04 Jun 2020 Senate Approves PPP Loan Modification Rules
Late Wednesday June 3, 2020 the US Senate backed the Paycheck Protection Program Flexibility Act of 2020, the House passed this bill on May 28th and it is now with President Trump for signature. Timing became a major consideration as many borrowers were rapidly approaching the end of the original 8-week Covered Period to spend the PPP loan funds.
It became obvious that many businesses were not able to meet the 8-week guidelines for reasons beyond their control and legislators worked to change the rules to allow for the actual intent of the original CARES Act.
This bill has been in the news for days. Most business owners are aware of the general guidelines in the bill, such as extending the Covered Period and the reduction in required Payroll Cost percentage. The bill does however have a few wrinkles to be aware of.
Covered Period – Now 24 Weeks
The original 8-week Covered Period will now be 24 weeks, allowing business owners an extra 16 weeks to spend their loan proceeds and be allowed forgiveness. Many business owners were finding themselves unable to prudently spend 100% of their loan proceeds within the original 8-week period. The additional time frame and other changes related to the original rehire safe harbors discussed below could also result in new problems to navigate.
As a result, the Act allows for an employer’s election to have the original 8-week Covered Period stand. Employers able to spend the funds within the 8-week period and keep their head count may find the election beneficial.
June 30 Rehire Safe Harbor Date – Now Dec 31
The original Act required an equivalent employee head count and salary reduction to be maintained during the 8-week Covered Period but allowed a Safe Harbor for restoration by June 30th and still be allowed full forgiveness. Given the conditions and the plight of certain industries not able to rehire during the time frame, the Act extends the 8-week period to the new 24-week period and the Safe Harbor rehire date to December 31, 2020. Though most employers may find this change beneficial, some businesses may find themselves in worse condition as of December 31st than they will be at June 30th and should consider the election.
Exemption Based on Employee Availability
The new Act has created two somewhat ambiguous exemptions for employer’s who desire but are unable to rehire the required number of employees. For the period beginning on February 15, 2020 and ending on December 31, 2020 the amount of loan forgiveness will not be reduced proportionally if, in good faith the loan recipient is able to document:
- an inability to rehire individuals who were employees of the recipient on February 15, 2020 and an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020 or
- 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 guidelines issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020 and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
We expect to see future guidance and parameters on meeting and documenting these exemptions.
75% Payroll Cost Requirement – Now 60%
The original CARES Act required that at least 75% of the requested loan forgiveness be attributable to allowable Payroll Costs. Failure to reach that 75% would result in a partial reduction in the amount of loan forgiveness. The Act has now been adjusted such that only 60% of the proceeds must be spent on Payroll Costs allowing 40% to be spent on the other non-payroll costs such as rent, utilities and mortgage interest for forgiveness.
The wrinkle here is that now 60% must be spent on Payroll Costs or there is no forgiveness. Under the Act, there is no partial forgiveness if Payroll Costs fall under the 60% threshold. We are not sure whether that was intended, but that is how it is written for now.
Loan Repayment Period – Now 5 Years
The original Act required amounts not forgiven to be repaid within a two year time frame including a six month payment deferral. The new Act extends the repayment period to five years. Additionally, the payment deferral period is now allowed to extend until the date the SBA makes a determination on the amount of loan forgiveness which could extend well beyond the original six-month deferral period. Payments, however, will be required to begin no later than ten months after the last day of the Covered Period.
Deferral of Payroll Taxes
The original Act precluded an employer from taking advantage of a provision that allowed for the deferral of certain employer’s portion of Social Security due in 2020, to be paid half in 2021 and half in 2022 if they received a PPP Loan and received forgiveness on some or all of that loan. The new Act now allows for the deferral of those taxes regardless of any loan forgiveness.
Deductibility of Expenses Paid with Forgiven Loan Proceeds
Unfortunately, this was not addressed so we should still operate under the premise that those expenditures will not be deductible.
Other Important Remaining Questions and Clarifications
There are a number of things we can assume from the changes but are still uncertain.
For instance, past clarifications indicated that Payroll Costs were limited to $100,000 prorated and limited to $15,385 based on an 8-week period. Is that now $46,154 based on a 24 week time frame?
Is an owner or self-employed who was limited to 8/52 of 2019 income, now eligible for 24/52 of 2019 income? As always, there will be more to come…
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