Food & Agriculture Quarterly June 2020 - Page 10

The SBA, in an interim final rule effective as of April 30, 2020, allowed seasonal employers to use the third time period for calculating their loan amount. In a subsequent interim final rule, the SBA provided that if a seasonal employer received its PPP loan before the alternative criterion (May 1, 2019 to Sept. 15, 2019) was posted and would be eligible for a higher maximum loan amount under the alternative criterion, then such seasonal employer could increase its loan amount by using the alternative criterion. Seasonal employers should choose the time period that gives them the largest loan amount. For those in the agricultural business, this will likely depend on their growing season. The CARES Act, unfortunately, does not define a “seasonal employer,” though it did indicate that the SBA would determine whether a business is seasonal. Presumably, many businesses in the food and agricultural sector will qualify as seasonal employers. PPP Forgiveness All businesses, seasonal or otherwise, may have their PPP loans forgiven if they use the PPP loan for eligible costs, such as payroll, interest on secured loans, rent, and utilities, and their forgiveness amount isn’t otherwise reduced as discussed below. If a borrower’s loan is not fully forgiven, then the amount not forgiven would be treated as a conventional unsecured loan with one percent interest and a maturity of two years. The CARES Act as well as other guidance from the SBA, including the PPP Loan Forgiveness Application issued on May 15, 2020 (Forgiveness Application), provide that a borrower may have its forgiveness reduced – in other words, will have to pay some or all of the loan back – in three situations. Specifically, the borrower will not have its loan fully forgiven if it: ∙ ∙ ∙ PAGE 10 reduces full-time equivalency (FTE) employees during the chosen forgiveness period, reduces average annual salary or hourly wages more than 25 percent for employees during the chosen forgiveness period, or spends more than 25 percent of its loan on nonpayroll costs. Assuming a borrower uses all of its PPP loan on eligible costs and its forgiveness amount is not reduced by any of the three situations described above, then its loan will be fully forgiven. Note that a borrower may also have its forgiveness amount reduced if it received an Economic Injury Disaster Loan (EIDL) advance. The Forgiveness Application provides that a borrower’s final forgiveness amount will be reduced by the amount of its EIDL advance, if any. Before discussing how a borrower’s forgiveness amount may be reduced, it is important to note one key feature of the Forgiveness Application, which offers more flexibility to certain borrowers in choosing their forgiveness period for payroll costs. The Forgiveness Application allows PPP borrowers with a biweekly or more frequent payroll schedule to elect to calculate eligible payroll costs using the eight-week period beginning on the first day of their first pay period following their PPP loan disbursement date (the “Alternative Payroll Covered Period”). Prior to this guidance, borrowers were expected to calculate eligible payroll costs using the eight-week period beginning immediately after the loan disbursement date (the “Covered Period”). The SBA believes this will create administrative convenience for the borrower. This new change is more flexible and favorable to borrowers because the “Alternative Payroll Covered Period” should now more easily conform to an employer’s normal pay period schedule. Average Annual Salary or Hourly Wage Reduction A borrower’s expected forgiveness amount—the amount spent on eligible costs during the applicable forgiveness period—will be reduced if the business decreases an employee’s average annual salary or hourly wages by more than 25 percent during the chosen forgiveness period (either the Alternative Payroll Covered Period or the Covered Period) as compared to the period of Jan. 1, 2020 through March 31, 2020. Importantly, the expected forgiveness amount is only reduced by the amount of a salary cut in excess of 25 percent. Also, for purposes of this reduction, employees who at any time in 2019 made over $100,000 on an annualized basis can have their salaries cut without affecting forgiveness. Below are three example of how salary reductions