[This post supplements the Connell Foley blog post “Summary of Financial Assistance Available to Small Businesses Under the CARES Act” posted on 03.29.2020.]
The Paycheck Protection Program Flexibility Act (PPPFA), signed into law June 5, 2020, has extended deadlines and made other key changes to the CARES Act’s PPP loan program. These changes are aimed at making it easier for employers to qualify for forgiveness of PPP loans. Following is an overview of some salient features of the PPPFA.
- So long as appropriations remain unused, borrowers can apply for PPP loans through the end of 2020. The PPPFA pushes back the cut-off date from June 30 to the end of this year. Although the loan application must be received by the lender before the end of 2020, expenditures that count toward forgiveness must also occur in 2020. Therefore, if an employer needs to take advantage of the PPPFA’s longer period to qualify for loan forgiveness, an employer should apply soon.
- New borrowers have 24 weeks to pay payroll costs and other qualified expenses to qualify for loan forgiveness.
- Existing PPP borrowers have the choice of whether to elect to use a 24-week period or remain with the original eight-week period, running from the date of the first advance, generally.
- To qualify for loan forgiveness, 60 percent or more of the proceeds of the PPP loan must be used for payroll expenses. Prior to PPPFA, the threshold was 75 percent. However, under the prior rule, an employer that did not meet the 75 percent test was subject to a proportionate reduction in the principal amount that could be forgiven. Under the new rule, commentators have said that the 60 percent threshold is a “cliff.” That is, it is thought that an employer’s failing to expend at least 60 percent of the loan proceeds for eligible payroll expenses cuts off forgiveness of the entire loan amount. It is not clear that that outcome is what Congress intended.
- It is anticipated that employers will continue to push to loosen the 60% threshold for payroll expenses. Within the remaining 40 percent, expenses are generally limited to rent, mortgage payments, utilities and interest on loans, and these expenses do not include such costs as capital improvements to make workplaces safer for workers.
- The PPPFA also pushes out to December 31, 2020, from June 30, the date by which an employer must bring its workforce back to the level from before COVID-19 affected US businesses. Now, December 31 is the last date by which an employer must re-hire furloughed or terminated employees to avoid a reduction in loan forgiveness. For example, if a business had 50 employees before the pandemic and reduced its workforce to 25 employees, the employer will still receive complete forgiveness of its loan if it spends the proceeds on permitted uses during that period, and as long as it has 50 employees (not necessarily the same ones) by December 31, 2020. This date, obviously, does not apply if the employer meets the standards for forgiveness and applies for forgiveness at an earlier date than the end of the year.
- Previously, workers who were terminated for cause, voluntarily resigned or, when offered the opportunity to return to work on the same terms as before then refused to return to work, were not counted for purposes of a reduction in the forgiveness amount. The PPPFA added two more exceptions for employers that have reduced their workforce if, during the period beginning on February 15, 2020 and ending on December 31, 2020, the employer, in good faith, can document that it either:
- (i) could not find qualified employees to hire on or before December 31, 2020 (it is not clear what an employer must do to demonstrate that such qualified employees were not available); or
- (ii) could not restore its business to a comparable level of activity as of February 15, 2020 because of governmental requirements, such as social distancing.
- The PPPFA eases repayment terms for amounts of PPP loans that are not forgiven. Previously, for loans already advanced, unforgiven amounts were to be paid in two years. Under PPPFA, a new borrower will have five years at 1% interest to repay the loan. Further, the first payment will not be due until six months after the SBA makes a determination on forgiveness. Under current rules, based on when the employer requests the bank’s decision as to forgiveness, the bank has 60 days to make a forgiveness determination, and after that the SBA then has an additional 90 days to review the bank’s decision. In fact, an employer could easily have no amount due to the bank until the middle of 2021. An existing borrower and its lender will need to agree mutually to extend the term to five years.
- In addition, the PPPFA also permits borrowers to take advantage of the CARES Act provision allowing deferment of the employer’s payroll taxes for Social Security. Previously, PPP did not permit deferment of these taxes on the forgivable portion of the loan. The PPPFA also allows borrowers to defer payment of the employer's share of Social Security taxes (6.2%) regardless of whether their loan is forgiven. This permits current borrowers to defer payment of the employer's share until 2021, when 50 percent of the deferred share must be paid, with the remaining 50 percent to be paid in 2022.
- Employee compensation eligible for forgiveness after the PPPFA remains capped at $100,000. Employers are waiting for SBA guidance regarding whether employer owners and contractors are still capped at $15,385, based on the eight-weeks model, or whether by extending the period to 24 weeks, the $100,000 cap now means a cap of $46,154 ($100,000 ÷ 52 weeks x 24 weeks).
- The PPPFA does not address the IRS’ pronouncement that expenses paid with forgiven PPP loan proceeds will not be deductible. Therefore, the safer course for treatment of payroll and non-payroll costs paid with PPP loan proceeds continues to be no deductions for such expenditures on borrowers' tax returns.
- Similarly, the PPPFA does not address SBA audits of loans as outlined in the Treasury Department “Interim Final Rules” on PPP loans issued late on May 22. According to PPP Loans FAQs, the SBA could audit any loan at its discretion to determine if “the borrower may be ineligible for a PPP loan, or may be ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower.” SBA audits even remain a risk for loans under $2 million, which have a “safe harbor” on the issue of whether economic uncertainty made the loan necessary. The SBA can still look at the calculation of the original loan amount and review whether it had “access to credit elsewhere” when determining whether to forgive all or a portion of the loan. All employers, especially those with loans in excess of $2 million, should make clear with good documentation in applications for forgiveness why, considering liquidity, PPP funds were financially necessary at the date of application. If there was generous liquidity, an employer risks an SBA determination that the employer was ineligible for the PPP loan, at the outset. In such a case, the employer presumably would have to repay the loan. Almost 4.5 million PPP loans have already been advanced, and it is unclear whether the SBA has the desire or the capacity to audit a substantial portion of those loans. It is the employer’s responsibility to provide convincing documentation when the employer applies for forgiveness of a PPP loan.
We will continue to monitor the PPPFA and provide updates as applicable.
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