Food & Agriculture Quarterly June 2020 - Page 13

FOOD & AGRICULTURE QUARTERLY | JUNE 2020 annual salary or hourly wages of employees in order to maximize forgiveness. Borrowers should be aware of the June 30 safe harbor, and if either the salary reduction or FTE reduction applies, borrowers should consider applying for forgiveness after June 30 if they can prove that they meet the safe harbor to avoid any reduction in their forgiveness amount. FTE Reduction Exceptions There are a few exceptions to the FTE reduction calculation. The CARES Act allows “de minimis” exceptions to these rules. For example, the SBA has recently clarified in PPP FAQ #40 that an employer will not have its forgiveness reduced if it laid off an employee, then attempted to rehire that same employee on the same terms as before, and the employee declined the offer. In this situation, the employer needs to make a good-faith, documented effort to rehire the laid off employee in order for the de minimis exception to apply. This exception for good-faith efforts to rehire is included in the Forgiveness Application. The Forgiveness Application also adds three new FTE reduction exceptions. Forgiveness will not be reduced by any employees who during the chosen covered period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours. Note that a Borrower should only include these FTE reduction exceptions on its application if the position was not filled by a new employee. Non-Payroll Costs Offer Limited Forgiveness The third situation where a borrower’s expected forgiveness amount may be reduced is if more than 25 percent of its PPP loan is used on non-payroll costs. A business can use a PPP loan on non-payroll costs, but in order to maximize forgiveness, only 25 percent of the forgiveness amount can be for non-payroll costs (i.e., covered secured debt interest payments, covered rent payments, and covered utilities). So, a borrower is not required to use at least 75 percent on payroll costs, but failing to do so will result in less than full forgiveness. Maximizing Forgiveness Ultimately, in order to maximize its forgiveness amount, a borrower must comply with the spirit of the program. As the name suggests, the Paycheck Protection Program is meant to protect payroll. This means that a borrower should try to maintain employee levels, keep employees at the same pay, and spend at least 75 percent of the loan on these payroll costs. Doing so will allow a borrower to achieve more forgiveness of its PPP loan. A borrower should also carefully document its spending during the covered period and consider using a separate bank account for its PPP loan, so that it can easily demonstrate how it spent each dollar from its PPP loan. CONCLUSION Small businesses should take advantage of the Paycheck Protection Program, if they have not already done so, in order to keep their employees paid and hired during this pandemic. The program is widely available to small businesses, including agricultural businesses and farmers. Seasonal employers should carefully review their calculation for their maximum loan amount, and if they applied prior to the April 30 interim final rule, they should increase their loan amount if the third alternative criterion would give them a higher loan. To maximize its forgiveness amount, a borrower should carefully document how it spends every PPP dollar and otherwise spend the money on mostly payroll costs in order to keep its employee count and wages at the same level as before the pandemic. If a borrower had to lay off employees or cut salaries during its chosen forgiveness period, then if possible, it should rehire employees or restore salaries before the June 30 safe harbor in order to maximize its forgiveness amount. Jack Meadows an associate and focuses his practice on banking, finance and real estate. He can be reached at 614.227.2101 or [email protected] PAGE 13