PPP Flexibility Act Passes Senate, significantly decreases barrier to loan forgiveness

By Travis Miskowitz

The Senate unanimously approved H.R. 7010 – Paycheck Protection Program Flexibility Act of 2020. By passing the House bill, the Senate avoids a long and drawn out reconciliation process. The President is expected to sign the bill into law quickly. While the bill provides much needed flexibility to small businesses, there is one change that can significantly impact a borrower’s ability to achieve loan forgiveness. The tersely worded bill provides for only 7 bullet points.  We expect the Small Business Administration, in conjunction with the Department of the Treasury, to provide revised regulations in the coming days and weeks.

Below is a summary of the key updates:

Covered PeriodBorrowers may now elect to extend the covered period from 8 weeks to 24 weeks, tripling the amount of time a borrower can incur eligible costs and increasing the amount of loan forgiveness. Borrowers will have the option of sticking with the original 8 week covered period.
Spend Requirement between Payroll and Nonpayroll CostsThe payroll spend requirement has been reduced from 75% to 60%, BUT, 60% is now a cliff, meaning borrowers MUST spend 60% of the loan amount on payroll costs, or none of the loan will be forgiven. Decreasing the spend requirement to 60% should enable more borrowers to achieve forgiveness, but borrowers should take a careful look at their projected payroll costs during the covered period to ensure they can achieve this minimum spend requirement.
More time to replace FTEs and Restore Employee SalariesBorrowers will be able to use the 24 week covered period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. The re-hire and salary restoration safe harbor deadlines have been moved from June 30th to December 31st.
PPP Loan TermsThe interest rate remains at 1% for all borrowers. The portion of the loan that is not forgiven is now repayable up to 5 years instead of 2 years. The bill also extends the repayment deferment from 6 months to 10 months. It is not clear if the payment deferment applies to all loans or new loans only.
New Relief for Borrowers with Reduced Full Time Employee (FTE) CountThe legislation includes new exceptions for borrowers that experience a reduction in FTEs. For the period February 15, 2020 and ending December 31, 2020, the amount of loan forgiveness will not be reduced when a borrower experiences a loss of FTEs if the borrower is able to document any of the following:

• There was an inability to rehire individuals who were employees of the borrower on February 15th
• There was an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020
• There was an inability to return to the same level of business activity as such business was operating at before February 15th due to compliance with requirements established by the Secretary of Health and Human Services, the Director of the Centers for Disease Control, or the Occupational Safety and Health Administration during the period beginning March 21, 2020 and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other customer safety requirement related to COVID-19.

This is a welcome update to the program that ensures businesses are not penalized for a reduced FTE count if the business is unable to fully reopen due to government orders. Borrowers will not see a reduction in loan forgiveness in this situation.
Payroll Tax Deferral ReliefBorrowers that took advantage of the employer FICA Tax Deferral can now defer the payroll tax for 2 years and take advantage of PPP loan forgiveness. The bill 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. Previously, borrowers were only able to defer the FICA tax until their PPP loan was forgiven.

While H.R. 7010 provides welcome relief, there are still unanswered questions that will require clarification from the SBA and Department of Treasury. Below is a synopsis of these items:

Employee Compensation LimitThe maximum amount paid to any one employee that can be forgiven is capped at an annualized salary of $100,000. Currently, this equates to $15,385 of compensation per employee that is eligible for forgiveness. If borrowers elect the 24 week covered period, this limit would be reached when an employee receives $46,153 in compensation. It is unclear if borrowers will be able to compensate employees up to $46,153 and include this amount in the forgiveness requested, or if the $15,385 limit will continue to apply.
Owner-Employee Forgiveness ImpactOwner-employee forgiveness is currently limited to 8/52 of their 2019 compensation. It is unclear if the forgiveness quotient will increase to 24/52 of their 2019 compensation.
Self-Employed Forgiveness ImpactIt is not clear how the bill impacts self-employed Schedule C filers. Currently, forgiveness for these borrowers is limited to 8/52 of 2019 Line 31 Net Profit. It is possible borrowers may be able to increase ratio to 24/52.
60% Payroll Cost Spend RequirementSenator Rubio, one of the key architects of the PPP program, is uncomfortable with the 60% payroll cliff, and has requested the SBA address the issue favorably in regulations. It is unclear if this will be possible due to statutory language in the bill. For now, borrowers should evaluate their project payroll costs and determine if they will be able to meet the 60% requirement.
When Can You Apply for ForgivenessWill borrowers be able to apply for forgiveness prior to the expiration of their 24 week covered period, if the funds are fully spent? This is unclear at the moment. It also appears H.R. 7010 clarifies a borrower must apply for forgiveness within 10 months of the expiration of their covered period.
Favorable Tax Treatment of DeductionsThere are still some rumblings that the tax impact of loan forgiveness will be fixed to allow the deductibility of expenses paid for with forgiven PPP funds. It is unclear if there is enough political capital for this to pass. For now, we should assume expenses paid with forgiven PPP funds will not be deductible on the 2020 tax return.

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