Did you receive a PPP loan? If so, you are probably wondering how to maximize the loan forgiveness. I mean, after all, most of us heard forgiveness and jumped right on the PPP loan bandwagon, didn’t we? Most of us didn’t bother to read how the loan had to be spent in order to maximize this. Additionally, there was a lack of clear definition from the SBA, so that leads to more questions which were being answered by the Treasury. And finally, there’s Congress…they continue to change the CARES Act legislation.
The CARES Act specified that loan proceeds were to be used for business payroll, lease payments, mortgage interest, and utility payments. (Did you catch that it is the mortgage interest? Not the mortgage payment itself?) It also stated the loan funds were to be used during the eight-week “covered period” that commenced immediately after receiving the loan proceeds. That meant the forgiveness clock started ticking the day the loan proceeds were deposited in the employer’s bank account, and some companies were first in line to get the funding, so their time is almost up already.
To add to the confusion, the SBA decided to limit uses other than payroll to 25% of the amount forgiven—a limitation not included in the CARES Act. And there is language that states what qualifies as payroll and what doesn’t. Another requirement is to maintain a pre-COVID headcount. This causes a problem for most small businesses because the generous unemployment benefits are causing employees to decide to not come back to work. (This is a short-sided view, by the way. When they are ready to come back, their job may be filled already!)
And there was much confusion. So to add more to the issues that arose surrounding forgiveness, Congress passed more legislation that made substantial changes. The new act is the Paycheck Protection Program Flexibility Act (PPPFA) of 2020.
The changes to the program:
- The covered period has been extended from 8 weeks to 24 weeks after the origination of the loan or December 31, 2020, whichever occurs first, giving employers substantially more time to comply with the forgiveness requirements and other terms of the loan. If the loan was received before the enactment of the PPPFA, the borrower may choose either the original 8-week period or the new 24-week/December 31, 2020 period.
- Loan maturity has been increased from 2 years to a minimum of 5 years, giving borrowers a longer amount of time to pay back the portion of the loan that is not forgiven. For loans finalized prior to the PPPFA, the lender and borrower can agree to change to the longer term.
- Congress has rebutted the administration’s attempt to limit the uses of the funds for other than payroll to no more than 25% of the forgiveness. The Act instead requires at least 60% of the loan proceeds to be used for payroll, and up to 40% can be used for business rent, mortgage interest (but not for pre-payment of the interest or for payment of principal), and utility payments. CAUTION: This means if less than 60% is used for payroll, there will be zero forgiveness.
- To alleviate employers’ rehiring problems, the Act provides an exemption for employers that are unable:
o To rehire an employee who was working for the employer on February 15, 2020,
o To hire similarly qualified employees on or before December 31, 2020, or
o To return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 20 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.
- The deferral of payments of the PPP loan principal, interest, and fees that was originally six months to one year is changed by the Act to be until the date the loan forgiveness amount is remitted to the bank by the SBA.
- The original rules of the CARES Act prevented employers who received PPP loan forgiveness from being able to defer payment of payroll tax, another provision of the CARES Act. The PPPFA changes that rule to allow qualified employers to take advantage of deferring 2020 payroll tax payments even if they’ve received PPP loan forgiveness. The deferral allows 50% of the eligible payroll taxes to be deferred until December 31, 2021, and the balance to December 31, 2022. Taxes that can be deferred include the 6.2% employer portion of the Social Security (OASDI) payroll tax. The employer and employee representative portion of Railroad Retirement taxes (that are attributable to the employer’s 6.2% Social Security (OASDI) tax rate), effective for wages paid March 27, 2020, through December 31, 2020.
Another resource for this information is an article from ADP. https://www.adp.com/resources/articles-and-insights/articles/e/eow-paycheck-protection-program-flexibility-act-of-2020.aspx All of this means the loan forgiveness application will have to be changed as well. Hopefully, this will give the SBA additional time to work on simplifying the application. If you have questions about how these changes might apply to your situation, please give this office a call. We’d be happy to help!
UPDATE: I wrote this blog June 6th. As of Monday June 8th, the 60% rule for forgiveness has changed. You may now be eligible for partial forgiveness. See the following article for the changes: https://www.journalofaccountancy.com/news/2020/jun/partial-ppp-loan-forgiveness-remains-60-percent-threshold.html