Overview of the Paycheck Protection Program

Clinton Larson Hello and welcome to EB & Flow. I'm your host, Clinton Larson. And today we have a very timely topic. We are going to be talking about the Paycheck Protection Program, otherwise known as the PPP. And joining me today is someone who has practically lived and breathed the Paycheck Protection Program for the last year, and that is Eide Bailly principal, Adam Sweet. Welcome to the podcast, Adam.

Adam Sweet Thank you, Clinton.

Clinton Larson And would you mind introducing yourself and maybe giving us a little bit of your role here at Eide Bailly?

Adam Sweet Sure. So, Adam Sweet, I'm a principal, as Clinton mentioned. I'm part of our National Tax Office. I sit in Spokane, but really that's, I'm born and raised in Spokane. But it's not so much relevant for my NTO practice, that I'm really a resource for the entire firm. And typically my focus is what we call flow through entities. So partnerships and S corporations on the tax side. But I was lucky enough or unlucky enough, let's say, to be nominated for our SBA working group back in February or March of last year.

And really what that turned into was the PPP working group. So as you mentioned, that's been probably half my time with the firm over the last nine or 10 months. Just focused on the PPP.

Clinton Larson Yeah, because it's such an important program for a lot of businesses given last year and you know what they had to go through. So I think there's a lot to cover. So I think we should just dive right in. And so maybe the best place to start is obviously from the beginning. Can you give us a little history of what the PPP program is?

Adam Sweet Yeah, so this this came about with, if we rewind 10 months ago to March of 2020, we have the COVID national emergency in full bloom with states shutting down, the stock market crashing by 20, 30 percent, you know, potentially mass layoffs on the horizon, kind of affecting every industry. And Congress passed what's called the CARES Act Coronavirus Relief Act. I didn't quite get that perfectly right. But it's the CARES Act and included in the CARES Act or maybe the most prominent feature of the CARES Act was this new program called the Paycheck Protection Program.

And the idea is it's a loan program under the Small Business Administration, the SBA. But the idea was we're going to give money to people. It's structured as a loan. But if they do the right things with the money, which is maintain payroll and incur eligible expenditures, but basically if they do the right thing with the money, then the government's going to forgive the loan. So if you think about it, really what the government's doing there is covering the payroll expense for eligible businesses for a period of time in 2020. And the hope being that that gets businesses through the maybe the most severe part of the downturn. And then at the end of that, they have a full workforce. No one's on unemployment and things maybe can return semi back to normal.

Clinton Larson Right, and there was a first round last year, but there was a second round that just opened up this year, correct?

Adam Sweet Correct. Yeah, so this opened, in fact, there been, if you can even think about it, multiple rounds. There was originally, I think three hundred, maybe 50 billion dollars to PPP first round broad strokes here. It's not industry specific. So really, nonprofits, for profits, manufacturing, dealerships, construction, didn't really matter. As long as you met the eligibility requirements, you could apply for PPP. And the eligibility requirements where you needed to have less than five hundred employees. That's the general eligibility for round one.

So they put three hundred and fifty billion dollars to it back in March. I think we blew through that money in about three weeks. So I think by maybe the beginning of April of 2020, the first allotment of PPP round one money was gone. So the program was on pause for a couple of weeks and then I think Congress re-upped it with another couple hundred billion dollars and this was maybe in late April of 2020, and then that amount of money kind of carried through the summer time.

And then PPP one wound down in fall of 2020. And then as part of kind of year end COVID relief legislation that was passed at the very end of December, Congress did two things. One, Congress reopened PPP round one, and then also created a second round of PPP lending where if you got money during the first round and you used the money appropriately and maybe had your loan forgiven, you could reapply for a second PPP loan. What I called it PPP two loan round one PPP one loan.

And some of the main differences between the two programs PPP one generally speaking, you needed less than five hundred employees and you needed to say that you needed the loan due to the economic uncertainty caused by COVID and you needed to promise that you were going to do the right things with the loan. The right things were 60 percent to payroll and then 40 percent to what I'll call qualified overhead expenditures.

Round two, they changed it a bit. They first ratcheted it down to rather than 500 employees, you can only have up to three hundred employees to be eligible for round two. Round one, you could borrow up to ten million dollars, round two you could only borrow up to two million dollars. Your loan size for both rounds is based on two and a half months of payroll during kind of a look back period.

And then maybe the biggest change, I mean, beyond those two, the biggest change to the PPP two is you have to show a gross revenue decline. You did not have to show gross revenue decline for PPP one. PPP two you have to show a twenty five percent gross revenue decline. And there's a couple of different periods you can use. You can compare 20 to 19. You can also choose a quarter, calendar quarter in 20 and compare it to that same calendar quarter in 19.

Clinton Larson And that's a good lead in to maybe a discussion about like what type of businesses or organizations should be looking at a PPP loan?

Adam Sweet So it's really almost everyone in a way. And it even surprised us because you maybe would have assumed originally that this was only for restaurants or for the hospitality sector who were directly affected. But there is no precision to either PPP one or PPP two in that regard. Almost any business can be eligible as long as you meet the employee standard for either round one or round two, and then also for round two as long as you meet the gross revenue standard.

So, yeah, so we have manufacturing clients. We have clients involved in the real estate industry. We have medical practices, dealerships. I mean, really the whole gamut of Eide Bailly clients potentially are eligible for the PPP loan, both round one and round two. Also including non-profits, which we sometimes forget about. But obviously non-profits are equally affected by COVID or maybe even more so affected but think about the nonprofits in each of our local communities. So they are also eligible for, they were eligible for PPP one and they are again eligible for PPP two.

Clinton Larson And so you talked about how businesses need to be, you know, thinking about how to do this the right way to maximize that forgiveness and really take the full advantage of this program. So what are some of the common questions? What are some of the common issues that come up when businesses are first considering if a PPP loan is something that's right for them?

Adam Sweet So I think the first question for most people is they want it to be forgiven. Most people don't want to end up owing money. So on the front end, when they come to talk to us, they're going to say Eide Bailly. They're going to say Adam, I'm going to borrow this money, borrow the hundred dollars or whatever it's going to be. But how do I make sure that I get it forgiven?

And I think the key there is you get a period of time, which is called the covered period, which can be between eight weeks and up to 24 weeks. There's some, you know, a little bit of nuance in there. But generally speaking, both for PPP one and PPP two, you get an eight to twenty four week covered period. The day one is when the loan is disbursed to you from a lender. But you see, you start the clock at that point and during your covered period, which again could be twenty four weeks, you want to make sure that you incur enough eligible expenditures to achieve forgiveness.

So really if you think about it, if you get a loan for one hundred dollars, you want to spend that hundred dollars on eligible expenditures and that's how you achieve forgiveness. And that also reminds me of another key point, and I probably should have brought it up in the beginning, but you actually don't directly go to the SBA to get your loan. The SBA works through local lenders. So most of our clients, their main interaction with this program is through their local bank. And then a local bank works with the SBA.

So it's the local lenders are really the touch point for most of our clients in the community when they're looking for the PPP loan. And that includes both for when you apply for the PPP and then also when you apply for forgiveness. Both of those things start with your bank of choice, your lender of choice.

Clinton Larson And what are some of those qualified expenditures that you were talking about? What are what are some of the things that people need to know up front in terms of making sure that they spend that money on stuff that's qualified?

Adam Sweet So 60 percent of your qualified expenditures need to go to payroll and payroll is a defined term. So generally speaking, it includes salary up to one hundred thousand dollars for non owner employees. You prorate that to your covered period and that's an eligible expenditure. And then the other 40 percent can go to what I call qualified overhead, which could be rent, could be mortgage interest. There's some new categories now for protective PPE if you had to make investments in the PPE as part of your business.

Also, there's some, if you had to incur certain other expenditures to kind of adapt to COVID, that also kind of falls into the 40 percent overhead bucket. I would say for the majority of our clients, it's payroll is the major expense because it needs to be 60 percent. It can also be 100 percent of your qualified expenditures.

So payroll's the easiest to first of all, to incur, because if you think about that, the loan is based on two and a half months of payroll and then you can add up to 24 weeks of a covered period, which means you can have almost six months to incur enough ineligible expenditures to get your loan forgiven. It's also a very popular category because it's easy to substantiate when you go back to your bank to apply for forgiveness. You have your IRS tax forms, your payroll tax forms. And so it's just a very easy thing to substantiate that you've incurred the right expenses. It's going to be easy for the bank to process and review those. And I would guess it's going to be make it very easy for the SBA to review.

So we have the 60 percent payroll, 40 percent non payroll overhead. And I would just guess, and even really speaking from experience, that most of our clients are looking to the payroll for almost all of their qualified expenditures.

Clinton Larson Right. And that was going to be my next question. I was just curious, as you've been working with businesses and working through this program with them, what have you seen for the hurdles that they come into with forgiveness or things like that? Are there things that have been coming up that is good to know before you start?

Adam Sweet Yeah, absolutely. So, you know, I provided a nice, neat summary, like everything, the devil's in the details. And one thing about it is Congress, sure, Congress created this pool of money and said, we're going to give it to you and it's going to be free if you do certain things. Some of those things are not only incurring or paying eligible expenditures, they're also maintaining payroll.

So if you cut payroll during your covered period, either you cut your full time equivalency count, which is kind of think headcount, or if you cut salaries by more than twenty five percent. And again, there's more details here than we're going to get into today. But if you do either of those two things, that can reduce your forgiveness.

So for some of our larger clients, that may add turnover, payroll turnover during the covered period during 2020, that's where a lot of the planning comes in and a lot of the consulting comes in, is that they're going to have enough eligible expenditures, but it's making sure that they have enough FTE headcount and making sure that they didn't cut anyone's salary beyond the specified amount. So that they can get full forgiveness.

Clinton Larson Great. And have you seen a lot of businesses coming back in this second round to take advantage of another loan? How has that been so far? What's the second round sort of initial intake been?

Adam Sweet Yes. So I think there's certainly less interest, let's say, from PPP two versus PPP one. Some of it is because people, some businesses actually turned out to have a pretty decent 2020. They didn't know it back in March of 20. But, you know, they had a decent 20. So maybe they can't show the gross revenue decline. Also, it's just the amounts are smaller. You know, you can borrow up to 10 million now. It's two million. So there's certainly less interest.

But at the same time, there's quite a few clients that will, that are going to need PPP round two and are eligible for PPP two, you know, due to the continuing economic uncertainty. If you think restaurants or hospitality clients, people, you know, people that own hotels, that the COVID emergency is certainly not over for those businesses. So I think for those types of people, they're going to be looking to us for help with PPP two and PPP two will certainly be a lifeline for the next couple of months.

Clinton Larson Right. And is there a deadline that people need to be aware of when it comes to this program?

Adam Sweet Also, Congress always puts the deadline out there and then they always end up moving the goalposts. So but for starters, I think the PPP two right now is scheduled to end March 31st of 2021. So that would be, you know, a month and a half away. You could easily see them, though, potentially pushing that date back some. So keep right now March 31st. But I'm sure if we're talking a month from now, we may learn that Congress pushed that date back some.

Clinton Larson And, you know, I was just curious in general, how has the reaction been from businesses who have gone through this loan program? How much has it helped them? How much have you heard from them in terms of what the impact of this program has been?

Adam Sweet Yeah, I think it is. I can speak really mostly to PPP one, because that's the program that we've been through. And so I think, you know, hugely impactful, if that's even a word to use. Again, I don't think any of us. It's easy to forget how uncertain March and April 2020 was. If we just rewind back then again, I think the market was down to nineteen thousand. You know all these states were shutting down completely.

So if you're a business, you know, you're potentially thinking we have to go into severe cost cutting mode, which unfortunately could mean laying off staff because you just don't know. So in steps the government and the government says we're going to give you money just to maintain payroll. And I think for a lot of people, that was a huge lifeline, the huge sigh of relief, knowing that at least for eight, 10, 14, 15 weeks you're going to have money from the government and all you need to do is maintain payroll and then that loan will be forgiven. So I would say a huge impact if we look back to the second and third quarter of 2020.

Clinton Larson What do you think the first step should be then, for businesses interested in the PPP loan? And where would they start? What's the first thing they should do?

Adam Sweet So I think for starters, you can, you want to find a lender that you work with. So for a lot of people, that's the bank they work with right now as part of their business. I think at the same time, if there's any complexity to your business and if your loan is going to be over a material amount, you know, materiality could be a different number. You probably want to find an adviser, and that could certainly be Eide Bailly if you're an Eide Bailly client. If you're not, you know, find your local Eide Bailly professional or whatever other. If there's another CPA you work with, you probably want to link those two people up right away. I mean, the two people being the lender and then your advisor, which again, could be Eide Bailly or another CPA professional.

Clinton Larson Thank you very much today, Adam. This has been really informative. And like you were saying, this is a super important program for businesses to be aware of. So any sort of parting thoughts you have in terms of what businesses should be thinking of when it comes to the PPP?

Adam Sweet Yeah, I just say that as this COVID emergency continues to kind of play out and PPP one winds up and PPP two is just beginning, that don't be shy to reach out and look to Eide Bailly specifically. We have, I do a webinar probably once every three or four weeks on updates to the PPP program. We have lots of articles coming out every week, every couple of weeks, articles that not only cover PPP, but other areas, for instance, the Employee Retention Credit, other areas of government stimulus. So just look out. We try to get as much material out there as we can and then don't be shy about reaching out. If you need help or if you have questions, we're here. Start with your local Eide Bailly office and you can go from there.

Clinton Larson Great, thanks for joining us today. Adam.

Adam Sweet Thank you, Clinton.