By Scott Lewis, CPA, MSA
Over the past several months, the Paycheck Protection Program (PPP), has been fraught with general confusion and continually changing rules and guidance since its inception. This loan program was signed into law to provide relief to small businesses during the coronavirus pandemic as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, back in March of 2020. But on a much more positive note, over the last two weeks both the House and the Senate approved legislation, the “Paycheck Protection Flexibility Act of 2020 (the Act)” and it is expected to be signed by the President.
This Act provides significant new flexibility to borrowers of the PPP loans in several key items:
The Act extends the amount of time to use these loan funds from the initial coverage period of eight weeks to twenty four weeks. Borrowers can still elect to keep the original eight-week period depending on their economic and business circumstances. Regardless of which timeframe is used, the covered period cannot go beyond December 31, 2020.
The Act lowers the requirement stating that 75% of the proceeds that must be spent on wages and related benefits (payroll) to qualify for loan forgiveness, down to 60%. The other 40% is to be comprised of paid and incurred rent, utilities, and debt related interest. However, a new condition as part of the Act states that if less than 60% of loan proceeds are spent on payroll, none of the loan will be forgiven.This was modified in part to help alleviate some small businesses that are laden with higher fixed expenses such as rent than payroll. The PPP was designed to provide a direct incentive for small businesses to keep their workers on the payroll. The possible repercussions to be faced by borrowers who cannot meet these requirements remain to be seen. There is already discussion amongst Congress to make technical tweaks to this new payroll expenditure requirement and percentage scale.
The period to restore the number of employees and amount of payroll pre-Pandemic, to qualify for full forgiveness, has now been extended to December 31st, whereas before, this date was June 30th. The Act also adds a section to prevent loan forgiveness from being reduced if one of the two following conditions is met and can be documented in good faith: (1) the borrower is unable to rehire a terminated employee and unable to hire a similarly qualified employee to replace the terminated employee or (2) the borrower is unable to return to the same level of business activity before February 15th, because of guidance issued by the Occupational Safety and Health Administration (OSHA), the Centers for Disease Control and Prevention (CDC), or the U.S. Department of Health & Human Services (HHS).
The Act extends the time to pay back the unforgiven portion of the loans from the original two years to five. This will be automatic on any loans obtained after this act is signed into law. There will be loan applications allowed to be submitted after June 30, 2020. Pre-existing loans can be extended to five years, but they would need agreement by both the borrowers and lenders. The interest rate will remain at 1%.
Borrowers now have the option to defer payments on their employer share of social security taxes, through December 31, 2020, which was not permissible previously if a loan was obtained. Employers are able to defer payment of 50% of their Social Security liability until December 1, 2021 and the other 50% until December 31, 2022.
The Act allows borrowers up to ten months from the date their covered period ends (whichever period is elected) to apply for loan forgiveness. If this is not done, no forgiveness will be allowed.
As we have seen with the frequent updating of guidance on the PPP loan program since its inception, the Paycheck Protection Flexibility Act has left us with many unanswered issues that will need further clarification. There will be updates to the calculations and the instructions to the loan forgiveness applications needed. We will be reviewing these forthcoming steps taken by the U.S. Department of the Treasury and the SBA as they issue revised formal updated guidance to implement the Act.