Good morning, Constructing Brands today, I’m so happy to have back our guest Stephen Katz. For those of you who remember Stephen Katz, Stephen is the chairman of corporate law practice over at Peckar and Abramson. And Stephen has dug deep into what’s going on with the PPP loans, the payroll protection loans that the government enacted back in early March. And so Stephen has been diligently looking into all the nuances as they’ve been changing. Stephen, thank you so much for coming back. Please share with us. I mean, right now, before we get started today, Thursday, June 4th, and what’s going on, Stephen.
As it seems to be the case, the more things change, the more they change with this PPP stuff. And last night, the Senate passed unanimously passed the house bill to extend the PPP program and modify it and give it a little more flexibility in some pretty meaningful ways. Most importantly of which that people will be, I think very happy to hear is that they’ve extended the 8 week period to use the proceeds for, and for them to be that loan to be forgivable as a grant, they’ve extended that 8 week period, to 24 weeks or up until December 31st, whichever occurs first. So that’s a really, really big change. And I think will become, will be very, very welcome relief to many, many businesses, especially those that haven’t been able to really operate and are just really starting to open up now and over the next few weeks.
Interesting, it’s gone now from 8 to 24 weeks. Has there been any conversation or discussion about more funding coming through for those people who have actually utilized the funds and now are running out of them?
No, not, there’s been no change yet about, you know, getting a second bite at the apple. There is a so, and right now, though, I would say for companies certainly that have not taken advantage of the funding, there are some pretty very good advantages. Now, obviously, as we get further along, there’s more certainty obviously now more time you have until December 31st on the forgiveness piece for the covered period to use proceeds also for borrowers who take the loans now after what, and again, by the way, let me just caveat this thing. The president has not yet signed this. He and the every expectation is he will, but once this does become officially a law the other thing that they’ve added in this is that the term of the loan for borrowers, who will, who do borrow after this becomes law has now been moved from two years to five years. Interestingly, though, for those who have taken the loan, it really, they kind of punted on that in terms of making everything that was two years to five years, they basically said nothing prohibits a borrower and the lender from agreeing to extend the maturity date to up to five years. So what that means also is for those people who are listening, who already have a loan, you need to talk to, it looks like you’re going to need to talk to your borrower and get an amendment, have them agree to an amendment, to your loan documents to extend it from two to five years, if they’re so inclined and you can agree on it. Now I do expect there’ll be further regulation on that matter. You know, again, this is the law treasury will need to act and issue further regulations on how to implement some of this stuff as well. But those are two and in very, very critical critical things. And then the third thing, which is actually also probably equally as critical, and this is also again with every time they change something, of course it creates an ambiguity, but one of the other things that they’ve changed is now, as you recall, you were supposed to for loan forgiveness, you’re supposed to use 75% of the proceeds of the loan that you were asking to be forgiven for payroll costs. They’ve lowered that threshold now to 60%, but the way the law is now written, the act is written, it creates an ambiguity and an issue. And this is something Senator Collins raised. It looks now that the 60% rule kind of creates a cliff. So, and what that means is it seems the way the act is written. It seems to say that if you don’t use 60% of the proceeds for payroll costs, you get no forgiveness currently before this, it was, you know, as long as you ask for 75% of the amount you’re asking to be forgiven, you’ll get loan forgiveness. And then the balance will have to be paid as a loan. So there’s an ambiguity there and we expect, and I’m sure there’ll be very heavy lobbying of the treasury department to clarify that that’s not, hopefully not what’s intended and that it’s supposed to work the same way as we think the 75% rule is to work. But it is an open question.
Well, help me with the logic here, Stephen, because if you’re running a business and you went through the documents to get the loan, you put down how, what you looked at your last year’s payroll probably, and you looked and basically you 2 times that payroll plus a rent factor, and that was your number. So if in fact it goes from 8 weeks, which is what the loan is supposed to cover, and now we’re saying it’s 24 weeks. You have 3 times the amount of time, to, I mean, you could simply put it in the payroll bucket, assuming that you didn’t cut your, pay, your staff down by more than 33%. You still have, even if you have cut back 25% of your staff, I guess where I’m going with this, and you decided to take all that money and you just want to put it into the payroll bucket, as opposed to the other expense bucket, you can spread that over now over until December. So I don’t know why would it even matter because who’s not going to, where would anybody be in a position where this doesn’t help them because of the time they’re giving to be able to utilize the funds in the way in which you choose to?
Yeah, well, clearly that’s what it’s intended. And again, let’s go back to first and foremost, it’s the payroll protection program. So the intended bulk of proceeds and use was really intended to be for payroll. But I will say that I’ve certainly spoken with a number of businesses and just the way the math works out. In fact, if they utilized it properly and, you know, allocated everything to payroll, and even assuming they kept everyone at 100%, there were a number of companies that just because of the way the math works out, that there, wouldn’t be enough to, you know, they could spend the, keep everyone 100%, spend it fully on payroll spend it fully on, you know, and then maybe the other 25% for rent and other expenses, and they still either had money left over.
How’s that possible?
It just is a function of the math. You know, remember it just works out that way. They just don’t have, again, I’ve seen the numbers and it just works out. It’s really just a math thing. You know, and then the other side of it too, is they may have, where they could have used more for rent and other things. So now at least you can go to the 40% instead of 25%. So it really is an individual case and it’s again, it’s a math and accounting issue where you just have to run the numbers. So it does seem to work. Again, until we get further clarification, one thing that one has to be very, very careful of that the 60% rule is a cliff is you don’t want to get too close. You know and you want to make sure that if that’s the way what they actually intended and what it’s supposed to, how it’s supposed to work you know, you really do want to be very, very careful that you don’t get too aggressive. And then you could jeopardize, you know, that there’s no sort of a partial forgiveness or just forgiveness on what you ask to be forgiven versus, you know, either your 60%. And if you’re within, 60% is payroll, you’re good. And if it’s 61%, I’m sorry, if it’s a 59% of payroll, you lose your whole forgiveness. It seems rather draconian. But again, it’s an ambiguity that needs to be cleared up.
What about private equity?
That is still not you know, that’s still private of portfolio companies or private equity firms are pretty much out of the out of this program. That’s not going to change. I think it’s certainly been you know, bolstered if anything by the whole certification regulations and FAQs that basically they’re looking at, if you’re a private equity owned, you probably have, you know, in their view, you’ve got additional sources of capital and your private equity sponsor could put more money in, you know, we can certainly debate whether or not that’s actually correct and proper or whatever. But in fact, that’s the rules. That’s why there’s been no change on that. I don’t anticipate any change on that, especially with the negative PR that large companies got, or certainly large public and capital market backed companies have gotten.
It sounds like the big changes are extending from 8 to 24 months, which is huge. Obviously it’s not 100% done yet, but it looks like it’s going to be done.
Well, I think the 24 months it’s done, I mean, unless the president vetoes or refuses to sign, it’s going to be 24 months. I mean, it’s Senate, the Senate and the house have both, you know, have both agreed on that. There was, you know, between the Senate and the house, there was a debate, whether it be 24 or 16, but the Senate passed the House bill as is with 24.
Okay. Term it alone, which it sounds like if you’ve already gotten the, those funds back in April, you might want to revisit a conversation with your, the loan officer, the, your lending agent, right. Because you’re going to have to make an amendment. And then payroll from 75 to 60, which is huge. I know for so many companies.
Yeah. Plus also you may have situations where people were looking at, okay, I have my employees furloughed and I’m not paying them anything. Right. And now I could bring them back. And even, then in this situation, you know, it’s not, maybe it’s not all or none, all or nothing where I might be getting partial. I might be comfortable with partial forgiveness. And now I have time. I could bring these people back. And even though I might not necessarily get full forgiveness, at least I have a period where I get partial forgiveness or with some of the rehire provisions and recapture provisions in terms of salary, maybe they can even get full forgiveness. So it gives again more flexibility and people need to dig in and really work with their accountants and run the numbers and do the spreadsheets to see and a couple of other things. I also want to point out that this bill also gives that are very good things is the deferral of principal and interest is not, is going to contain rather is going to continue until you get a decision on your loan forgiveness. So it used to be 6 months now. It’s until you get a determination on your loan forgiveness, you just have to apply for forgiveness within 10 months after the last day of the covered period. So that’s very good. Also the deferral of payroll taxes will also you can defer payroll taxes. Now you weren’t able to defer a payment of payroll taxes because of the, if you’ve got CARES, act money, and now they’ve eliminated that. So that’s another important thing. And then there’s also, they’ve made some further flexibility that if somebody is let go, and then you can’t rehire that person and find another qualified individual to replace them, that you’re not going to get dinged on reduction of full time equivalent employees. And that’s one way. And another thing they also said is if you can’t get back to the same level of business activity, and you could show that and prove that so therefore you have a reduction in staff you may be able to, get a grace on that in terms of reduction in staff because being unable to get to the prior level of business activity, how exactly that’s going to play out. I think we’ll probably see some further FAQ and regulation on that, but that’s also another area of flexibility that they’ve added as well. And I think that in a nutshell, that kind of, you know, deals with what they’ve approved. One big thing that we were there is a bill in the Senate, but it hasn’t really gone anywhere yet. One big thing that we do want to see changed. And I think that’s maybe hopefully the next round of look at this stuff that the next round of looks that we’ll get will deal with this is the IRS has came out with a position that expenses that are covered by PPP loans that are forgiven are not deductible. So for example, payroll expense. So for example, your payroll expense, if it’s covered by a PPP, the extent it’s covered by PPP loan and that loan is forgiven, those expenses are not deductible for taxes. That’s the IRS’s position. There is a bill that Senator Cornyn introduced back in, I think it was on like around May 5th in the Senate that would reverse that position. But the IRS has basically kind of said, our hands are tied. This is how the code works. This is what we have to do. If Senate wants to fix it, go fix it. So Senator Cornyn introduced the bill, haven’t seen any further action on it. It’s clearly something that many people, there is bipartisan support I’m told for that. But thus far, there hasn’t been any progress yet on that front. And I think that’s something that needs to be addressed and frankly, people need to be aware of. So, there’s this great thing about the grant, but just bear in mind on the tax front right now, as it stands, you’re not going to get that deductible expense. So you could be, you know, the government give it, then the government may be taking away when it comes to taxes because you’re losing some deductibility there.
Interesting. So this is all unfolding and Stephen as always you’re right on top of all that did we cover everything? I know we talked about extending from 8 to 24 months, the term of the loan going to from 2 years to 5 years and needing to make, have that conversation with your lending agent the payroll, the amount of the loan for forgiveness going from 75% down to 60%, still up in the air in terms of the tax, some of the top tax consequences. Did I miss anything? Is there anything else that is new breaking that people should know about?
What you’ve recapped is pretty much covers it. Again, I caution people don’t do anything rash just yet the president hasn’t signed this. And we expect that there’ll be a host of new regulations that will need to come out to implement this stuff. So I think the most important thing, and the drum beat that we continue to beat, is stay tuned, definitely keep looking into this. I’ll also want to let people know we are going to be, our firm will be hosting next week. Probably I believe it would probably be on Thursday, a webinar with a Q and A on these new developments. Hopefully by then, we’ll see some more action by Treasury to clarify some of this before regulation. And our plan is to keep regularly doing these webinars and Q and A’s, so we can keep our clients and friends of the firm and other interested parties apprised of new developments and how this has all kind of shaking out.
That’s great. So, it’s Stephen Katz, chairman of corporate law practice, Peckar and Abramson and the website that you could get information for Stephen, that he just referred to the webinar, that’s Pecklaw.com. Stephen, any other information, if someone would like to get in touch with you, or if they want to join that webinar, anything that anybody needs to know?
Sure. If they want to get in touch with me. You can feel free to email me. And my email address is S K A T Z @pecklaw.com. That’s P as in Peter, E C K L A W .com.
And as far as the webinar coming up, it sounded like you don’t have the date firmed up just yet, but it’s going to be sometime next week. Where can people find out where that when that date is and, and how they could join it?
Certainly they can go to our website. And as you said, it’s www.pecklaw.com P as in Peter, E C K L A W.com. We’ll have we’ll certainly have it up on there and how people can register. Also the plan is we are going to have somebody from the accounting firm of CohnReznick on with us as well. We’ve I presented with them before, and they’re a wealth of knowledge and expertise, certainly on the accounting front and the sort of the math issues that a lot of these loans present. So I think it’s a very valuable resource for your listeners, and we certainly welcome anybody who’d like to attend to either hop on the website, if you have trouble finding it or whatever, feel free to email me and I’ll get you, make sure you’re on our list.
Stephen, thank you so much for joining us on Constructing Brands. Always an incredible pleasure and your knowledge, I mean, it speaks for itself. Thank you so much. Really appreciate you.
Eric, it’s always my pleasure. Anything I can do to help and again, just everybody be safe and be healthy and we’ll all get through this.
Thank you, Stephen.
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