On-Demand: Updates on PPP Loan Relief
January 12, 2021
Our speakers reviewed the new second draw PPP loans and discussed implications of recent changes to the program.
Alan Wink:Thanks, Allen. Good day, everyone. I hope everyone is well and a belated happy and healthy new year too, to everyone on the call. The $900 Billion COVID Relief Bill recently signed into law by President Trump includes an additional $284.5 billion for the Paycheck Protection Program to support small businesses. In the earlier stimulus program, 5.2 million small businesses borrowed $525 billion in potentially forgivable loans. The second draw or PPP loans, or PPP2 as they're called, allows for loans of up to $2 million to businesses with fewer than 300 employees down from the 10 million with no more than 500 employees in the first round of PPP loans.
An additional point in the second draw PPP loans is that businesses must also demonstrate at least a 25% drop in revenues between comparable quarters in 2019 and 2020 to qualify for this new program. This time Congress focused more on helping businesses than on keeping jobs by allowing borrowers to spend the funds on a wider range of non-payroll expenses. And we will certainly discuss these expenses with you in the presentation today.
Today's webinar will focus on an update of PPP loan relief and forgiveness and the new program for the second draw PPP loans. More specifically, we will cover new dollars available for first-time borrowers. We'll talk about the PPP second draw borrowers and the eligibility requirements for the second draw loans. We're going to talk about the expenses eligible for forgiveness has now been expanded. We will talk about the forgiveness process and how to maximize the amount of forgiveness. We will talk about the tax issues regarding PPP loan forgiveness. Now that it's been clarified by both Congress and the IRS. We're going to touch briefly on economic injury disaster loans. We're going to talk about the changes to the employee retention credits. We're going to talk about companies in the bankruptcy process and their eligibility for PPP loans. And we're going to talk about other miscellaneous provisions.
So after much debate, signed by the president to law on December 27th, was a $900 Billion COVID Relief Bill. As I mentioned earlier, there were 325 billion for small businesses in this bill, including 284.5 billion for the second round of Paycheck Protection Program loans. In addition, there was 166 billion in direct checks to individuals, much of which has already been distributed. 120 billion and enhanced unemployment benefits. $82 billion for education. 55 billion for vaccines, testing, and contact tracing. 70 billion for transportation and rental assistance. 26 billion for nutrition and agriculture, 17 billion for childcare and broadband access for low-income families, and 12 billion for bank servicing low income and minority communities.
So of the 284.5 billion for the second draw PPP loans, this includes 30 billion for PPP loans issued by community financial institutions and certain small depository institutions. It also includes an additional 35 billion for first-time borrowers, including 15 billion for first-time borrowers with 10 or fewer employees or loans less than $250,000. It also includes 25 billion for second draw PPP loans for smaller borrowers with 10 or fewer employees or loans less than $250k.
I think in this bill, Congress attempted to deal with the fact that many small businesses had issues getting first draw PPP Loans since they did not have adequate existing bank relationships. So I think this will be handled adequately and in the second draw PPP Loans. In addition, for the other 325 billion for small businesses, 15 billion was made available by the SBA for eligible live venue operators or promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture operators, or talent representatives.
Now, this was primarily because these businesses were shut for most of 2020. This is called the Shuttered Venue Program. The amount of the shuttered venue grant is the lesser of 45% of gross revenues earned in 2019 or $10 million. Once again, the lesser of 45% of gross revenues in 2019 or $10 million. Once again, if you received a shuttered venue grant, you were not eligible for additional PPP funds. So with the 325 allocated to small business here and the prior stimulus bill joint authorization level for both round one of PPP, and second draw of PPP has been set at $806 billion.
As I previously mentioned in this new stimulus bill, $35 billion has been set aside for first draw borrowers. And the window for first-time borrowers to apply is actually today. Who is eligible for this additional $35 billion allocated for first draw loans? Businesses with 500 or less employees, sole proprietors, independent contractors, and eligible self-employed individuals. Nonprofits, including houses of worship, chamber of commerce, including 501C-6's, economic development organizations, tourism organizations, certain news outlets, and housing cooperatives.
Robert Katz:And what's important there is the 501C-6's is that we're at it are all of the business and industry associations that are out there. So it's going to open up an opportunity for those industry associations to now go and apply for PPP funds.
Alan Wink:So let's talk a little bit more specifically of what's included in the second draw loans. So as I said earlier, the recent stimulus bill created a second loan from the paycheck protection program called the PPP Second Draw Loans. It's really meant for smaller and harder hit businesses. The maximum loan amount is $2 million. Businesses that are part of a single corporate group shall not receive more than 4 million of total second draw PPP loans.
In order to be eligible for a second draw PPP loan, you need to employ 300 or less employees, businesses that have multiple locations can employ no more than 300 employees per physical location, but the new caveat for the second draw loans is that the borrower must exhibit a 25% gross receipt decline in any quarter in 2020 compared to the same quarter of 2019. The question that's come up is what happens if I was not in business in 2019? The SBA has not yet issued guidance in terms of the comparable period if you were not in business in 2019. One of the other criteria to receive a second draw loan is that the borrower had to use or will use the full amount of their first draw loan prior to the receipt of the second draw PPP loan.
Robert Katz:And Alan, this is Rob. Just one other comment on that too. It's important whether you have used or are going to use the loans. So the fact that you haven't used it up as of now or application doesn't mean you don't qualify or you wouldn't qualify.
Alan Wink:Thanks, Rob. Let's talk about how the amount of the second draw PPP loan is calculated. Very similar to how the first round of PP loans was calculated with a couple of different revisions. The loan amount is calculated at two and a half times your average monthly payroll costs. I know this sounds similar to the first draw loans. One change is that food service companies and hotels can get three and a half times their average monthly payroll costs. What is the average payroll monthly costs? What is the timeframe we use to measure that? You can either use your 2019 payroll, or you can use 12 consecutive months prior to the application for the second draw loan.
So once again, you can either use the 2019 payroll or the 12 consecutive months prior to your application for the second draw loan. About seasonal employees, they can use any 12 week period between February 19th, 2019, and February 15th, 2020 as the base period for calculating the amount of loan that they're eligible for.
The waiver of the affiliation rules that apply during initial PPP loans also apply to the second draw loans. You can only receive one-second draw loan. And as I said before, you can either receive a second draw loan or a shuttered venue grant, but you cannot receive both. How long is the covered period for the second draw loan? Very consistent with the first draw loan. The covered period is any period between eight and 24 weeks. Very important fact, the last day to apply for and receive a first or second draw loan under this new stimulus bill is March 31st, 2021. So it's coming quickly.
Terms of the second draw loans are consistent with the terms of the first draw loans that we've been talking about for the last nine months. Just go through them really quickly. Once again, the loan is 100% guaranteed by the SBA. The borrower does not have to provide any collateral or personal guarantees. The interest rate is 1% calculated on non-compounding, non-adjustable basis. The loan has a five-year maturity. And once again, the lenders are permitted to rely on certifications of the borrower to determine the borrower's eligibility and use of the loan proceeds.
Robert Katz:Hey, Alan, this is Rob again. And regarding that, because that has become in terms of forgiveness and new PP, or PPP2 a lightning rod. So if you go back to FAQ 31 of the original questions, it's really important that you look at that and make sure you qualify under that term because that's what the new 3509 and 3510 are covering.
Alan Wink:So who's not eligible for a second draw of PPP loan? And they've tried to be a little bit more specific on this than they were for the first round of PPP loans. So any entity that was ineligible for a first draw PPP loan is also ineligible for a second draw of PPP loan. If your business was not in operation on February 15th, 2021, you are not eligible for a PPP loan. Any entity that has been permanently closed is not eligible. However, certain businesses have temporarily closed or temporarily suspended their business. They remain eligible for a second draw loan. As I said earlier, if you received a shuttered venue grant, you're not eligible for a second PPP loan.
Publicly traded companies are not eligible. Lobbying organizations are not eligible. Any entity that's affiliated with entities in the People's Republic of China is not eligible for a loan. Entities registered under the Foreign Agents Registration Act are not eligible. Any entity that is wholly or partially owned by the President of the United States, Vice President of the United States, head of the executive department or any member of Congress or their spouse is not eligible for a PPP loan. Banks, life insurance companies, finance companies, and investment companies are ineligible. Real estate holding companies and real estate management companies that only manage affiliated properties are not eligible.
So let's talk a little bit about the application process and the documentation necessary to apply for a second draw PPP loan. The SBA has issued form 2583.SD as a form that needs to be filled out. As I said earlier, the SBA is given some preferential treatment to smaller borrowers this time around. So the application process for community-based lenders for the second draw loans is opening on January 13th. The specific date for other lenders has not yet been established. We should know that over the next couple of days.
So the payroll cost documentation is the same documentation that was required for the first draw PPP loans. If you use calendar year 2019, the cap to calculate your average monthly payroll cost, then you have to supply no additional data to your bank since the bank already has that from your first draw loan. Loans greater than $150,000 need to provide documentation to support revenue reduction of 25% or more in only one quarter when you're comparing 2019 and 2020.
The documentation could be relevant tax forms or quarterly financial statements, or bank statements. For loans of $150,000 or less, no documentation is required when the borrower submits its loan application. Documentation of revenue reduction must be submitted before the borrower applies for loan forgiveness. So for loans greater than $150,000, it's lender's responsibility to perform a good-faith review to determine the accuracy of the revenue reduction. You must provide evidence for any retirement group health, life, disability, vision, and dental insurance contributions that you're including in your loan amount. Self-employed independent contractors and sole proprietors must provide form 1040 Schedule C.
In terms of the necessary certifications from the borrower. The borrower must certify that the applicant has not received and will not receive another second draw PPP loan. The applicant must certify that he or she has realized that revenue reduction of greater than 25% in one quarter. And the applicant must also certify that he or she has used the full first draw loan on eligible expenses before the second loan is dispersed. So at this point, I want to hand it over to a colleague Rob Katz.
Allen Wilen:Hi, Rob. Before Rob jumps in, I want to go through some of the questions because we have a couple of 100 questions that have already come in from folks. I want to make sure I get some of the big ones that are being repeated. Is there a maximum salary level per person when calculating average payroll, like there was the last time in the first PPP?
Alan Wink:Yes. Allen, it's still that $100,000 same rules as the first PPP loan.
Robert Katz:Yeah. And Allen, well, I'm sorry. And also, there's still the same cap on 5% owners. It's still $20,000 and change, same with the Schedule C.
Allen Wilen:Okay. The other question that continues to pop up here is that, when you calculate the quarters for purposes of calculating the decline of 25%, is it specifically calendar quarters? Could it be any three quarters if you have a fiscal year? And the other question that came about was, what if I have one quarter where I really did poorly, and I couldn't meet the 25% threshold, but then I have one quarter where I far exceeded? Do they have to be balanced out?
Alan Wink:Allen, the answer is no. The SBA is very specific in that it is, you have to exhibit one quarter where declining revenues is greater than 25%. And they also I'm sure there'll be additional guidance issued on this, but they have also said that it is on calendar quarters. They haven't created any other guidance relative to that. So right now, it is calendar quarters.
Allen Wilen:The other question is going to be whether they, you need to apply cash or accrual accounting, we need to do these calculations does it matter?
Alan Wink:I think that's a great question, Allen. Also, the guidance has sort of been silent on that, but since they're asking for tax returns as a form of documentation, you probably the suggestion is to do it if you're a cash-basis taxpayer doing on a cash basis, accrual basis on an accrual basis.
Robert Katz:Allan. I agree with Allen and Alan because consistency is going to be important. On the second draw, there's going to be a lot more scrutiny. And we'll talk about the scrutiny that's coming in already. So if you're a cash basis financial statement, or an accrual basis financial statement, and then you try and fit into the box by changing the methodology, and you get pulled for audit, it's going to be very, very questionable. And the other concern that I've spoken to people about is if you have an issue on your PPP2, the government has the right to look back and call back at PPP1 even if it's been forgiven.
Allen Wilen:So two more questions really quickly before I jumped to you, Robert. We should get through a lot of these questions because it's on people's minds. If I am a portfolio company, how do affiliation rules work with other portfolio companies of that private equity firm? Am I allowed to supply the second time? Am I not allowed to apply? How does that work?
Alan Wink:Well, Allen, I think there was an awful lot of confusion around that topic. With the first round of PPP loans, in terms of what was considered to be an affiliate. I think this time around, they're going to come down much harder on that rule in terms of if companies are affiliates and they have more than 500 employees are not going to be eligible. I agree with Rob's earlier comment that there's going to be a lot more scrutiny on the second wave of PPP loans because they are earmarked to smaller hard-hit businesses.
Allen Wilen:Okay. And then the last question I had, which has come up is a number of religious entities don't institutions don't have tax returns, they file, what do they use to support their 25% revenue decline? Just internal financials?
Alan Wink:Internal financial statements. And once again, they're going to have to certify that they've experienced greater than a 25% decline in revenues.
Allen Wilen:Is there any look back issue here for forgiveness later on related to endowments or other sources of funds that they may have, or is that relevant this time around?
Alan Wink:I believe it's irrelevant.
Allen Wilen:Okay. So, Rob, you want to keep us going here?
Robert Katz:I will Allen and a happy and healthy new year to everybody. And for Alan Winks's last comment, I'll just follow up with the endowments because that has become. Before I jump in to slide number 13, that's become a very hot issue on the 3510, but again, keeping in mind they have the right under what you're certifying. So while it doesn't say specifically, you can boil down the 10 pages or nine pages of 3509 and 3510 into basically two paragraphs. And that is, did you prove to us that you really, really, really needed the money. And we were the lender of last resort. And I don't think that requirement, even though there may not be a specific form, will change with the 35 or, I'm sorry, with the PPP2 draw.
So some of the good things is you'll see. And as Alan Wink and Allen said, it's really about sustaining the business because the expanded eligible expenses. You can see almost every category was expanded. So the payroll cost remained fairly consistent. The first four on the slide, the payroll costs, including salary wages, vacation, leave, employer-paid insurance, and retirement. Mortgage interest, rent utilities are similar to PPP1.
Covered operations. Now the next group are what's been expanded, so covered operations, including the business software, cloud computing services, other human resources, and accounting needs. Property damage costs related to property damage due to 2020 public disturbance is not covered by insurance company. Covered costs include suppliers pursuant to a contract purchase order, order for goods that are essential to the recipient's current options. Covered worker protection expenses, the PPE, and the cost to comply with COVID-19 federal health and safety guidelines. And those were also if you have a PPP1 that's over $2 million, those are the type of expenses that you're allowed to show on forms 3509 and 3510.
Also, the worker protection and the 60/40 cost allocation for payroll and non-payroll costs are the same, so that has not changed. And the guidance again applies to the original PPP loan as well as PPP2 unless your forgiveness application has already been processed. So it expands and gives a better coverage opportunity.
So what are some of the operational expenses? And some of the questions we've been receiving early is the 25% reduction is not applied to gross margin. It's strictly based on revenue because I've had that question. We've had that question. It's been asked. So here's some of the software or cloud computing services that are your business operations, product service delivery, payment or tracking of payroll expenses, human resources, sales and billing functions, supplies and inventory, and Zoom, WebEx, Amazon Cloud, QuickBooks, other accounting, or office softwares.
Property damage. Again, the cost related to physical damage, unfortunately, due to public disturbances that were occurred in '20 and not covered by insurance or other compensation, and it does not cover anything; it's due to a natural disaster. What is defined as supplier costs? And, again, expenditures paid to a supplier of goods that are essential to the operations of your entity and again underlying essential to the operations. So it's nothing that you would define as discretionary. Expenditure was made pursuant to a contract purchase order in effect at the time or before the covered period, and for perishable goods, the contractor PO was in effect before or any time during your covered period.
What about worker protection expenditures? And again, those are somewhat self-explanatory. Any expenditure that allows the business to comply with government requirements or government guidance. PPE, plexiglass partitions, sneeze guards, renovation of assets for again, better social distancing, or safety air filtration systems and it's important to quantify them because a lot of times what I've seen, what we've seen is that companies and organizations are not giving themselves enough credit. And what I mean by that is the numbers once you start adding them up are usually higher than your first intuition. And one, in particular, is if you have a school and your size of the class has been reduced because you've had to expand the social distancing so you can't have as many students in the same area, and the expenses you've had to incur to reset out and refit out the classrooms they're usually expensive. And in this case, now you can deduct them or reduce them for your PPP1 or 2.
So for loans under $150,000, the process has been amazingly streamlined for the good and a whole lot of reasons. So the borrower signs and submits to lenders the one-page certification. The SBA has 24 days from December 27th to create the certification. It's a description of the number of employees. The borrower was able to retain because of the loan.
The estimate of the loan spent on payroll. Total loan amount and it tests complying with the loan requirements. You may be required to provide documentation substantiates through reduction of gross receipt in 2020. And the certification requires the recipient to attest to the following: The information is accurate. The borrower has complied with the requirements. You're going to hold the information for at least four years. You're required to retain the employment record for four years and all the records for three years. And somebody asked during the process, where I use a payroll company, so aren't they retaining the records? The answer is yes. They should. Maybe they don't. So when you go for your application, make sure you have the backup. And again, keeping in mind if you're going for draw 2 and you get questions raised, the audit covers both the draws.
So here and this is important. Not that everything else isn't important, but what are the forgiveness considerations? It's again, making sure your cover period and you've selected the appropriate cover period. Making sure you consider applying the safe harbors. So if you were forced to close or minimize your operations due to government shutdowns in your area, you're covered under a safe harbor as long as you can document it.
What is the proper forgiveness application form? Make sure you use it. People say I used the short form, the easy, or the regular, and it really becomes simple to us or to me is don't force it in. If you can't do it or you're not sure, then just use the standard form. Calculate your payroll and FTE and wage reductions. I've found, and we've said this before, that most of the payroll companies have it summer more robust than others, but they've been very good and flexible about providing somewhere between good and excellent documentation.
The employee categorization, again, it's over $100,000, 5% owners, et cetera, and understanding applying the reduction exceptions. The non-cash compensation expenses. Again, make sure you've included everything. Provide complete documentation. And what we've seen is this is something that's critically important because this will slow down your forgiveness approval. When you apply, have the complete documentation package. So as if you were expecting an audit, so it's all there, it's timely, it's done. And we've said this, I've said this in an interview. If you don't have the documentation or you're not sure you're not ready to file it, you should be able to pull out the 3508 and have the package of backup for it to tie it in right there.
The timing of applying forgiveness. I did see in one of the questions scrolling through again for PPP1 the bank and the SBA have a total of 150 days to review your package. And so it would be very hard to believe that you're going to be able to expedite it quicker than that. So just allow that accordingly. And as you start to discuss your covenants with your lenders, make sure you address how that loan or now that revenue comes in and your covenants, especially with your trailing covenants that have a trailing four quarters.
So now, completing the SBA questionnaire, 3509 and 3510s for loans over 2 million, it's a relatively new form. And verification is the compelling case example. And if you've seen this form, there are boxes throughout the form, and I use the example. It's the liquidity assessment. So it's section two it's question number 13. You have 1000 characters. To make a compelling case, it's something similar to one of those check the box and explain. And that gives you a chance in there a couple, again, a couple of places throughout the form to make a compelling case why your loan should be forgiven. And to me, you should use every character of that box because we've had discussions with clients where I've just said that your explanation is not compelling enough. I'm not saying whether you agree with me or not. I'm just saying as somebody who's seen audits and been through them. You want to make that as compelling as possible. And it's basically your free comment opportunity. And again, the 09 and 10 will be provided by the lender. And once the lender sends it to you, the borrower has 10 days to complete.
So what are the tax issues with first draw and second draw loans? Gross income does not include any amounts that would rise from the forgiveness of a PPP loan. And I've received some questions where somebody says, what's gross revenue and gross income? And in generally, people know what that definition is. So sometimes, if that question comes up, it doesn't need clarification. No deduction shall be denied. No tax attribute shall be reduced. No basis increase shall be denied by reason of the exclusion of gross income. It's the same treatment for draw one or draw two, and PPP loan borrowers no longer have to deduct the amount of the EIDL advance from their PPP forgiveness, which I believe was capped at 10 million, I'm sorry, $10,000.
And the bankruptcy provision. And this was a very, very hot provision. And so, in PPP1, bankrupt companies were not allowed to apply, and it went up through the court system. The courts haven't been consistent. There was an early case in Texas, but now as you'll see in the second bullet, it's required. It says, sorry, first bullet is special procedures if the bankruptcy administrator determined certain small business debtors are eligible, and it requires court approval for the loan to these debtors and requires that the PPP loan be given a super-priority claim in the process providing additional protection to the bank. So it's administrative claim, and it's not just an unsecured claim. So if you have to take it, if you're going to take it in bankruptcy, it's important to be cognizant of it, whether you're a debtor, whether a company in or one of the creditor groups. With that, Alan Wink, I'll turn it back to you.
Alan Wink:Thanks, Rob. Great job. Let's talk a little bit about employee retention credits, paid sick, and family leave credits because this has changed dramatically with the new bill. The original CARES Act created a refundable payroll tax credit for employers that retained employees during 2020, despite the impact of COVID-19. The credit was equal to 50% of their first $10,000 of qualified wages paid during 2020. So this leads to a maximum credit of $5,000 per employee. Employers that received PPP loans were ineligible to also claim the employee retention credit. The new stimulus bill recently signed by President Trump made several modifications to the retention credit that are retroactive to the effective date of the CARES Act. Now the employee retention credits are available to all recipients of PPP loans. Employers can claim the employee retention credit on all eligible wages, not used to support PPP loan forgiveness.
The retention of the employee retention credit has been extended to July 31st, 2020, instead of December 31st, 2020. I'm sorry, it's July 31st, 2021, to December 31st, 2020. The credit has been increased to 70% of up to $10,000 of qualified wages paid per quarter in 2021. The gross receipt tests for determining employer eligibility has been reduced from a 50% decline in revenues to a 20% decline in revenues. And finally, the new bill has increased the threshold for including all qualified wages from 100 to 500 employees. So this certainly increases the available credits for employers of between 100 and 500 employees. Or paid sick and family leave credits. The timing has been extended through the first quarter of 2021.
A few other relevant provisions of the $900 Billion COVID Relief Act. Individual stimulus checks of $600 per person for people making under a certain salary threshold was put in place. Those checks, most of those checks have already been mailed out or transferred to people's accounts. Enhanced unemployment benefits of additional $300 per week through March 14th, 2021. Emergency rent assistance has been included in the bill. The exact amounts have not yet been determined. They will be determined over the next couple of days. And finally, the business meal expense deduction has been put back in place. 100%of business expense deduction as long as the expense is for food or beverage provided by a restaurant. But when attempt to keep restaurants open and in business.
Since the CARES Act was originated about nine months ago, the EisnerAmper Borrower Response Team has been actively assisting companies with loan origination and loan forgiveness. We will now be assisting companies with the 284.5 billion available for small businesses under the second draw loans. We will be continuing to follow new SBA guidance as it applies to all elements of the CARES Act with 5.2 million different entities applying for forgiveness; every application has some level of uniqueness. So please don't reach out to any of the members of our Borrower Response Team with anything relating to the CARES Act, PPP loans, or anything of the like. Allen, I'm going to hand it back to you.
Allen Wilen:Great. Thank you very much. So we've got about a 10-minute window here for some more questions, and I wanted to go through some of the questions that were asked and see if we can knock them off, and we'll knock off the easy ones first, which recommendation for whether I use the same bank for my PPP2, or can I use a different bank? Some of the banks haven't started even the forgiveness application process yet for PPP1. Is that going to affect the ability for people to go through the PPP2 process?
Alan Wink:Allen, let me take a crack at that because I've been talking to several bankers over the last week or so, and it's interesting that I think a lot of banks that were part of the program for the first draw PPP loans have decided they did not want to participate in the second draw loan. There probably is some benefit to going back to your original lender if you can, but if that lender has decided not to participate in this program, please let us know. We know several banks that are out there trying to originate second draw loans.
Allen Wilen:Okay. Coming back to the next issue, which was non-cash compensation. How does that factor into these calculations?
Alan Wink:It's factored in the same way it was for PPP1, same identical formula.
Allen Wilen:Private equity firms, scrutiny is there an issue here with, did they have the ability to apply in a PPP2 or all the affiliation rule is going to be an issue for them to get through?
Alan Wink:Once again, it's going to be a gray area. I know many private equity funds that return their PPP1 money. They are going to be under enhanced scrutiny the second time around. And it's for the reason I said before. This is meant to be for small, hard-hit businesses. And it's tough to put private equity firms in that category or their portfolio companies.
Robert Katz:I would, and Alan, I'm sorry for interrupting. I agree with that. And I think you can expand the private equity to professional services firms as well. The second draw is primarily for, as Alan just said, if you think about the broadening of it, it's for the hotel, the theater, the sheltered venues, which is also save our shows, you'll hear it as an SOS. And so if you don't fit into that box and you apply, you're going to get, as Alan said, significantly more scrutiny and with potential of exposure on your PPP1.
Allen Wilen:The other question continues-
Alan Wink:Allen, just to add one other point to that. And Rob, I think you're 150%, right. And I'd add the point that, once again, on this application, the lender is not asking for any information about your financial position in terms of what your balance sheet looks like. They're basically going under the guidance that if you had significant declines in quarter-to-quarter revenue, you need this money to re remain open and to stay in business. So that's been sort of the guideline they're putting here. They're not going back to the cash on balance sheet or access to other forms of liquidity.
Allen Wilen:So the other issue that continues to pop up, and maybe you guys can further define for us what you think the intention was related around supplier costs because I've had a number of questions here that are related to what's considered a supplier cost or subcontractors and independent contractors who provide services, are they considered suppliers? What happens if you're receiving supplies from a supplier in China, does that impact the ability here? Those kinds of things. So if you can give some more definition around that supplier number, that'd be really helpful.
Alan Wink:Allen, just to add something to that, I think they were thinking about suppliers at first was essential to the operations of the business. And secondarily, they're trying to look at supplier arrangements that were in effect before the covered period story started. Because there were assuming that if it was essential, you would've had those contracts in place before the coverage period actually began. I think those are the two criteria that kind of keep in mind. Number one, is it essential to the business going forward, and number two, were those supplier or rank agreements in place before the covered period began?
Robert Katz:Allen, I think the follow-up on that too. The way sometimes I look at things is if I had to testify in court, would the explanation to the judge be acceptable. So when we talked about on slide 11, the entities not eligible for the PPP loans. It's very specific. Entities affiliation with any of these in the People's Republic of China. So if the government is not willing and it's a very specific exclusion, and now you're going to say, you're going to use a supplier over there. It's just going to be a tougher sell.
Allen Wilen:Well, now that you're on that issue as well. One of the questions that was asked was related to a US subsidiary with foreign ownership, non-Chinese foreign ownership. Are they eligible?
Robert Katz:Allen, it's a very, very gray area, but again, if you go back to call it the intent, the government did not want taking money here and spending it in foreign operations. So I look at it this way because I had this call with a client yesterday about their company taking the money, and then they have timeshare subsidiaries underneath, and to me, it's where did the money go? It went to the parent. So the money has to be spent by the parent. And if you're going to funnel it out to foreign subs and use that as part of the umbrella, that's going to be a very tough sell because the personnel, the people here it has to be state spent, so that becomes a risk-reward and how much risks and what's the risk appetite.
Again, for me, my concern and it's important, and I know it's redundant is it's not only this one. So if you would now apply for a six or 700,000 loan now, and you add PPP1 and then let's say your PPP1 was four and a half million, then those would become worth it.
Alan Wink:Allen, I was going to say, if you remember, for the PPP1s, initially, foreign-owned companies with employees in the United States were not eligible, then it was changed because the intent of PPP1 was to keep people employed. So as long as the entity had US-based employees, they were eligible for a PPP loan.
Allen Wilen:Okay. And the last question before we have to turn it back over to Lexi is going to be, what documentation and what level of documentation is required to support these loans and the forgiveness on these loans? So am I going to be able to give them every supplier invoice in a file, or am I going to give them a spreadsheet that details it all out with invoice numbers? What are they going to be looking for to support this?
Alan Wink:Allen, I think what they're going to be looking for are copies of the supplier agreements. So making sure that they're dated prior to the beginning of the covered period, they're going to be looking for copies of payment correspondence that supports the amount that was paid during the covered period and possibly invoices for certain suppliers. I think those are the documents are going to be requesting.
Robert Katz:Yeah. Allen, I just want to add a quick note. If you're putting it down as a deduction, then it's material enough that you're somebody who's giving you free money, that you don't have to pay back has the right to ask for backup, and it's reasonable, reasonable backup, whether it's the bank statement, the payment, the invoice, et cetera, but if somebody is giving you money you don't have to pay back. So generally, they can ask for whatever backup they want.