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Brooke Grisham     |     
VP, NYL and CEO, Nautilus Group


Thought Leadership: Business Planning

The Paycheck Protection Program (PPP) enacted under the Coronavirus Aid, Relief, and Economic Security (CARES) Act in response to the COVID pandemic established a massive forgivable loan program to support small businesses during these difficult times.

Of course, the initial emergency legislation covering such a broad swath of the economy left many questions for borrowers unanswered. Both the Small Business Administration (SBA) and the U.S. Department of the Treasury (and the Internal Revenue Service) have provided supplementary guidance over the last two months, much of which has been welcome. Some provisions, however, were unexpected, and it is very important for borrowers to be made aware of them. Compounding concerns has been the inability for some employers to resume operations and/or hire back employees to expend the borrowed funds. On June 5, 2020, Congress passed the Paycheck Protection Flexibility Act of 2020 (Flexibility Act), a relief bill related to PPP that offers additional flexibility for borrowers to extend the period during which funds must be expended.

Paycheck Protection loan forgiveness under CARES and Flexibility Acts

Funds obtained by borrowers under the Paycheck Protection Program is based on loan funds expended on:

  • Payroll costs (a minimum of 60% of borrowed funds);
  • Interest payments on mortgages (incurred before February 15, 2020) on real or personal property of the business (not including any prepayments);
  • Rent payments under a leasing agreement (in force before February 15, 2020); and
  • Utility payments of the business including electricity, gas, water, transportation, telephone or internet access for which service began prior to February 15, 2020.

The period to spend PPP funds is during the period of the earlier of 24 weeks from obtaining the loan or December 31, 2020. Furthermore, the amount of any forgiveness is based on the extent employees are retained on the payroll of the business; however, forgiveness will not be reduced due to workforce reduction if the employer can document an inability to rehire prior employees or similarly qualified individuals for such positions.

Borrowers must request forgiveness from their lenders by submitting documentation verifying the number of full-time equivalent employees, as well as their payroll costs, mortgage payments, rent payments and utilities payments within 10 months of the end of the covered period (8 weeks or 24 weeks as described above).

Loan Certification

On April 8, 2020, the SBA, in consultation with the Treasury Department, issued its first in a series of updated frequently asked questions. In response to highly publicized loans obtained by large companies, including public companies, the SBA addressed concerns about financial suitability for loans, a criteria not specifically referenced in the CARES Act. CARES, however, did provide that borrowers must certify with their loan applications that:

  • The uncertainty of current economic conditions makes necessary the loan request to support ongoing operations;
  • Funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; and
  • No duplicate loan applications are pending or duplicative amounts have been received.

The FAQs indicated that the SBA would review the suitability of loans for borrowers that may have had other sources of liquidity or capital available when obtaining the loan. Such guidance creates concerns and ambiguities over the extent to which a loan was necessary to support ongoing operations, as well as potential civil and criminal liability exposure as to the certification that the PPP loan was necessary. Ultimately, on May 13, 2020, the SBA established a certification safe-harbor that any borrower (including affiliates) that received a loan of less than $2 million will be deemed to have made the required certification of necessity in good faith.

  • Treasury officials have indicated that they intend to review loans in excess of such level. The SBA went on to state in its guidance that borrowers that it deems did not have adequate basis for the required certification will be directed to repay borrowed funds—assuming such funds are repaid, SBA will not pursue other enforcement or referrals to other agencies regarding the certification.
  • Of additional note, the Treasury Department recently indicated that it will be disclosing certain information about PPP borrowers who obtained loans in excess of $150,000—specifically,the names and addresses of such businesses would be made publicly available, as well as demographic data and other information.

Best practices for current borrowers to maximize eligible forgiveness

In light of the near daily updates, guidance and legislative changes, borrowers are understandably concerned about both complying with the myriad aspects of the rules, as well as maximizing the amount of the loan that may ultimately be forgiven. To that end, it is crucial for most borrowers to engage with their professional advisors to assist with proper documentation and record keeping. Conventional wisdom indicates that thorough documentation will be crucial to substantiate eligible expenditures, ensure the proper timing within the covered period, and evidence the need for the loan. Some best practices for maintaining and accounting for PPP funds include the following:

  • Many borrowers established a separate bank account for borrowed funds and only applied such funds to forgivable expenditures. Of course, practical limitations may have made this option unworkable in many cases—as such, adequate record keeping evidencing an expense incurred during the covered period, as well as those paid, will likely suffice in most cases. The expanded 24-week covered period from the original 8 weeks may help many borrowers who were unable to utilize the loan proceeds during the ongoing COVID shutdown.
  • Importantly, SBA guidance states that borrowers should retain supporting records for a period of six years after loan forgiveness. Such documents include all records relating to the loan, including documents submitted with the loan application, documents supporting certifications as to necessity of the loan, and documentation to support forgiveness and demonstrating material compliance with PPP requirements.
    • It likely makes sense to review the initial loan application prior to preparing the loan forgiveness application to address any potential inconsistencies. For many borrowers, the initial loan documents may have been prepared in haste during a very chaotic period—now is the time for borrowers to ensure clarity and consistency for PPP funds.
    • While many borrowers remain concerned about scrutiny as to the “necessity” of loans, it likely makes sense to provide contemporaneous records as to various risks to the business that support the use of borrowed funds.
      • For example, records and company minutes may document internal discussions and projections regarding revenue and profit margins, concerns about the need to lay off or furlough employees, costs incurred in shifting the work environment where applicable and lost productivity as a result, how other closures were expected to impact the ability to operate, and, for businesses that may have had access to other sources of capital, statements demonstrating that funds would not have otherwise been borrowed in order to pay furloughed employees or maintain closed operations.
    • Other important documents to retain include:
      • Detailed payroll records for cash compensation, benefits and hours worked where applicable;
      • Written offers to re-hire employees that elected not to return; and
      • Documentation for self-employed earnings where applicable;
        • Per SBA guidance, the 2019 Schedule C, provided as part of loan application, must be used to determine the amount of net profit allocated to the owner for forgiveness purposes. In most cases, this schedule also formed the basis for the initial loan—additional recent guidance for self-employed/independent contractors/sole proprietors (who did not otherwise include payroll costs of other employees in the calculation of the loan amount) provides that such borrowers using the 24-week period for the forgiveness calculation will generally be eligible for full forgiveness of such borrowed amounts, regardless of how such funds were specifically expended, as such funds are assumed to constitute payroll costs.
  • As many cases will result in less than 100% forgiveness for PPP funds, borrowers should also be prepared to repay some amount of the loan for a variety of reasons. Of course, under the Flexibility Act, the term for repayment and initial deferral for the start of repayment was generally extended as described above.
  • Additionally, borrowers should be very cautious with respect to transactions that could invite closer scrutiny of a PPP loan, including repayment of shareholder loans or other distributions to owners outside the normal course of business, compensation paid to family members who either performed no services or were otherwise not on the historical payroll of the business, and use of PPP funds for non-permitted purposes. Some borrowers may be under the impression that mere repayment of funds will avoid further scrutiny; however, the initial certification of the loan and clear limitations of how loans are to be used must be kept in mind.

About the author

Brooke Zrno Grisham, ChFC®, CLU®, AEP®, is a Vice President at New York Life and Chief Executive Officer of The Nautilus Group®, a membership-based resource accessible to a group of approximately 200 experienced agents and financial professionals affiliated with New York Life. 


The Nautilus Group® is a service of New York Life Insurance Company. Nautilus, New York Life Insurance Company, its employees or agents are not in the business of providing tax, legal or accounting advice. Individuals should consult with their own tax, legal or accounting advisors before implementing any planning strategies. © 2020 New York Life Insurance Company. All rights reserved.