Paycheck Protection Program loan forgiveness and safe harbor deadline: Here’s the latest
Several weeks after the coronavirus pandemic decimated the U.S. economy, countless small businesses impacted by the crisis have yet to receive a shred of government relief. For others that secured federal loans through the Paycheck Protection Program, many are discovering the devil was in the details.
And those details keep changing.
According to a recent count by The Wall Street Journal, the Small Business Administration has issued more than 40 guidance updates since the program first rolled out. The PPP, as it’s known, allows companies with 500 employees or fewer to apply for forgivable loans of up to $10 million, but the initial rules were riddled with controversial loopholes and confusing contingencies, leaving many to wonder if the funds—$350 billion in the first round approved by Congress followed by an additional $320 billion—were really money well spent.
In one notable example, the Treasury Department issued a change in guidance in April that suggested publicly traded companies that received loans should reexamine whether they really need them. Many did just that, including restaurant chains like Ruth’s Chris Steak House and Shake Shack, which vowed to return the funds.
For borrowers, two important deadlines are approaching: The safe harbor deadline and the eight-week loan forgiveness period. Here’s what to know:
As noted above, the government could end up making a lot of trouble for recipients who are determined to have taken the loans in bad faith. But guidance from the SBA or the Treasury hasn’t been very clear about what that means, and many businesses have expressed concern that they could potentially be charged with fraud.
“Given potential liability, businesses should review the required certifications in their PPP loan applications, particularly the necessity of PPP loan funds to support their ongoing operations,” said Neil Getnick, an anti-fraud lawyer at the New York City firm Getnick & Getnick, in an email. “Moving forward, federal and state legislation involving funding for COVID-19-related issues needs to prioritize protecting against fraud, waste, and abuse.”
But time is running out. The deadline for returning the loan “no questions asked” is today (Thursday, May 14). After that, as the New York Law Journal points out, “the government will no doubt seek to make examples of undeserving PPP loan recipients.”
Loan forgiveness period
The rules regarding loan forgiveness have also been criticized as confusing and restrictive. PPP loans are only forgivable if a recipient spends most of the money maintaining payroll costs. According to the SBA, 75% must be spent on payroll, while the rest can be spent on other business costs like utilities or rent.
How much of the loan is forgivable? This is where it gets tricky. A borrower’s specific forgiveness amount is based on payroll costs over an eight-week period, and the clock starts ticking as soon as the loan is disbursed. For some of the first recipients, who received funds in early April, that means the eight-week period will expire in the next few weeks. What happens after eight weeks is not entirely clear (both lenders and borrowers have been asking for more guidance), but it’s likely that the loan will not be considered forgivable after that point.
It’s also worth noting that some groups—restaurants and other business with storefronts—have been asking for changes in these forgiveness restrictions. Many argue that it makes no sense for them to maintain payroll when they’re unable to operate due to COVID-19 shutdown orders.