The Paycheck Protection Program Flexibility Act of 2020 was enacted on June 6, 2020 and it makes material amendments to the Paycheck Protection Program.
Below is a summary of the changes introduced by this new PPP legislation along with some high-level analysis and considerations.
The Paycheck Protection Program continues to have updated guidance and standards related to eligibility and loan forgiveness maximization.
Extension of the Covered Period for PPP Loans
The original statutory language provides that borrowers can achieve partial or whole forgiveness of their PPP loan if they make eligible expenditures during a specified time period. Originally, this covered period was defined as the eight-week period beginning on the date of loan origination. This meant a borrower seeking full forgiveness needed to carefully plan in order to make enough payroll (generally salary, health and retirement benefits) and non-payroll expenditures during that eight-week period. Some borrowers considered making bonus payments to certain employees in order to generate additional payroll expenses (and additional forgiveness).
The new legislation extends the covered period to 24 weeks, providing significant additional time for borrowers to make eligible expenditures under PPP loan funds. For instance, a borrower with a bi-weekly payroll may now be able to include 12 pay periods in its forgiveness calculation, rather than the four pay periods under the eight-week covered period. And that borrower (assuming they are obligated to pay rent) could now claim five or six months of rent payments as eligible non-payroll expenses (subject to certain limitations discussed below).
This new 24-week covered period may remove the need for some borrowers to make special bonus or similar payments because non-owner employees can now presumably be paid 24 weeks of payroll up to an annualized $100,000 limit, equaling $46,153 during the 24-week covered period, instead of the previous maximum of $15,385 per employee. Therefore, the extension of the covered period is likely to result in many more borrowers being eligible for partial or full forgiveness of their PPP loans.
Finally, borrowers can choose to apply the original eight-week covered period instead of the new 24-week covered period. Borrowers able to achieve full forgiveness during the original eight-week period may seek this option in order to apply for forgiveness sooner.
Maximize your loan forgiveness under PPP.
Non-Payroll Costs Limited to 40%
The government interpreted the original statute to require at least 75% of eligible expenditures to relate to payroll expenses, resulting in borrowers being able to only use 25% of their loan proceeds on eligible overhead and other eligible non-payroll related expenses. The new legislation relaxes this requirement by requiring a borrower to use at least 60 % of the loan proceeds on payroll. Therefore, a borrower could use up to 40% of its loan proceeds on rent, utilities, and other qualified expenditures.
PPP Program Now Open until December 31
The PPP program is now scheduled to expire on December 31, 2020. This means, in part, that borrowers presumably have until December 31, 2020, to restore full-time equivalent (FTE) employee count and any salary reductions. Borrowers eligible for full forgiveness during the original eight-week covered period may choose to apply that period (rather than the new 24-week period) in order to measure any FTE or salary reductions against the June 30 date (rather than waiting until December 31). New borrowers can also apply for new PPP loans until December 31, 2020, so long as funding remains in the program.
Originally, the PPP was scheduled to expire on June 30, 2020. Further, several factors that could limit forgiveness were tied to this June 30, 2020, date. For instance, reductions to a borrower’s average FTE count, as well as certain employee salary reductions, could reduce the amount of possible forgiveness, but borrowers restoring FTE counts and salaries by June 30 could avoid these reductions.
New FTE Rules in Play for PPP Loans
Reductions to a borrower’s average FTE count can reduce that borrower’s potential forgiveness amount. The original statute introduced several safe harbors allowing a borrower to avoid a forgiveness reduction, and the new statute introduces two new exceptions.
Specifically, a borrower will not have its forgiveness reduced on account of any FTE reduction if the borrower is able, in good faith, to document one of the following:
Payroll Tax Deferral
As part of its response to the COVID-19 pandemic, Congress is allowing certain employers (and self-employed individuals) to defer the employer’s share of employee payroll taxes for the 2020 tax year, with any deferred amount paid back in 2021 and 2022. However, Congress and the IRS have both stated PPP loan borrowers could not make use of this deferral once their loan was forgiven. The new legislation changes this by allowing a borrower to defer its share of eligible payroll taxes like any other taxpayer even if the borrower’s PPP loan is forgiven.
New Term for PPP Loans
The new legislation extends the term of PPP loans from two to five years and allows for deferral of principal and interest payments until the date on which the PPP loan is partially or wholly forgiven.
Why You Need to Understand PPP Loan Guidance
Although introduced late in the process, this new legislation provides welcomed changes for many PPP borrowers. The extension of the covered period to 24 weeks along with requiring only 60% of eligible expenditures to relate to payroll may result in many more borrowers being able to achieve some level of forgiveness. Still, borrowers must properly plan to achieve full forgiveness, and the recently released forgiveness application and associated instructions will need to be updated to conform to this new legislation.
The PPP loans and their loan forgiveness can be very beneficial to organizations. They’re also confusing as additional guidance continues to be issued. Let us help you make sense of it all.
Take a deeper dive into this Insight’s subject matter.Tax