Changes to the Paycheck Protection Program (PPP)

The information in this publication is provided only for educational purposes and to inform the reader of relevant topics. This is not to be perceived or utilized as formal tax or legal advice. It is up to the reader to seek the necessary and appropriate tax and legal professionals that specialize in these areas for specific guidance.

Paycheck Protection Program Flexibility Act of 2020

The President signed H.R. 7010 – Paycheck Protection Program Flexibility Act of 2020 on June 5. Previously, the Senate had passed H.R. 7010 – Paycheck Protection Program Flexibility Act of 2020 on June 4, 2020, and the House passed the bill on May 28, 2020. This bill makes a number of changes to the Paycheck Protection Program (PPP) by amending the Small Business Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Flexibility Act amends the CARES Act and amends provisions relating to loan terms and loan forgiveness.

On June 8, 2020, Treasury Secretary Steven T. Munchin and SBA Administrator Jovita Carranza released a Joint Statement Regarding the Enactment of the Paycheck Protection Program Flexibility Act. 1

An important note about this legislation is that it did not change the date a PPP loan must be approved by the deadline, which remains June 30, 2020.

Noteworthy Changes That May Make Forgiveness Easier To Come By

Term of Loan Maturity. Section 2(a) of the Flexibility Act amended the CARES Act to provide a minimum maturity of five years for all PPP loans made on or after the date of enactment of the Flexibility Act. The PPP loan originally provided a two-year term, so this change provides an additional three years for loans that received a loan number on or after June 5, 2020. The term on PPP loans that received a loan number prior to June 5, 2020, will remain a 2-year term. Lenders and borrowers may mutually agree to modify PPP loans made before such date to reflect the longer maturity.

Deferral Period for PPP Loans

Section 3(c) of the Flexibility Act extended the deferral period on PPP loans. Therefore, Part III.2.n of the First Interim Final Rule (85 FR 20811, 20813) is revised to read as follows:

When will I have to begin paying principal and interest on my PPP loan? If you submit to your lender a loan forgiveness application within 10 months after the end of your loan forgiveness covered period, you will not have to make any payments of principal or interest on your loan before the date on which SBA remits the loan forgiveness amount on your loan to your lender (or notifies your lender that no loan forgiveness is allowed).

Coverage Period Extension. Section 3(a) of the Flexibility Act amended the definition of “covered period” for a PPP loan from “the period beginning on February 15, 2020 and ending on June 30, 2020” to “the period beginning on February 15, 2020 and ending on December 31, 2020.”

Payroll versus Other Approved Expenses. The bill makes changes to the originally mandated PPP loan requirement that no more than 25% of the PPP loan be used for eligible “non-payroll” costs. The Act changes the 75%/25% rule so that 60% of the PPP loan must be used for payroll to be eligible for full forgiveness while up to 40% can be used for other eligible expenses, including interest on mortgages, rent, and covered utility payments.

Those who have already received a PPP loan prior to this act may elect to utilize the original coverage period of eight weeks instead of the twenty-four weeks or December 31, 2020 rule. The act also made a change to the deferral period of six months. The act now allows for a deferral period of not more than one year for making payments of principal, interest, and fees from the date forgiveness is determined. PPP loan holders must work with their lenders to determine the deferment period as well as any possible changes that may affect the borrower.

Forgiveness Limitation of PPP Loan. A minimum of 60% of the PPP loan funds must be used for payroll purposes to receive full forgiveness of the PPP loan. H.R. 7010 appears to create a cliff: if a borrower fails to spend 60% of the loan proceeds on payroll costs, NONE of the loan will be forgivable however, the U.S. Department of the Treasury and the Small Business Administration have provided some relief to this.

PPP Breaking News: Treasury Announces Relief From 60% Cliff

On Monday, June 8th, U.S. Treasury Secretary Steven Mnuchin and Small Business Administration (SBA) Administrator Jovita Carranza released a joint statement regarding the passage of the Paycheck Protection Program (PPP) Flexibility Act.

The statement generally reiterates what the new law provides, with one change that will apparently be made, and one clarification that will be important to borrowers. The new 60% statutory requirement, which replaced the 75% requirement, as described below, will not be a cliff, meaning that if a borrower spends less than 60% of the PPP loan amount for expenses that otherwise would be forgivable for payroll, state payroll taxes, group health insurance and retirement plans (which are referred to as “payroll costs”) during the 8 or 24 week testing period, then that borrower will get some forgiveness, instead of no forgiveness.

Now, a borrower that spends less than 60% of its PPP loan amount on payroll costs will be able to have forgiveness on payroll costs, plus non-payroll expenses for interest on mortgages, rent and utilities, to the extent that such non-payroll expenses do not exceed 66 2/3% of the amount spent on payroll expenses. Another way of calculating this is to divide payroll costs by 1.5 (or multiply them by 66 %, if you are not so good at division) to determine the maximum amount of interest, rent and utilities costs that can count towards forgiveness.

For example, if a borrower receives a $100,000 PPP loan, and during the covered period the borrower spends $54,000 (or 54 percent) of its loan on payroll costs, then because the borrower used less than 60 percent of its loan on payroll costs, the maximum amount of loan forgiveness the borrower may receive is $90,000 (with $54,000 in payroll costs constituting 60 percent of the forgiveness amount and $36,000 in non-payroll costs constituting 40 percent of the forgiveness amount). (66 % of payroll cost is $36,000).

You Can Now Defer Certain Payroll Taxes Even if You Received a PPP Loan

The CARES Act wasn’t ONLY about PPP loans. An additional incentive allowed employers to defer the employer’s 6.2% share of 2020 Social Security tax until the end of 2021 (50%) and 2022 (50%). Prior to the passing of this act deferral was only available to a borrower of a PPP loan until the moment the loan is forgiven.

H.R. 7010 allows an employer to double dip; a borrower of a PPP loan may now also defer all of its 2020 Social Security tax burden into 2021 and 2022, even if the PPP loan is forgiven prior to December 31, 2020.

Reduction of Forgiveness Based on Reduced Full-Time Equivalent Employees (FTE)

The bill creates an exemption from a reduction in the forgiveness amount based on the reduction of FTEs of an employer as long as the employer can prove and document that (points 1 and 2 below have to both be met or only point 3 must be met):

There was an inability to rehire individuals that were employees of the employer on February 15, 2020, AND
The employer was unable to hire employees that were similarly qualified for those unfilled positions on or before December 31, 2020, OR
The employer is able to document that the business was unable to return to the “same level of business activity” as it was operating prior to February 15, 2020, specifically due to compliance requirements as established or under the guidance of the Secretary of Health and Human Services (HHS), the Director of Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration (OSHA) during the period from March 1, 2020 through December 31, 2020. These recommendations are specific to standards set for social distancing measures, sanitation, and for the safety of workers and customers. Business owners will need to watch for future guidance on the documentation that may be required to prove the business was unable to return to the same level of business activity that occurred prior to February 15, 2020.

Failure to Apply for Forgiveness

If a borrower of a PPP loan does not apply for forgiveness within ten months after the last day of the coverage period, the borrower will be required to begin making payments on principal, interest, and any fees. The act specifically states that the payments will begin “on the day that is not earlier than the date that is ten months after the last date of
such covered period.”

Unknowns

With the passing of this act, a number of unknowns remain. Borrowers, lenders, and others will need to remain vigilant as guidance may be released from the Small Business Administration (SBA) and the US Department of the Treasury through FAQs and Interim Final Rules. Some of the pressing questions include but are not limited to

Will the calculation to determine loan value change to use the twenty-four-weeks rule or remain with the eight-week rule?
Further details are needed for the safe harbor rule to minimize the reduction of loan forgiveness due to a reduced FTE employee count.
Will borrowers be required to wait until the end of a 24-week covered period to apply for forgiveness? If the funds are fully spent by, say, mid-September, and the FTEs and salaries are at February 15th levels, can a borrower apply at that time, even though the covered period hasn’t ended?
Expenses paid with PPP proceeds that are ultimately forgiven will NOT be deductible to the borrower. But with the covered period now running until the end of the year – and with borrowers having what appears to be up to ten months to apply for forgiveness – it is possible that 2020 tax returns will be filed PRIOR to determining the forgivable amount. An obvious conundrum arises: how can we know the amount of expenses that are nondeductible on the 2020 return if we don’t know the amount of the loan that is forgiven? Perhaps the answer is that all amounts will be fully deductible in 2020, with an adjustment made on the 2021 return to effectively include the forgiven amount in income; a result that doesn’t align with the intended consequence of paying expenses with tax-exempt income, and that may have implications on other aspects of a business owner’s tax return (Section 199A, anyone)?

Unknowns Answered by Release of Revised Loan Forgiveness Application and by Issuance of Interim Final Rule Issued 6/17/20

The U.S. Small Business Administration (SBA), in consultation with Treasury, released Wednesday a revised loan forgiveness application for the Paycheck Protection Program (PPP). The SBA also unveiled a new EZ application for forgiveness of PPP loans. The applications reflect changes to the PPP made by the Paycheck Protection Flexibility Act of 2020, P.L. 116-142, which became law June 5. The applications and instructions are available in the links below:

Application highlights

The revised PPP Loan Forgiveness Application and instructions include a number of notable items. Among them are:

Health insurance costs for S corporation owners cannot be included when calculating payroll costs; however, retirement costs for S corporation owners are eligible costs.
Safe harbors for excluding salary and hourly wage reductions and reductions in the number of employees (full-time equivalents) from loan forgiveness reductions can be applied as of the date the loan forgiveness application is submitted.
Borrowers don’t have to wait until Dec. 31 to apply for forgiveness to use the safe harbors.
Borrowers that received loans before June 5 can choose between using the original eight-week covered period or the new 24-week covered period.

New EZ application details

The EZ PPP Loan Forgiveness Application requires fewer calculations and less documentation than the full application. The EZ application can be used by borrowers that:

Are self-employed and have no employees;
Did not reduce the salaries or wages of their employees by more than 25% and did not reduce the number or hours of their employees; or
Experienced reductions in business activity as a result of health directives related to COVID-19 and did not reduce the salaries or wages of their employees by more than 25%.

New interim final rule published

The SBA issued rules Tuesday night for determining payroll costs and owner compensation in calculating PPP loan forgiveness under the new 24-week covered period.

The Paycheck Protection Flexibility Act tripled the duration during which PPP recipients could spend the funds and still qualify for loan forgiveness — a span of time called the covered period. The interim final rule adjusts and adds to previous guidance for calculating loan forgiveness under the original eight-week covered period.

The PPP allows loan forgiveness for payroll costs — including salary, wages, and tips — for up to $100,000 annualized per employee, or $15,385 per individual over the eight-week period. The new interim final rule establishes the 24-week maximum for full loan forgiveness at $46,154 per individual.

Owner compensation replacement calculations

While the employee compensation limit for the 24-week period is three times the eight- week limit, the interim final rule does not do the same with the owner compensation replacement for businesses that file Schedule C, Profit or Loss From Business, or Schedule F, Profit or Loss From Farming, tax returns. For those businesses, forgiveness for the owner compensation replacement is calculated for the eight-week period as 8 ÷ 52 × 2019 net profit, up to a maximum of $15,385. For the 24-week period, the forgiveness calculation is limited to 2.5 months’ worth (2.5 ÷ 12) of 2019 net profit, up to $20,833.

The instructions for PPP Schedule A of the SBA From 3508 defines compensation to owners as “total amount paid to owner-employees / self-employed individuals / general partners.”, which seems to indicate that owner-employees and general partners will be limited to the $20,833 in payroll as referred above.

The owner compensation replacement calculations are structured to prevent owners from reaping PPP windfalls that Congress did not intend, according to the interim final rule. Specifically, the SBA and Treasury wants to prevent the following scenario, which is made possible by a provision in the Paycheck Protection Flexibility Act, that provides a safe harbor from loan forgiveness reductions to any borrower that is unable to return to the same level of business activity it was operating at before Feb. 15, 2020. This may have allowed the owner to treat the entire amount of the PPP loan as payroll costs, with the entire loan potentially being forgiven.

SBA may provide further guidance, if needed, through SBA notices which will be posted on SBA’s website at www.sba.gov. Questions on the Paycheck Protection Program may be directed to the Lender Relations Specialist in the local SBA Field Office. The local SBA Field Office may be found here.

Additional resources and information on assistance programs related to COVID-19 can be found on the Clemson Cooperative Extension Agribusiness Program Team Resources for COVID-19 website.

If you need help navigating the PPP bill or anything else, we are ready to assist you. You can contact us easily at any time here.