06/04/20 – Paycheck Protection Program Flexibility Act Part 1
As many of you have probably seen by now, the Senate approved the Paycheck Protection Program Flexibility Act on Wednesday night (6/3), and we hope that the President will sign it into law shortly. This bill provides some much-needed relief to small businesses who have been struggling to meet the demands and nuances of the previous guidance. We’ve outlined some of the highlights below.
- The covered period has been extended to the earlier of 24 weeks from the date of loan origination or 12/31/2020 instead of the original 8 weeks.
- This means borrowers now have up to 24 weeks to spend 2.5 months worth of payroll.
- However, they can elect to keep the original 8 week period if they received their PPP funds prior to the date of this new Act.
- The deadline for hiring employees back (if they were let go between 2/15/2020 and 4/26/2020) was extended to December 31st (originally, they needed to be hired back by June 30th).
- The Act added a new FTE reduction exemption based on employee availability. This means that during the period beginning 2/15/2020 and ending 12/31/2020, loan forgiveness will be determined without regard to a reduction in the number of FTEs if—
- “Employers were unable to rehire individuals who were employees on 2/15/2020,
- Employers were unable to hire similarly qualified employees for unfilled positions on or before 12/31/2020, or
- Employers were able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the CDC, or the OSHA during the period beginning 3/1/2020 and ending 12/31/2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.”
- These guidelines are very vague and unclear, but it seems like Congress’ intent is to greatly reduce the impact of the FTE reduction and, in some situations, almost remove it entirely. As always, the SBA may clarify some of these statements in later guidance, but we’re hopeful that these will be in the spirit of this new legislation.
- In order to obtain loan forgiveness, borrowers MUST use at least 60% of the PPP loan on payroll costs. Currently, this means that if a borrower receives a $100,000 PPP loan, $60,000 must be spent on eligible payroll costs. If the borrower only spends $50,000 on eligible payroll costs, then loan forgiveness will be $0 even if they only spent $10,000 on non-payroll costs which would have satisfied the previous rule that at least 75% of the amount SPENT had to be on payroll costs.
- Multiple members of Congress have stated that this was not their intention and have indicated that technical tweaks could be made to the bill to restore the more favorable sliding scale in the original guidance.
- Borrowers who are granted loan forgiveness can continue deferring payment of payroll taxes. Previously, borrowers were no longer eligible to defer payments once their PPP loans were forgiven.
- The maturity date was extended to a minimum of 5 years for any loan made after the date of this Act, which will be the date the President signs it into law.
- Any borrower who received a PPP loan prior to this date is eligible to renegotiate existing terms to match this 5-year period. The Act did not provide further details on whether the bank is required to match this 5-year period.
- Payments of principal, interest, and fees on all PPP loans are now deferred until the lender receives the forgiveness amount from the SBA. Originally, payments were only deferred for 6 months after the loan origination date.
- If a borrower chooses not to apply for forgiveness, the first payment will be due 10 months after the last day of the original 8-week covered period. For example, if your loan origination date is 5/1/2020, your 8-week period would end on 6/26/2020 (56 days later). If you did not apply for forgiveness, your first loan payment would be due April 26, 2021.
Items Awaiting Guidance
- Wage limitation—The Act did not address whether the employee wage limitation would be increased to $46,154 (24/52 weeks x $100,000).
- Currently, the wage limitation is $15,385 (8/52 weeks x $100,000).
- If this increase applies to employees, will it apply to owners?
- Self-employed taxpayers – Originally, their forgiveness was limited to 8/52 of Line 31 of the 2019 Schedule C. The Act did not address if this fraction is now 24/52.
- Due date – The Act did not address whether borrowers had to wait until the end of the 24-week covered period to obtain forgiveness.
- Tax impact – The Act did not correct any previously issued IRS statement regarding non-deductibility of the expenses paid by the PPP. Therefore, the amount forgiven is still taxable.
As you can see there were a lot of positive updates that came out of the legislation passed last night. Overall, we believe these changes will increase the likelihood that more of your loans will be forgiven. Everyone now has more time to use the funds, calculate the amount forgiven, and submit the forgiveness application. This is helpful since we believe the forgiveness application is going to be much more arduous than the original application.
Please reach out with any questions regarding the new information and what strategies you could utilize to maximize forgiveness. Luckily, this bill has afforded us all some time to figure out the next steps. Banks will have to figure out their own processes, a new application will have to be drafted by the SBA, and we are once again waiting on the government to further clarify and provide specifics. In the meantime, we recommend reaching out to your lender to see how they will be able to assist you with the forgiveness application preparation. Once more complete guidance is issued, we plan on holding another live Q&A session. Stay tuned!