This article was originally published on April 22nd and was most recently updated on July 8th. It is being updated as new information becomes available.
Banks and the SBA had stopped approving loan applications on June 30th, the original expiration date of the program. Now, businesses who had not yet applied and been approved for a PPP loan have until August 8th to apply.
More than $130 billion of funds are still available under the program. Businesses can only apply once.
If you need assistance with applying for a PPP loan, please contact your local Blue & Co. advisor.
The Paycheck Protection Program Flexibility Act of 2020
On June 5, 2020, President Trump signed into legislation the bipartisan bill titled the Paycheck Protection Program Flexibility Act of 2020 (PPPFA or H.R. 7010). H.R. 7010 substantially changes many of the provisions related to the forgiveness of Paycheck Protection Program (PPP) loans administered as part of the CARES Act. The modifications provide borrowers more control over the use of funds and make it easier to obtain forgiveness. The following is a summary of the key changes.
Changes to the “Covered Period”
Most notably, H.R. 7010 changes the “covered period” of the PPP loans to 24 weeks or until December 31, 2020, whichever comes first. The covered period is the amount of time a company has to expend the PPP loan funds in order to obtain forgiveness from the SBA and was initially set at eight weeks from the date the loan was funded.
Updates on Payroll/Non-Payroll Percentage Allocation
Under initial post-CARES Act guidance, 75% of the PPP loan proceeds were required to be expended on payroll costs in order to obtain loan forgiveness. H.R. 7010 amends the payroll/non-payroll percentage allocation to 60%/40%, respectively. However, in doing so, H.R. 7010 creates a “cliff,” whereby borrowers who fail to spend at least 60% of the funds on payroll expenses (which includes payroll, health insurance, and related retirement funding) will receive no forgiveness at all. It appears that H.R. 7010 will provide borrowers the option of using either the original eight-week covered period or the revised 24-week period (under both scenarios, the 60% payroll / 40% non-payroll test must be met).
UPDATE: During a joint statement released Monday, June 8th by the SBA and the Treasury, it was clarified that “if a borrower uses less than 60 percent of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs.” The statement also said that they will “promptly” issue rules and guidance, a modified borrower application, and a modified loan forgiveness application implementing the amendments to the PPP made by H.R. 7010.
Safe Harbor Provision Extended
Further, H.R. 7010 also extended the safe harbor provision to December 31st (from the prior June 30th date). The safe harbor provision enables borrowers to replace or rehire employee deficit or salary reductions to avoid subsequent reductions to the forgiveness amount sought by borrowers. For taxpayers that may struggle with replacing salary cost and employees by the December 31st deadline, H.R. 7010 provides an exemption from a reduction in forgiveness for borrowers that have incurred a reduction in their workforce if, during the period beginning on February 15, 2020 and ending on December 31, 2020, the borrower can document any of the following:
- The borrower could not find qualified employees to replenish the reduction in workforce; or
- The borrower could not restore its business to comparable activity as a result of social distancing or other federal health guidance.
Repayment Term Extended
With respect to any loan balance remaining at the time of forgiveness, H.R. 7010 extends the term of the note to five years; the previous loan term was two years. It further appears that there will be no payments on the loan until the date on which the SBA makes a determination on the forgiveness application submitted by the borrower. The loan will continue to be a non-recourse obligation (no owner liability) and carry the 1% interest rate.
Expanded Eligibility for Deferral of Employer’s Share of Social Security Payroll Taxes
Lastly, H.R. 7010 would allow borrowers to be eligible for the deferral of payment of the employer’s share of Social Security payroll taxes, regardless of whether the borrower receives forgiveness. The deferral of the employer’s share of the Social Security tax was introduced in the CARES Act but was previously unavailable to companies that had applied for PPP loan forgiveness. Under these provisions, the borrower can defer payment of the employer’s share of Social Security taxes incurred through December 31, 2020. One-half of the deferred taxes will be due December 31, 2021, with the balance due December 31, 2022.
More to Come
While the amendments set forth under H.R. 7010 continue to be borrower-friendly, there will no doubt continue to be guidance and subsequent clarification of H.R. 7010 in the coming weeks. We will continue to monitor the situation and provide additional clarification as the information is released. If you have questions in the meantime, please contact your Blue & Co. advisor.
- PPP Loan Forgiveness Application
- PPP Loan Forgiveness Considerations for Not-For-Profits
- PPP Solutions
- On-Demand Webinar: Maximizing Forgiveness & Minimizing Reduction for Your P3 Loan
- On-Demand Webinar with OSMA: PPP Loan Planning for Physician Practices
- On-Demand Webinar: PPP Loan Planning for Contractors
Other Recent Updates on Paycheck Protection Program (PPP)
May 22nd: Further Clarification on “Incurred” and “Expended” Definitions
On Friday, May 22nd, the U.S. Small Business Administration (SBA) and the Department of Treasury released additional guidance pertaining to the Paycheck Protection Program, specifically as it relates to the loan forgiveness.
Many borrowers are nearing the end of their eight-week covered period. The Interim Final Rule (IFR) issued on May 22nd provides further clarification of the “incurred” or “expended” definitions regarding eligibility of qualified expenditures (both payroll and non-payroll) incurred during the covered period. Additionally, the IFR addresses other key matters including hazard pay and bonus expense inclusion, full-time equivalent and safe harbor clarifications, potential loan forgiveness reduction implications, and the documentation required to submit for loan forgiveness.
The matters addressed in this IFR have impact on the forgiveness calculation and are critical for borrowers to understand prior to the end of their covered period. We continue to monitor these developing issues and will provide an in-depth analysis of the additional guidance provided by the SBA. A link to the full IFR released on May 22nd is included here.
May 15th: PPP Forgiveness Application Released
Late on Friday, May 15, the SBA, in consultation with the Department of the Treasury, issued the PPP Loan Forgiveness Application (“Forgiveness Application”) with corresponding detailed explanations. Below is a high-level overview of the guidance. Blue & Co. will be releasing detailed analysis and education on the application in the upcoming week. Stay tuned.
The Forgiveness Application provides detailed explanations as to the process by which PPP borrowers will ultimately apply for forgiveness of PPP loans, in accordance with Section 1106 of the CARES Act.
The Forgiveness Application include processes to reduce borrower compliance matters and ultimately simplify the procedures that borrowers must take to apply for forgiveness of their PPP funding including:
- An “Alternative Payroll Covered Period” election that will enable borrowers to align the 8-week covered period with the borrowers’ regular payroll periods;
- The ability for borrowers to include eligible payroll and non-payroll expenses “paid” or “incurred” during the 8-week (56-day) period after receipt of the PPP funds;
- Detailed instructions of the calculations required for purposes of forgiveness (including FTE equivalency, reductions, etc.);
- Further explanation of the rehire and salary restore implications on or before June 30th;
- The development of a new exemption protecting borrowers for good-faith re-hire efforts for employees that decline the offer (electing to remain unemployed).
May 13th: New Interim Final Rule Issues
On Wednesday, May 13, the SBA issued a new interim final rule allowing for lenders to increase PPP loans (even if already disbursed) to partnerships. Prior to this guidance, partners in partnerships were prohibited from submitting a separate PPP loan application for themselves as self-employed individuals, but rather, the income of partners was to be reported as a payroll cost, up to $100,000 annualized cap for purposes of the PPP loan application filed by the partnership.
As a result, partnerships that had already filed PPP applications (or that have successfully been funded) without the inclusion of partner self-employment income (up to the $100,000 cap) most likely would not have received the maximum amount of PPP funding available to them. The revised guidance issued on May 13th enables lenders to increase existing PPP loans to partnerships necessary to include appropriate amounts to cover partner compensation in accordance with the interim final rule.
Additionally, the revised guidance established an alternative method for calculating the maximum loan amount for PPP loans issued to borrowers deemed to be seasonal employers. If you qualified as a seasonal employee, you are encouraged to review this guidance to see if you have received the maximum eligible amount.
Lastly, the guidance extended the safe harbor date from May 14th to May 18th. The safe harbor date provides the opportunity for borrowers to return PPP funds if they are not able to make a good-faith certification of the necessity of their loan requests.
May 13th: Guidance Released on “Good-faith Certification”
In recent weeks, borrowers have been concerned over the SBA’s “good-faith certification” concerning the necessity of the loan request. On Wednesday, May 13th, The Small Business Administration (SBA), in consultation with the Department of the Treasury, provided further guidance on this matter. Specifically, the SBA and Department of the Treasury state that:
“Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”
With respect to those loans over $2 million, which the Department of Treasury has indicated would be subject to review, the guidance goes on to state that if the:
“SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.”
May 1st: Guidance Provided on P3 Expense Deductibility
On April 30, 2020, the IRS released Notice 2020-32. While loan forgiveness was excluded from income per the CARES act, this notice also confirms that the covered expenses related to the loan forgiveness are not deductible to the extent of the amount of the loan forgiven. The Notice reads:
NON-DEDUCTIBILITY OF PAYMENTS TO THE EXTENT INCOME RESULTING FROM LOAN FORGIVENESS IS EXCLUDED UNDER SECTION 1106(i) OF THE CARES ACT
To the extent that section 1106(i) of the CARES Act operates to exclude from gross income the amount of a covered loan forgiven under section 1106(b) of the CARES Act, the application of section 1106(i) results in a “class of exempt income” under §1.265- 1(b)(1) of the Regulations. Accordingly, section 265(a)(1) of the Code disallows any otherwise allowable deduction under any provision of the Code, including sections 162 and 163, for the amount of any payment of an eligible section 1106 expense to the extent of the resulting covered loan forgiveness (up to the aggregate amount forgiven) because such payment is allocable to tax-exempt income. Consistent with the purpose of section 265, this treatment prevents a double tax benefit.
For example, assume you received a P3 loan of $100,000 and the entire amount is later deemed forgivable. The $100k of expenses incurred will not be deductible and the forgiven loan is not subject to income tax.
This ends many weeks of speculation on how the loan and related expenses will be treated for tax purposes. This treatment is consistent with prior IRS guidance, but many were hoping for an additional benefit due to the ongoing financial crisis. Unfortunately, this notice confirms the IRS’s position.
Please consult your Blue & Co. advisor if you need assistance with how to record the loan & related expenses in your books & records.
The Small Business Administration (SBA), in consultation with the Department of the Treasury, provided updates to their Paycheck Protection Program (PPP or P3) Loan Program Frequently Asked Questions (FAQs) on Sunday, April 26th. A complete version of this update can be accessed here.
This version of the update provides additional clarifications, all of which are consistent with the advice and information disseminated by Blue & Co. to date.
April 27th: Additional Guidance Provided Related to P3 Eligibility
Most notably included within this update is additional guidance related to the eligibility requirement for borrowers to certify the economic necessity for the P3 application. As part of the application process, the borrower must certify that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations.
Documentation and planning is key to successful participation in the P3 program. This is why we have advised our clients to prepare three-month, six-month, nine-month and even 12-month forecasts to demonstrate the necessity for the P3 funding for purposes of supporting the borrower’s operations.
The updated FAQ specifically states:
“[b]orrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.”
As such, consistent with the guidance we have provided our clients to date, documentation to demonstrate the necessity of the funding and ultimate usage of such funding will be required.
If a borrower has already applied for, or even received P3 funds, prior to the issuance of this guidance and does not feel they are capable of making this good faith certification – demonstrating the necessity of the funding to support their operations – they can repay the loan in full by May 7, 2020.
If you have additional questions or concerns, please contact your Blue & Co. advisor. As a further reminder, the portal for P3 applications is set to re-open on Monday, April 27th.
We will continue to monitor this situation and provide updates as available.
April 22, 2020: An Update on the Paycheck Protection Program
Many clients have applied for Paycheck Protection Program (PPP or P3) funding through their lending institution. Of those applications, many were successfully approved and have received funds while others are expecting funding from their successful application in the days ahead. Unfortunately, as we (and many others) expected, the initial $349 billion funding of this program dried up quickly, and funds were fully allotted within 13 days.
In response to this accelerated depletion of the initial funds, the Federal government has moved quickly to ensure additional funding to those who did not receive P3 funds initially. In doing so, on Tuesday, April 21, 2020, the Senate passed an amendment to HR 748 to provide an additional $310 billion of P3 funding (and thus increase P3 funding to a total of $659 billion). It is expected that the House will pass this amendment as well with the further expectation that President Trump will sign into law the additional funding on or around April 24th. We encourage clients, similar to our initial guidance, to be in close contact with their lending institution to make sure their P3 application is properly submitted in order to receive funds through this amendment.
As always, if we can be of any assistance throughout this difficult time, please reach out to your local Blue & Co. advisor for assistance and additional guidance.