 My name is Mark Shklov. I am the host of Think Tech Hawaii's Law Across the Sea program. Today we're going to go across the sea to Portland, Oregon to talk with attorney Eric Kodish about the Paycheck Protection Program. Eric is a partner and shareholder with the law firm of Lane Powell. The COVID-19 pandemic has been the impetus for the creation of new areas of legal practice, one being the Paycheck Protection Program, or PPP, as it's called. As a business and tax lawyer, Eric has found himself in the forefront of PPP law, advising clients and counsel on how to travel this new road. Now, we've got a lot of questions to ask Eric. We may not get to all of them. We may not get to all the answers. But Eric has graciously prepared, and we will circulate a PowerPoint presentation along with this program that discusses a lot of these issues. Now, Eric, welcome. My first question is, how are you in Oregon? How's everything going? We are doing well. Oregon is in the process of reopening. So that is going well. I actually saw people sitting in a restaurant and eating. It was a strange sight. Well, OK, well, that's good. Yeah, when will we get back to normal? What is normal? But OK, what is the PPP? Let's talk about that and briefly tell me what it is. I think most people have a general idea, but to me, it's very complex. Yeah, and happy to be here. Thank you very much for inviting me. So fundamentally, the PPP is a program that was added to the Small Business Act by the CARES Act. And fundamentally, it's a way for the government to provide funds for a business's key operational expenses, which are payroll, mortgage interest, rent, and utilities, for about eight weeks of operations at the pre-COVID-19 level. And the key is it's called a loan, but it's structured as a forgivable loan. So it's really meant to be a grant. But to make the whole thing work, the federal government is running the money through the banks. So if you get money from a bank, that's a loan. And then you get the loan forgiven, as if it were a grant. Wow, and we have some parts of your presentation that we can put up on the screen. And the first screenshot would be kind of a brief description of what the PPP is. So that would be the first one to put up from the studio. It's up. OK. And that will give you some idea of what the background is about the start of the PPP. And how much can a business borrow under the PPP? That's the next screenshot. And so the amount that can be borrowed, it's two and a half times your 2019 average monthly payroll costs. Now here, payroll costs is a specially defined term. So payroll costs are cash compensation capped at $100,000 per year. So if you have an employee who makes over $100,000, you can only take into account their monthly payroll for $100,000. But it includes self-employment income. So if you're a partner in a partnership, or you have your own sole proprietorship, and you don't actually get payroll, you still get that. Then there's non-cash benefits with no cap. So far, the SBA has seemed to limit this to employer contributions for health care and retirement. And then state and local taxes on wages. So the main one there would be unemployment insurance. Well, it's kind of broad, then. I mean, various areas that are covered. And what can these funds be used for? I mean, does it have to be used for all those things? Or can it be used for different things? How does it work? So the way the statute works is it gives you seven allowed uses of the funds. So you can use it for payroll costs, costs related to the continuation of group health care benefits during periods of paid leave, sick leave, medical or family leave, and insurance benefits. Those kind of were always included in payroll costs. Then mortgage interest, rent, utilities, those are very important. But then in addition, you can use it for any kind of interest payment, even interest that isn't on a mortgage. And you can use it to refinance. A lot of businesses at the beginning, there was a thought that the faster money would be these emergency injury disaster loans or EATLS, which had existed before the CARES Act. So you have seven allowed uses of the money. But you only get forgiveness for four uses. And so the four uses, you only get forgiveness for using the money in what they always call the covered period. And there's a little confusion there because the covered period was originally eight weeks from when you got the loan. But thanks to a law that was just signed, that President Trump signed on Friday, the Paycheck Protection Program Flexibility Act, businesses can now actually get 24 weeks to spend the money. So you get credit and forgiveness for spending these things up to 24 weeks. And you get forgiveness credit to the extent you pay it on payroll costs, broadly defined as when you were applying for the loan. Mortgage interest, rent or utilities. The mortgage interest, the rent and utilities all have to be in accordance with agreements that I think, if I remember correctly, had to be in place by February 15th, 2020. The PPP funds can be used for more than just paychecks. Covers really a broader number of categories. And it looks like it's meant to help people. That sounds good, help businesses. Absolutely, it's meant to cover basically your key expenses. Your key expenses of the business will be payroll, rent, mortgage interest and utilities. The one thing it doesn't cover is supplies. OK, and it's meant to keep businesses open, it sounds like, because that was the intent, I guess. It's meant to keep businesses open and more importantly, as the name implies, it's meant to protect paychecks. It's meant to ensure that businesses don't lay off their workers. So it's kind of here, it's basically this understanding that because of the COVID-19 pandemic, things are going to be shutting down. You're not going to be getting as much revenue. Well, your first thing when that happens is you're going to lay people off. So it's the government coming in and saying, OK, I'm going to give you some money that will cover eight weeks of expenses. So now you can operate at normal levels for eight weeks. Now, they moved it to 24 weeks because people have been slow in reopening, but the basic idea is there's this money you're going to get. It's going to cover you at 100% operations for eight weeks. Maybe you can't be at 100%, so maybe it'll take you longer. But the idea would be is that during that eight weeks, you're still able to make money. And so you can start building this reserve. So when you run out of the PPP money, you now have the reserve you built plus new money coming in. And it basically is bridging us from this pandemic to kind of a happier, healthier time when the economy's reopened. And I've heard about the PPP for a while. And I mean, is it still open to apply it, or is it too late, or what can be done? It is not too late. I've seen reports of about $100 billion still left unspent. I mean, the main thing was is that this started off with about $349 billion, I believe, and then they added another $300 some billion to it. And the Paycheck Protection Forgiveness Act that was just passed would indicate that new loans can still happen. So there still must be money out there for business to get. So if you haven't applied, it's not too late. And what type of businesses can qualify for the PPP? I think we've got a slide for that, too. And basically, what I would say is there are three main categories. Any business or charity was not more than 500 employees. So it's mainly meant for small businesses. But then, even if you don't satisfy that, if you satisfy an employee-based or revenue-based standard that the SBA has always had based on your industry code, you can qualify. And then another big one is the SBA announced that you can also come in under what they've always had for general SBA loans as their alternative size standard. And that means you have tangible net worth of not more than $15 million, and average net income after federal income taxes for the last two fiscal years that averaged not more than $5 million. And I've worked with a lot of clients who have well over 500 employees but fit within that alternative size standard. So there's kind of various qualifications. And it does sound like it's looking for businesses that are maybe not huge, but, I mean, still substantial. And to try to keep them alive during this strange period, yeah. Absolutely. And no, I mean, we've definitely worked with clients. Now, the amount of the loan is capped at $10 million. And for most, it's gonna be, you'd have to have a pretty high payroll in 2019 in order to be able to get to $10 million. But some can get there because with this alternative size standard, you could have a much larger, I think one of the big things we've seen is the businesses that have significant debt, so they don't have tangible net worth over $15 million. And it's easy to get under that $5 million average income before tax. And who should apply then? I mean, should just anybody, is this open? Is that what your opinion would be? Just, if you need it. Yes, everyone, absolutely. Everyone, if you qualify, you should apply. There is really no reason not to. Now the, that said, there is, it's basically anyone who's affected by the pandemic. So we, you know, there are definitely businesses that, you know, they'll always be businesses that actually benefit from the pandemic. If you were in the business of home delivery, then your business has probably skyrocketed. So one of the keys is, is that you have to be able to certify in good faith that current economic condition, current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant. Oh, okay. Eric, we are going to take a short break and then be right back. And the first thing I'm gonna ask you is, is who cannot apply for PPP, but thank you, we'll be right back. The host of Think Tech Hawaii's Law Across the Sea program talking with Eric Kodish in Portland, Oregon about the Paycheck Protection Program, the PPP. And last time we left off, I mean, we're talking, we got a lot of questions. And fortunately, Eric, you've prepared a PowerPoint presentation that we'll be able to distribute later on with maybe more answers and more discussion. But right now, tell me, who cannot apply for PPP? So the key ideas, the ones that cannot apply would be businesses that are too big, that don't meet any of the size standards. Also businesses that cannot make the uncertainty certification. I think that's one of the big ones is, you really have to, you don't have to necessarily be negatively impacted right now. So you could be in a lagging indicator industry where you're fine now, but your pipeline looks horrible. So in the future, you'll have an impact. The key is that you just have to have uncertainty, but if your business is booming now, then you won't be able to. And then what the statute will say is that even if you make the necessary size standards and you have the necessary uncertainty, you cannot do it if you're engaged in any activity that is illegal under federal state or local law. So a big one there will be cannabis businesses. Even if legal, in Hawaii it would not be legal under federal law. Also if you're a household employer, so you can't get a PPP loan if it's for nannies and things like that. There's an issue that if 20% or more of the owners are, you have had criminal issues and it's summarized on the slide or if you have defaulted or are delinquent in some other loan guaranteed by the SBA in the last seven years and it caused a loss to the federal government. So that's the key is that you had to actually have caused a loss. Okay. And so you got to make a statement that's true. You got to be something that is lawful. Let me ask you, how about if I'm just an employee owner of a business, can I apply for a PPP? So you can't, but the business can't. And when the business does it, it can apply using the, taking into account what the you as an employee owner made, whether if you're an employee shareholder of an S corporation, then you have a wage. And if it's a sole proprietorship or a partnership, you get to include the self-employment income in the payroll costs that are the basis of the loan and in the payroll costs for which you get forgiveness. And so you got to explain that, I guess, in your application and make it clear what your position is and in that respect, where do you apply it? Where do you apply for the PPP? Your bank, contact your local bank, make sure they're set up to take the PPP loans. These, any of the major banks are also small regional banks. This has been such a big program that Congress made it very, very easy for banks to become eligible and to make these loans. And they've done an effective job of it. And they're interested in doing it, is that correct? I mean, the banks are into it. Absolutely, because there are fees that they get and there is a 1% interest charge, that's probably not enough for them. But the main thing is, this is not a time where the banks wanna be lending money to most businesses, but here's a loan they can make that is fully guaranteed by the federal government so they know they're not gonna lose money and they can collect normal fees from on it. Okay, and in that regard then, what is the role of the Small Business Administration with respect to the PPP? So the Small Business Administration guarantees the loan. They make the final decision on what portion of the loan is forgiven. The SBA is the one that pays the bank back, the forgiven amount, that's incredibly important. They issue guidance about the loan. So the application for the loan is their form, so is the forgiveness application. They've issued now 16 intermediary final or interim final rules, so there's lots of guidance and a bunch of frequently asked questions. I mean, overall, they basically oversee the whole process. And I guess the banks, what you're saying is the banks like that because it gives them some security and hope that they know they're gonna get paid back. Exactly, the loan is fully guaranteed. So even if a part of the loan isn't forgiven and the borrower defaults, the SBA has guaranteed the loan. Okay, so the banks know they're getting their monies. And what are, I wanna kinda jump ahead a little bit. What are the basic terms of a PPP loan? That's another slide, yeah. Yep, so the basic terms, now this first one, for anyone who got a loan before June 5th, it's a two-year note at 1% interest with no guarantees. For loans after June 5th, because of the Payroll Protection Program Flexibility Act, it is a five-year loan. Again, since most or all of it's gonna be forgiven, whether it's two years or five years isn't as important. Payments under most, originally payments were to start after six months with monthly payments amortized, but the Payroll Protection Program Flexibility Act actually makes it so that payments do not begin until you've gotten word on how much is forgiven. So essentially, you take this loan out, you have no payments until you find out what part of the loan is forgiven. And then, if you get 100% forgiveness, then the entire loan is forgiven. What's a little unclear is, I believe that you still owe the 1% interest. So 1% interest will accrue the entire time you've had the loan. So even if it's 100% forgiven, you have to pay that the most recent SBA guidance on how forgiveness will work, indicated that the SBA was paying the banks the accrued interest. So we'll have to see how it actually works, but I think everyone should just expect that, you got this great loan, essentially free money, but you have to pay 1%. And again, if you do the whole thing in less than a year, then it's less than 1%, obviously. It's 1% annualized. Wow, that's a really good deal. And in order to get your PPP loan approved, is there a basic plan or how do you move forward to do that? Yeah, it's minimal. I mean, the PPP loans are designed to be easily accessible by small businesses without attorneys, without advisors. There's a very simple loan application that's available on the SBA's website, every bank has it. And then you provide the documents to substantiate. Now, mainly since it's all based on 2019 payroll, you're basically gonna give your quarterly, right now you already are doing quarterly reports for your payroll, the Form 941. So you've done all of those for 2019, you just provide a copy. If you're dealing with a self-employed owner, well, then they've got a different form that will have their self-employment income. So you just have to show that, but it's all numbers from 2019 that for returns that have already been filed, or maybe you're on extension still, but for your 2019 return, you can get it for your self-employment income. The main thing I've heard is I've not heard people complain about access. It's been relatively easy to get these loans. Well, I mean, it sounds very good. Now, let's go to the next step about, what do I need to know about forgiveness of PP loans? What can and cannot be forgiven? We've already talked a little bit about non-payroll expenses, but I'd like you to kind of review those issues. So, absolutely. So as originally passed, the program was meant to cover key operational expenses. So your payroll, your mortgage interest, your rent and utilities for about eight weeks of operations at pre-COVID-19 levels. Now, they extended it to 24 weeks because people aren't operating at pre-COVID-19 levels and they need a little bit more time to incur the costs. But the idea would be is that, you have these expenses, you're going to have them anyway, for again, payroll, mortgage interest, rent and utilities. And then, as you incur them, keep in mind that your loan was two and a half times average monthly payroll. And that was basically going to be enough to cover about 100%, sorry, going to be enough to cover eight weeks. Well, now that you have 24 weeks, you'd have to have a real shut down. I mean, you'd have to be operating at, for an entire 24 week period at less than one third, your pre-COVID-19 levels, in order to not be able to get 100% forgiveness and you'll still get something. You know, it really sounds promising. And I mean, to you, I hear you saying it's easy to make these applications. I'm not a tax lawyer. And, you know, it does seem, well, like I need some help if I'm going to do it. I mean, what, you know, the rules seem to change too. I read, you know, on your website that there's like, every so often there's changes. What's all that about? And do you have any concerns about it? Sure. So, you know, what I would say is, you know, at its core, things have stayed the same. And the SBA actually, I mean, their loan forgiveness application is, you know, it's not that it's easy. It's fairly difficult, but the SBA does a very good job of providing step-by-step guidance on what is the number you're supposed to put in, you know, and kind of building to things. I would say that, you know, the general rules that are applicable to most businesses are well-established, but, you know, questions arise or keep arising kind of on the periphery and at the edges of, well, what about, you know, this or what about that? You know, a good example would be, you know, you had, at the beginning of this, companies laid off workers because there was no business and they were scared. And at the same time, the federal government stepped in and really improved unemployment benefits, you know, extended the period, but also provided, I think, like an extra $600 a week. So then businesses started getting their PPP loans and they started going back to their employees and started saying, hey, you know what, we've got this money now. So even though we're not getting money from customers, we can still put you back on payroll. And of course, for lower wage employees, the response was, I'm doing better on unemployment. So I don't want to come back. And that created an issue that people were struggling with getting their employees to come back. And so rules were designed and changed to be able to say to the employer, okay, if your employee won't come back, you won't be dinged. And that takes extra rules and extra complication, but it's there to solve a problem that businesses otherwise would have. And, you know, you have gotten into this because of COVID-19, it's a new area of law for you. You're learning, I think, as you go to a certain extent too. What other business opportunities have come up? And, you know, with respect to this? I mean, no, this has been, I mean, there's all kinds of opportunities that are arising from this PPP loan. I mean, businesses have the opportunity to continue full operations, despite a drop in customers and revenues. Advisors like me have an opportunity to assist with questions and issues that always arise from a new regime. It's been an excellent way for me to meet, you know, me to have, you know, to gain new customers and new clients, but also to kind of strengthen my relationship with my existing customer, you know, the existing clients of my law firm of being able to say, you know, yes, we can help with this brand new thing. Banks have this opportunity to continue normal lending operations using loans guaranteed by the government. And perhaps most importantly, I get now personally, I get the opportunity to give a presentation for Hawaiian audience, which I have never had the chance to do. All right, well, that's great. And Eric, I want to thank you. And I want to close by putting up a couple of slides that refer to your law firm and how to contact you and maybe how to get more information. You know, you have a very good website and we are going to be putting up your PowerPoint presentation along with this program, various links and circulating it within the Hawaiian community. And I hope within the wider legal community, but thank you very much, Eric Kodish. I appreciate this update on the PPP and we'll see where it goes. And aloha to everybody and thank you for joining us today.