. These companies will be faced with the difficult choice of either not accepting badly-needed funds or having to repay a large loan.

Our view is that these companies are just as "essential" to our economy as any others. They also pay their fair share of taxes. They deserve the same opportunity for loan forgiveness under the PPP so their companies can survive and thrive in the future.


Mario Vicari, Kreischer Miller

Mario O. Vicari is a director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email.   




Christopher F Meshginpoosh CPAChristopher F. Meshginpoosh is managing director of Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email.   



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Mario O. Vicari, CPA

Mario O. Vicari, CPA

Director, Family-Owned Businesses Group Co-Leader, ESOP Group Leader

Construction Specialist, Family-Owned Businesses Specialist, ESOPs Specialist, M&A/ Transaction Advisory Services Specialist, Transition/Exit Planning Specialist, Business Valuation Specialist, Owner Operated Private Companies Specialist, Private Equity-Backed Companies Specialist

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