PPP Act Amendments
Here’s an update on the Paycheck Protection Program flexibility Act of 2020 that was passed. This bill, H.R.7010, brings changes to the program including a longer covered period, new spending threshholds and more.
The main changes in the Act are:
- No penalty if you were unable to rehire / hire similarly qualified positions or unable to return to the same level of business in February 2020 in accordance to guidelines (stay at home orders, reduced capacity, etc.) – also extends rehire date to December 31, 2020
- Two year deferral of employer’s share of payroll taxes for all employers
- PPP loans now have a minimum maturity of five years for unforgiven portions
- Deferral period extended
- The eight week period can now be a 24 week period if borrower elects
You can find information on this pdf file of the PPP information sheet.
CARES Act and Accounting for PPP Loan Proceeds
When the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was passed by Congress and signed into law by President Trump on March 27, 2020, economic assistance for American workers, families and small business affected by the COVID-19 pandemic became a reality.
The PPP authorized the Small Business Administration (SBA) to process loans for eligible businesses of up to $10 million. In addition, the SBA has said that PPP loans of $2 million or higher will likely be audited.
Since the CARES Act was a quickly created program, it has resulted in some confusion as to eligibility, terms, and forgiveness, and there have been many interpretations and Frequently Asked Questions (FAQs) addressing specific questions. In general, the PPP loan process forced businesses to address if they were eligible for PPP loans; if approved, should they keep the loan proceeds or return them and, if kept, how to have the loan forgiven.
In addition, another issue businesses were forced to address is how to account for PPP loan proceeds. PPP loan proceeds may potentially be forgiven if the loan proceeds are used for payroll, mortgage interest, rent and utilities. The forgiveness is based on maintaining employees and salary levels and amount of forgiveness can be reduced or eliminated if the number of employees or their salaries decrease. The rules on forgiveness are currently in flux, but a new form on forgiveness was recently issued by the SBA.
The legal form of a PPP loan is debt. As such, when initially received, it may be appropriate for the business to record a liability for the loan. However, depending on a business’ expectation for meeting the PPP’s eligibility and loan forgiveness criteria, it may be appropriate to record the PPP loan akin to a government grant. Both models are further discussed below.
If the business does not believe it will be meet the eligibility requirements for forgiveness and expects to repay the loan, the business would record a liability for the loan proceeds in accordance with Accounting Standards Codification (ASC) 470. The loan would be a liability, and interest would accrue on the loan over the life of the loan at the stated interest rate. Although the interest rate on this loan is 1% (below market), no additional interest would need to be accrued based on current market rates available to the business. ASC 835-30 excludes that requirement when the interest rate is prescribed by a government agency. If the business’ expectation changes for example, the PPP loan proceeds are later expected to be forgiven — the business would recognize a gain on the extinguishment of debt when the loan is forgiven.
If a business expects to meet the eligibility requirements for forgiveness with a high degree of confidence, it may recognize income as it incurs the qualified expenses under ASC 958-605. Effectively, businesses should account for PPP loans that are expected to be forgiven similarly to a government grant, which is earned as the company complies with the grant criteria. Generally accepted accounting principles do not address how a for-profit company should account for a loan that can be forgiven when, or if, certain conditions are met; however, they do indicate an entity shall first consider accounting principles for similar transactions or events within a source of authoritative U.S. GAAP for that entity (commonly known as analogizing) and then consider nonauthoritative guidance from other sources. Therefore, accounting for a business entity might best be done by analogizing to the not-for-profit guidance (ASC 958). If the business’ expectations change after reassessing the forgiveness provisions and the business’ compliance, or lack of, with those provisions, they may have to reverse previously recognized income in its statement of operations.
Regardless of accounting treatment, clear and robust disclosures of the PPP loans and how they have been accounted for should be included the financial statements.
One final note on PPP loan proceeds: IRS Notice 2020-32 confirms that businesses are currently not entitled to tax deductions for expenses that are usually deductible if they are paid by PPP loan proceeds. This IRS ruling is under review.
Funding Options to Finance Your Business
What type of financing options are available?
What if I don’t have cash or enough personal equity to make a purchase?
Financing is one of the most frequently talked about topics among buyers and our broker team, especially first-time buyers navigating the buy and sell process.
Whether your unique transaction requires a singular loan to purchase the business, or a multi-funding approach, there’s more lenders and funding opportunities available to potential buyers than ever before.
Starting with the most popular or more commonly known, here’s our list of funding options that will help you fund the business of your dreams:
Of all of the financing options available to potential buyers, seller financing is the most flexible. Also known as owner financing or seller carryback, the buyer and seller enter into an agreement much like a banking relationship. An amount is agreed upon and with this, the seller carries the note and the buyer agrees to pay the seller back—with interest—over a certain period of time. A quicker turnaround time for both parties, more fluid terms for the buyer, as well as a key financing strategy when traditional loans aren’t available and / or seller financing can be used to offset any limitations related to conventional loan options.
More widely known, traditional term or conventional loans are supported by private lenders as opposed to the government and with this, typically require a more significant personal and financial investment. A few examples include a 20-30 percent down payment, shorter and more stringent terms and a favorable credit score of 700-plus, among others.
Small Business Association (SBA) Loan
The Small Business Association partners with other lenders in order to offer small business owners’ government-backed loans with more flexible repayment terms, down payment requirements and lower interest rates. There’s a variety of SBA loans to choose from, each with their own set of unique qualifications. While the process for getting approved requires extensive documentation and paperwork before funding is released, an SBA loan is one of the best formal loan options available to tap into.
Buyers can finance their business purchase by leveraging existing retirement funds without risk of any tax or other penalties. There’s three different ways to achieve this, including a rollover, borrowing against and / or cashing out [your 401k].
Home Equity Line of Credit (HELOC)
Taking a second mortgage out on your home—or a Home Equity Line of Credit (HELOC)—will give you equity toward the purchase of a business. Following a proper business valuation to determine the cost of the business, you should take the next step in finding out [how much equity] you have available to you.
Consider reaching out to your current banking partner to gather some additional information and insight or, let our team answer your questions and provide creative solutions to your financing needs.