19. Convince me a PPP loan is not for you.

Jovita Carranza, administrator of
the Small Business Administration

Calling all roasters who have not already applied for a Paycheck Protection Program (PPP) Loan - please convince me, 'why not?'

Over the past month, the U.S. Treasury has made several dramatic changes which, in my mind, wipe out almost every good excuse I've heard so far about why a roaster would not apply for a PPP loan.

A. H.R.7010, the Paycheck Protection Program Flexibility Act of 2020 passed on June 5. This made the application for forgiveness of the loan much, much simpler. (There is now an EZ form similar to the EZ form for your taxes.) See our blogpost on that act.
B. The PPP Flexibility Act act also clarified many vague technicalities that had some companies worried - including the 8 week "covered period." In short, the government recognized the 8 week period was irrelevant for most businesses and offered a second option, the 24 week covered period.
C. On July 3, the PPP Extension Act was signed into law, extending the deadline for application for a PPP loan out another month, to Aug. 8, 2020.

These changes and clarifications eliminate excuses for roasters who hesitated because, "what if I can't bring back my people until September or October?" Now that will be fine. I also heard the legitimate concern about, "will the loan actually be forgiven? I'm not signing up for a debt if the rules for getting out are not clear." Makes perfect sense. But now the rules are clear and they're not that hard to follow. If you find them confusing, no worries! Please contact us about our Loan Application Assistance for Roasters (LAAR) program!

Also, now it is relatively easy to find a bank that will work with you on your loan. Early on, it was difficult for some businesses to find a bank to make the PPP loan. Businesses cannot go directly to the Small Business Administration (SBA), they must apply via a bank. Now on-line banks like Paypal and Nav offer them, so almost every business can access the PPP, even if they have their business account at an isolated, small town bank.

Private-investment owners
The one excuse I've heard that does appear to be a show-stopper is when a roaster is part of a larger investment/equity group. There are prohibitions in the original law creating the PPP against lending to businesses owned by these groups. Data released on Monday, July 6, from the SBA indicates that many large restaurant groups did receive millions in PPP loans. However, the SBA is requesting these funds be returned.

"Companies applying for the money were required to certify that the money was “necessary to support the ongoing operations,” while taking into account “their ability to access other sources of liquidity,” the SBA’s website states. 

Industries receiving the loans
The new data released by the SBA this week indicates about half the loans went to five industries, according to a Washington Post report. They are:
12.9% health-care and social assistance industry received
12.7 % to professional and technical services; 
12.4% to construction; 
10.3% to manufacturing; and 
8.1% to hotels, restaurants and other food service employers.

My guess is many roasting companies belong to the latter two groups. If you have not already, consider whether now you have any excuse. With PPP you can essentially receive grants to help pay yourself and your workers and keep the specialty coffee industry alive.

18. PPP's 8 week Period Becomes Much More Flexible

June 8, 2020

Last Friday, June 5, H.R. 7010, the “Paycheck Protection Program (PPP) Flexibility Act of 2020,” became law. This law will benefit roasters who have qualified for PPP loans because it makes sweeping revisions to the original terms of the loan. Forgiveness of loans is now so flexible, it's practically guaranteed.

Want to listen in on a webinar with up-to-date-details on how to apply for forgiveness of your PPP loan? Check out the free Small Business Association of Michigan (SBAM)'s webinar: Thursday, June 11, 10:00am EST: PPP Status, Updates and a Detailed Walkthrough of Forgiveness (Click here to register)

The most significant changes HB7010 incurs are as follows:

1. Businesses have 24 weeks instead of 8 weeks to accrue expenses that qualify for forgiveness. Summarized, can you rack up enough expenses over the last 6 months of 2020 to match what you spent in the first 2 months of 2020? If yes, you've hit one of the two major criteria for loan forgiveness.
2. The deadline for businesses to rehire workers, matching the headcount (full-time equivalent) they had at the end of February, has been extended from June 30 to December 31. Can you arrange that on December 31, 2020, you have matched or exceeded the number of employees that you had at the end of February 2020? If you answer yes, you've hit the second major criteria for forgiveness.
3. The requirement that at least 75% of the proceeds be used toward payroll expenses has been lowered to 60%. Now up to 40% can be used for rent, utilities and mortgage interest. This is important for roasters for whom rent is a serious amount of their monthly expense.
4. The original PPP rules allowed partial loan forgiveness if a company used less than 75% of the loan for payroll, but the bill as it passed states that none of the loan will be forgiven if the new 60% threshold is not met. The entire loan will need to be repaid if payroll expenses are less than 60%.
5. The payback period on any unforgiven loan amounts can be extended from 2 years to 5 years. This would have been more important back when it seemed like some parts of many loans would not be forgiven. But now that almost everyone's loan will be forgivable, this improvement in borrowing terms is nearly meaningless.
6. Bill 7010 also allows loan forgiveness recipients to defer their payroll taxes. Borrowers may defer the employer share of Social Security taxes (6.2%), regardless of whether the borrower receives forgiveness or not. 50% of deferred Social Security tax would be due in 2021, with the other 50% due in 2022.

Regarding Flexible Forgiveness:
The Small Business Administration (SBA) and US Treasury has recognized over the past weeks that the stipulation that the PPP's eight-week period must start the day the loan is disbursed, and end eight weeks later was overly restrictive. Now they are giving every business that qualified for a PPP loan 6 months to spend the loan disbursement on qualified expenses, and only 60% of those expenses have to be payroll. Up to 40% of the loan amount may be spent on rent, utilities (including phone costs) and mortgage interest. In other words, Treasury has basically made it pretty easy for businesses to get 100% forgiveness. 

HOW to correctly apply for that forgiveness is no longer clear, however, for many businesses. 

"When you change the rules of the game in the middle of the game, a lot of things become confusing."  ~ CPA Accountant commenting on HB7010

1. What if you finish using up all of your loan funds in a period that is more than 8 weeks but not 24 weeks? For example, you received the funds on April 4, and you finish using them on July 15? Can you apply for forgiveness and be done with it? Or are you forced to wait until after December 31st? Treasury has not yet issued guidance on this.

2. How do single-member LLCs calculate payroll for forgiveness now? Do they take 24/52 of the 2019 Schedule C net income? Previously they were required to calculate payroll as 8/52 of 2019 net income.

3. What if you hired back all your workers at the beginning of June, "playing by the rules" as they were initially written, and now you have to lay them off in July because you are still not open, and cash flow, including the PPP funds, have run out. Does laying them off like this count against your loan forgiveness?

16. Apply for PPP Forgiveness Like a Pro

This week the Small Business Administration sent out Paycheck Protection

Page 1 of the PPP Forgiveness Application

Program (PPP) forgiveness applications and more guidance on usage. You should have received this document from your lender. The 11 page document (see image of pg. 1 here) is basically a 1 page application with many pages of instructions to help you get the numbers right. There are 11 lines requiring numbers, with the 11th being the "Forgiveness Amount" for which you are applying.

This week the SBA also sent guidance about when the eight week "covered period" starts. The period no longer has to start on the day the loan was disbursed. Instead the employer may start the eight week period on the immediately following pay period. So if the loan was distributed April 24 and the next pay period starts May 1, the eight week period may start May 1.

PRO-TIPS:
1. The application provides a worksheet to help you calculate payroll costs. I would augment this with spreadsheets many CPA firms have already developed to assist with PPP payroll monitoring and reporting. CLICK HERE for an example prepared by Capocore Professional Advisors. The slide deck and webinar that goes with this spreadsheet are available on this Small Business Association of Michigan (SBAM) website.

2. CLICK HERE for a webinar from a month ago with a CPA company provided by SBAM on applying for PPP loan forgiveness. TODAY (May 22) the same CPA company is giving webinar on forgiveness using the new SBA application.

3. Get your documents together. For utility costs this can get cumbersome. Remember, getting government money for free takes an investment of time. For example, your phone costs can be counted as utilities. But you've got to provide (to your banker) phone bills and evidence (statements, receipts or checks) showing you paid those bills. For payroll, do you have a third-party payroll company? Their reports will usually be accepted by your bank. If you don't have a payroll company, get ready to make reports with details on each employee.

4. Are you using a work-share program? I.e. with your state, to allow employees to partially come back on payroll, and also get unemployment insurance? This, in many cases, is good for employees because they will still be eligible for the $600 additional per week, but it's not going to help you get more forgiveness on the PPP. That's OK - being good to your employees is the right thing to do.

5. The big two questions are, did you maintain your employee count and did you maintain wage rates? So the application walks you through calculating whether you reduced your "full-time employee" (FTE) number, which (ironically) can be a decimal. Then it walks you through whether you reduced wage rates. This gets confusing because the application was on a quarter basis (13 weeks) and the forgiveness is on an eight week basis. The instruction from the SBA is now to use annualized numbers for both numbers.

6. Understanding the term "Safe Harbor": This is referring to the fact that SBA said they want you to bring an employee back to the time and wage rates you were paying (pre-February 15) and you have until June 30 to do this. If you do not bring them back to at least 75% of full hours and full wages by June 30, the payroll for this employee does not count towards your forgiveness. For employees that ramp up their time and wage rates over the covered period (reaching at least 75% by June 30), a partial forgiveness amount is calculated. This "partial forgiveness" is the Safe Harbor.

7. How do you calculate FTE? Many CPAs thought that 30 hours/week would be considered 1 FTE. Nope! U.S. Treasury has now confirmed you must use 40 hours/week as the definition of 1 FTE. They do offer a simplified method such that anyone less than 1 FTE can be counted as .5 FTE. If you use this simplified method, you must use it throughout your application.

8. Exceptions to FTE for employees who refuse to come back to work: if an employee refuses to come back to work, or resigned, you do not have to reduce your forgivable amount for this employee's wages (as long as you did not replace them). So for the wages

9. Owners payroll calculation - owners of the business have their wages calculated separately from employees on Line 9. This is totally separate from Table 1 and Table 2 in the Schedule A worksheet. Owners' "pay" will be calculated as 8/52 of whatever was the net income on the owner's 2019 Schedule C. In other words, the pay used to to apply for the loan is the limit of the pay that can be used for forgiveness.

10. Do not rely on your bank to catch calculation errors - this is like doing your taxes. The SBA will come to you, not the bank, with questions.

12. Roaster Experiences with PPP, EIDL and other grants

Today we'd like to share a few of the roaster experiences we've heard.

Small roaster in SE Michigan has 1 cafe and 15 - 17 employees. All but 4 of them were laid-off at the beginning of the crisis. This business owner (so far) has chosen to:
* Applied for the EIDL Advance grant (no word on that yet)
* Applied for a Wayne County small business emergency relief grant and was awarded a couple thousand from this fund. This was a great relief as it basically paid one more month's rent. Her landlord was unwilling to consider any forgiveness or delay of the rent schedule.
* Did NOT apply for the PPP. Finds the benefit may not be worth the hassle on a number of levels. Not sure about loan forgiveness. Not sure about rules regarding bringing back employees when she's not sure she can employ them safely. Not certain the 8 week forgiveness period is long enough for her to put them on payroll if they are not working.

What impresses me about this roaster, like many I have talked to, is the agility she has shown adapting very quickly to the changing situation. She innovated continuously for weeks, for example, creating a contact-free take out window and beefing up on-line ordering operations. After the store fully shut down, they promoted a weekend take-out event that was very successful.

Another small roaster, south of the Detroit metro area, has one cafe. They remain open for take-out with reduced hours staying open only from 8am - 1pm. On April 14 they launched a web-store for their bags of beans for the first time. The owner's daughter helped him get that launched. The owner applied for and received about $5,000 from the Michigan Economic Development Corporation's emergency fund which are state funds.

A roaster with two cafes, one in Detroit and one in a northern suburb, chose this path:
* Applied for the EIDL and have received the $10,000 advance.
* Applied for the PPP but have not received funds from that one (yet).
* Applied for city-level grants and successfully received funding from those.
* Has been able to make arrangements for some leniency with landlords.
This roaster commented that while his spending is way down now, he's only now getting through paying for bills incurred in March just before the "shelter-in-place" orders were issued.

A St. Louis roaster with three locations has one of them open for pick-up, 8am - 3pm, and the other two are temporarily closed. The situation is dynamic for them, as with everyone, but when we talked on April 7th, the status was:
* Applied for the PPP
* Still considering applying for EIDL and local business emergency grants.
* Considering other SBA loan programs, not just the emergency loans, to help the business expand.
I was struck with this roaster's determination to not give up on business development plans. Slow down, perhaps, but not give up! They also promoted a Saturday take-out event at a store that sold out three hours before they had planned to end!

A New York roaster with 20 stores across Manhattan and Queens has about 200 employees. All stores have been closed and all but a core team of about 5 - 7 people had to be laid-off, which was "devastating" they told me. On top of that, their head of human resources moved to a different company in March and has not yet been replaced. They are still roasting for their wholesale accounts and on-line sales. The representative I talked to was confident that all government programs were being considered for possible fit, but was not aware of which, if any, SBA programs were being accessed. He shared that the company was serious about offering all employees job security. They've sent repeated messages to the laid off staff that the company will hire them back as soon as circumstances allow.

We hope this summary of economic and business realities of different roasters gives some reassurance, "you are not alone"! Pull up those boot-straps!

11. Great Resources and Unanswered Questions

Today we're sharing links to great resources we've found for roasters on the "small business"

Ken Pargulski at Espresso Royale in Whitmore Lake, MI

management front.

• CPA firm's Q&A on the PPP loan. See especially the section towards the bottom on forgiveness. CLICK HERE  . For a spreadsheet to help you calculate your forgiveable amount, CLICK HERE -- created by CPA firm Capricore.
• For questions about the weekly $600 additional unemployment benefit, and your costs as an employer, see this website's overview of the DoL guidelines.
• Comment: the $600/week benefit remains an especially relevant issue for cafe-owners. Several times the advice has been given that you as the employer have the right to essentially threaten to remove that benefit from them, if you prefer to have them come back on payroll. You would do that by offering your employees a job, encouraging them to come back to work, and if they refuse, you need to be sure they refuse in writing. Then you file that with your state and the employees are no longer eligible for the UI benefit. The unanswered question, of course, which worries cafe owners is, "what is the "right" thing to do, not just what is my "right" as an employer?"  Add your comment below on how you will answer this question!

Small Biz Assoc of Michigan's (SBAM) COVID19 resources page is curated and updated daily. It's a valuable resource because they add the recordings of all the webinars and daily updates videos they are doing. If your state doesn't have a small biz association that's well organized, check this out! A lot of what they are recommending and sharing is relevant for small businesses across the country.

• https://www.sbam.org/Resources/COVID-19-Resources 
• Be sure to note the webinars, including   
• Tax implications of the EIDL, PPP, and CARES Act and with Rehmann
• What You Need to Know About Spending & Tracking Your PPP Loan  with a CPA firm  (this webinar includes a spreadsheet template to help calculate your forgiveness amount.)
• HR & Legal Strategies (Presented by Bodman Law Firm April 2, 2020