Paycheck Protection Program (PPP) round two

What is the PPP2?

In March the US government passed The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Included in the CARES Act was a highly successful loan program for small business owners, the Paycheck Protection Program (the “PPP”). PPP loans were 100% forgivable—if you closely followed the rules laid out in the bill.

On December 27, a second COVID-related stimulus bill was passed (the Consolidated Appropriations Act, 2021) with another $284 billion made available for PPP funding. “PPP2,” as some are calling it, contains many similarities to the first round of PPP, but also has several important differences. During the first round of PPP, Rewards Network (“we”) received many questions around what restaurant owners needed to do in order to receive 100% forgiveness on their PPP loan. Our restaurant experts studiously combed through the CARES Act, updates from the Treasury Department, and the Paycheck Protection Program Flexibility Act of 2020, to provide you our best take on how to receive full forgiveness of your PPP loan.

We have taken the same steps on changes for PPP2, which you will find below. As the Small Business Administration (“SBA”) and the Treasury Department work towards providing further guidelines, keep in mind that this information is subject to change. This is a rapidly developing subject matter, we will continue providing updates as more information is released in the next several days. As always, you should not make business decisions based solely on this blog, but rather, you should use this to help inform your discussions with your business advisors, accountants, and attorneys.

PPP2 total funding available

$284 billion has been set aside for PPP2 loans, with $35 billion set aside for those small businesses that did not receive PPP funding. An additional $40 billion is set aside for small businesses that either have less than 10 employees or that are in a low-income area and where the employer is seeking less than $250,000.

Who is eligible to apply?

To be eligible for a PPP2 loan, a restaurant must have been in operation by February 15, 2020. If your restaurant did not receive a PPP loan, then the eligibility criteria in the CARES Act apply to your application for a PPP2 loan, with minor changes. If your restaurant received a PPP loan, the following additional eligibility criteria apply to a PPP2 loan:

Second-time qualified borrowers (businesses that received a PPP loan, but need additional funding):

1. Have 300 or fewer employees per location (note: this figure is used as most of our readers are restaurants with a NAICS Code of 72).
2. Have used or will use the full amount of your first PPP loan.
3. Demonstrate a 25% gross revenue decline in accordance with any of the following:
   • If you opened in the third quarter of 2019, then compare your gross receipts from any quarter in 2020 with either your Q3 2019 or Q4 2019 gross receipts.
   • If you opened in Q4 2019, then you may compare your gross receipts from any quarter in 2020 with your gross receipts from Q4 of 2019.
   • If you were not in business in 2019, but you were in business between January 1, 2020 and February 15, 2020, special rules apply to the calculation of your gross receipts for purposes of qualifying for a PPP2 loan.
4. For borrowers that returned all or part of a PPP loan, PPP2 allows for a second loan, but contains special provisions relating to these borrowers.

New allowable uses

As with the PPP, the “allowable expenses” eligible for loan forgiveness in PPP2 include payroll, rent, covered mortgage interest, and utilities. Expanding on the PPP, PPP2 makes the following expenses potentially forgivable, and allows the borrower to choose a “Covered Period” (the amount of time the borrower has to spend their PPP2 loan) between 8 and 24 weeks:

1. Worker protection and facility modification expenditures, including personal protective equipment, made to comply with COVID-19 federal health and safety guidelines.
   1. What does this mean? “Worker protection expenditure” is defined as “an operating or a capital expenditure to facilitate the adaption of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements established, or guidance issued by a state or local government during the period beginning on March 1, 2020.” This category includes costs incurred buying staff PPE, building new outside or drive-up dining capabilities, or adding protective measures such as better ventilation or acrylic between tables.
2. Expenditures to suppliers that are essential at the time of purchase to the borrower’s current operations.
   1. What does this mean? This is defined as “an expenditure made by an entity to a supplier of goods for the supply of goods that are essential to the business operation or that is made pursuant to a contract, order, or purchase order.” Of interest to many restaurant owners, this specifically applies to perishable goods.
3. Covered operating costs, such as software and cloud computing services.
   1. What does this mean? Covered operating costs is defined as “a payment for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records, and expenses.” For restaurants, “product or service delivery” jumps right off the pages of PPP2, and we will be paying attention to this as guidance is issued by the SBA and the Treasury Department.
4. Covered property damage costs.
   1. What does this mean? A covered property damage cost is defined as “a cost related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.”

What you need to provide (specific requirements and acceptable documents may vary depending on the lender)

1. Complete PPP application form.
2. Average monthly payroll cost
   • For Businesses operating for more than one-year, either:
     • your average monthly payroll costs (see below) for the one-year period immediately preceding the loan application date; or
     • your 2019 average monthly payroll costs.
   • For Seasonal business: use any 12-week period between February 15, 2019 – February 15, 2020 to compute your monthly payroll.
3. A good faith certification (a promise) that states:
   • The uncertainty of current economic conditions makes the loan request necessary to support ongoing operations.
   • The borrower will use the loan proceeds only to retain workers and for other allowable uses.
4. Some documents that may be required:
   • 2019 proof of payroll costs;
   • Business information (TIN, EIN, SSN);
   • Owner Information (all owners, title, %, address, TIN (EIN, SSN)).

How much can I apply for?

Most PPP2 borrowers can receive a loan amount of up to 2.5 times their average monthly payroll costs, the same as with the original. Unlike the first PPP, however, the maximum loan amount under PPP2 has been cut from $10 million to $2 million.

PPP borrowers with NAICS codes starting with 72, which includes the vast majority of all restaurants and hotels, can receive up to 3.5 times their average monthly payroll costs, again subject to a $2 million maximum.

What is included in my payroll costs?

Payroll costs DO consist of the following:

• Salary, wage, commission, or similar compensation (for individual employees making up to $100,000 annually);
• Payment of cash tip or an equivalent;
• Payment for vacation, parental, family, medical, or sick leave;
• Payment required for group health benefits, including insurance premiums (employer cost);
• Payment of retirement benefits (employer cost);
• Payment of State or local taxes assessed on the compensation of employees; or
• Paid administrative leave
• Group benefits are defined to include group life, disability, vision, and dental insurance

Payroll costs DO NOT consist of the following:

• Employee compensation for individual employees that exceeds a total of $100,000 in annual compensation (prorated for the Covered Period)
• Payroll taxes and income taxes
• Compensation of employees who reside outside of the United States
• Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116– 5 127) and qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act

How do I calculate my borrowing amount now that I know my payroll costs?

• The loan amount is calculated at 3.5x your monthly average total payroll costs (not to exceed $2 million)
  • Multiply average monthly payroll costs for the one-year period before the loan is made by 3.5.
  • Multiply average monthly payroll cost for 2019 by 3.5.
  • Compare the two products above and select the payroll costs calculation that is right for you.
  • Example: What is the maximum PPP loan that I can receive?
  • Assumptions:
    • 20.33 FTE employee count (more on that below)
    • ~100K monthly sales
    • 16% tip average, and
    • 30% labor cost (no additional costs were considered here)

Setting yourself up for full PPP2 forgiveness

Many of you are likely thinking just because I can qualify for a loan of 3.5 times my average monthly payroll costs, that doesn’t necessarily mean that I should take the full amount. While more guidance is expected from the SBA and the Treasury Department on topics that influence loan forgiveness, our recommendation for local restaurants is to take the full amount you qualify for, and then maximize every penny you spend with an eye towards full loan forgiveness. The following is designed to help you get there.

The goal of PPP2 has not changed from the original PPP: it is designed to get employees back to work (and keep them employed) and to help you pay other allowed expenses during this time of national crisis. Like before, if you create and follow a strategy based on accomplishing these goals, you will be giving yourself the best shot possible of exiting this crisis with an engaged staff and a strong business footing you can build on.

Streamlined forgiveness on loans under $150,000

PPP2 has simplified the forgiveness process for loans of $150,000 or less. As the average loan during the original PPP rounds was $100,000, and the vast majority of borrowers borrowed less than $150,000, this is likely to be the way most restaurants apply for PPP2 forgiveness.

What borrowers will need to do:

1. Sign and submit a one-page certification to their lender stating:
   1. how many employees the loan helped the borrower keep on staff;
   2. the estimated amount of loan that was spent on payroll costs; and
   3. the total loan amount received.
2. Complete an application provided by the SBA.
3. Attest that the borrower gave a truthful Borrower Certification and otherwise has complied with all other PPP2 requirements.
4. Promise to retain relevant records related to employment for four years, and spending records relating to Allowable Expenses for three years, for SBA audit purposes.

Forgiveness process for loans above $150,000

The Senate Committee on Small Business and Entrepreneurship has been given until February 10, 2021, to create the forgiveness process for PPP2 loans in excess of $150,000. We will update this blog as changes are made but to keep yourself safe in the meantime, please see below for more on keeping track of your PPP funds to achieve full forgiveness.

Button up the books

Irrespective of your loan amount, your first step should be keeping a close eye on how you are spending PPP2 loan proceeds. Many lenders in the first round of PPP loans required the establishment of a dedicated account for PPP loan proceeds this allowed many borrowers to keep a close watch on their PPP funds, and to keep their eye on full forgiveness. Different lenders have different rules, however, and practically speaking, for 99% of restaurants, here is what you can do:

• Keep your PPP loan funds separate from any other working capital;
• Make sure that your spending ratio for money received from the PPP loan is always within the 60% / 40% ratio, meaning you are spending 60% of the loan proceeds on payroll expenses, and the other 40% on allowable expenses eligible for forgiveness;
• Keep records of everything you use the loan funds for;
• Spend your PPP2 funds within the Covered Period you elect (between 8 and 24 weeks).

By following these steps, you will have done everything you can to maximize your potential loan forgiveness.

What happens if I must staff less than the FTE level I used to calculate my loan amount?

Many restaurant owners have told us that one of their biggest concerns is: what happens if I have to staff fewer FTE’s during the Covered Period than I used to calculate my average monthly payroll costs? This was a major topic and concern during the first round of PPP funding, made more pressing by government shutdown orders and capacity limitations, and it led to several SBA rules and regulations, Treasury Department guidelines, and the passage of the Paycheck Protection Program Flexibility Act of 2020. With another round of government ordered closings currently impacting markets across the country, you are wise to have this concern at the forefront of your mind while considering what level of funding to request.

In the first round of PPP funding, a reduction in force or a reduction in employee wages of more than 25% when compared to pre-COVID levels created a “forgiveness penalty”: the more you reduced your staffing levels or staff pay, the more you were penalized. Because of the dramatic impact of public health related closings and capacity limits, the SBA, Treasury Department, and even Congress passed clarifying rules, regulations, and clarifications on this topic. The Paycheck Protection Program Flexibility Act of 2020 went as far as to create a Safe Harbor, and an exception to the forgiveness penalty for businesses severely impacted by closings and capacity limits.

Unfortunately, we cannot state unequivocally that the Safe Harbor and exceptions will apply to PPP2 loans: both are tied to dates that will expire prior to the publication of this blog. Without clear specifications that state what to do if employee reductions occur, and how reinstatement will impact the forgiveness calculation, PPP2 borrowers are without clear guidance on this important topic.

Importantly, the SBA is required by the legislation creating PPP2 to issue guidance on this and other topics by January 6, 2021. Further, the PPP2 legislation empowers the Secretary of the Treasury and the SBA to jointly change dates in the CARES Act to effectuate the intent of PPP2. Rewards Network is calling on the Treasury Secretary and the SBA to extend the Safe Harbor and other exception deadlines through June 2021 so as not to unduly burden restaurant owners and other borrowers, and we will update the blog when more information is released.

Tax implications

While we are normally encouraged to stay away from anything relating to tax information, some things have changed since the initial CARES Act that you should speak with your accountant about. During your 2020 tax preparation conversations, be sure to ask about: not including PPP or PPP2 funds in calculations of your table income and the deductibility of expenses paid with the proceeds of a PPP loan.

Unsure where to apply?

There were many lessons learned during the first round of PPP funding, including where and how to apply. Many restaurants reported to us that they had the most success going directly to their day-to-day local bank or credit union for funding, as opposed to a large national bank. Some restaurants had a tough time securing funding with large financial institutions, even if that’s who they typically bank with. If you are having a hard time securing a loan with your bank you can apply through any existing SBA 7(a) lender or through any participating federally insured depository institution, federally insured credit union, or Farm Credit System institution.

Rewards Network has recently partnered with Womply, a local commerce platform who last year helped over 50,000 small businesses apply for and get approved for a PPP loan. If you would like to apply for a PPP loan with Womply, simply click here to start the process.

This best effort analysis is based upon the reading of the Consolidated Appropriations Act, 2021 and known Treasury and Small Business Administration regulations as of December 30, 2020. This is a rapidly developing subject matter, and your personal accountant, banker, and attorney will be best suited to help you determine how this blog applies to your specific business needs. Provided for information purposes only and subject to revision.

Need more information about coping with COVID-19? Check out our free resource section dedicated to advising restaurateurs on how to navigate the changing rules and regulations during the COVID-19 crisis.