On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 was signed into law. This law allows PPP receipients the opportunity to utilize PPP loan funds over an extended period of time which increases the potential for forgiveness. Key provisions of the law are as follows:
Timeline and unforgiven loan balance:
- Program term would be extended to December 31, 2020 from June 30, 2020
- Covered period would be extended from the current eight weeks to earlier of 24 weeks from date proceeds deposited or December 31, 2020. Borrowers with existing loans could elect to retain the existing 8 weeks
- Any portion of the PPP loan that is not forgiven would have a five-year term instead of the current two-year term. This will apply only to PPP loans received after the date of enactment of this Bill, unless borrowers and lenders with existing PPP loans can modify the terms of those loans to correspond to the terms of the Bill
- Would change the existing 75% requirement for minimum spend on payroll costs down to 60%. [Note: Remember the existing 75% limitation is derived by dividing total payroll costs by 75%]
- Deferral of payments on the PPP loan until such time as the final forgiveness amount is remitted to the lender by the SBA
Staffing and FTE penalties:
- Safe harbor restoration deadline date provisions (FTE and Salary/Wage Reduction) would be moved to December 31, 2020 from June 30, 2020
- Added another new safe harbor provision to remove the FTE reduction in forgiveness. Requirements to meet the new safe harbor is that the borrower can document:
- Inability to rehire individuals who were employees on 2/15/20 and the inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020, or
- Inability 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 Secretary of Health and Human Services, Director of the Center for Disease Control or OSHA during period 3/1/2020 and ending 12/31/2020, relating to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19
- Borrowers would be required to request forgiveness within ten months of the last day of their 24 week covered period (8 week covered period if making election to retain) or payments would be required to begin at that time
Unchanged or unanswered questions:
- At this time, we do not have any clarity to how the rules might change for business owner compensation. Under the original PPP loan rules, business owner compensation, for purposes of forgiveness, is capped at the lower amount of a) pro-rated 8 week amount of $15,385 or b) the average of 8 weeks of compensation paid during 2019.
- Prior House proposed legislation included removing the taxable hit on PPP forgiveness, but that has not been addressed through this law. So as of right now, we still expect all expenses that are forgiven through PPP, to continue to be non-deductible. The larger your loan and forgiveness amount, the larger the taxable hit this could be.
- With the change to the timeline of events, it is likely forgiveness approval will not be received until 2021. Since forgiveness is subject to bank and SBA approval, it is unclear how 2020 taxes will need to be reported since approval may not be received until after tax deadlines.
- There will undoubtedly be more forgiveness guidance from the SBA in the form or FAQ’s and Interim Final Rules, but this new law gives the breathing room needed to obtain full forgiveness.
DALLE Accounting will continue to provide updates as new developments are released.