SBA PPP LOAN FORGIVENESS RULES
By Scott Zickefoose, CPA, CM&AA, Senior Tax Manager | Business Turnaround Services Team
PPP Loan Forgiveness Assistance
On June 3, 2020, the Senate passed H.R. 7010, the Paycheck Protection Program Flexibility Act of 2020. This legislation was previously passed by the House of Representatives on May 28, 2020, and is expected to be signed by President Trump. This new Act makes substantive changes to the Payroll Protection Program (PPP) and allows borrowers more flexibility with respect to the PPP loan forgiveness process. Changes to the PPP loan forgiveness process have been outlined below.
Modifications Applicable to All Paycheck protection program Borrowers
- Borrowers can elect for their covered period to remain 8 weeks OR extend it to the earlier of 24 weeks from the date of first disbursement or December 31, 2020.
- To receive loan forgiveness under the new Act, a borrower must use at least 60 percent of the covered loan amount on payroll costs. The previous guidance from Treasury noted that 75 percent of the forgiveness amount must be attributable to payroll costs. It is important to note that the new language may imply that if the borrower does not expend at least 60 percent of the loan amount on payroll costs, there will be no forgiveness (a cliff test). This approach differs from the previous standard which would allow for partial forgiveness if less than 75 percent of the loan value was used for payroll costs.
- Safe harbor provisions which previously required restoration of wage reductions or Full Time Employee (FTE) reductions by no later than June 30, 2020, have been updated to allow borrowers to restore wages and FTEs no later than December 31, 2020. It is important to note the “no later than” language as the safe harbor can be satisfied prior to December 31st, but no later than that date.
- The FTE ratio will be determined without regard to a proportional reduction if a borrower, in good faith, is able to document:
- Inability to rehire individuals who were employees of the borrower on February 15, 2020 AND has an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
- Is able to document an 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 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 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. This is a newly introduced concept and has no additional commentary on how this safe harbor will be evaluated or implemented.
- Borrowers are eligible for the employer payroll tax deferral (CARES Act Section 2302) even after receiving notice of forgiveness. Previously, PPP borrowers were required to cease employer payroll tax deferrals once notified of a loan forgiveness decision.
- Payments on the PPP loan (principal, interest, and fees) are deferred until the date on which the amount of forgiveness determined is remitted to the lender. The previous Act allowed for payments to begin no earlier than six months from the date of loan origination.
- If a borrower has not submitted for forgiveness of a covered loan within 10 months after the last day of the covered period, such borrower shall make payments of principal, interest, and fees beginning 10 months after the last day of the covered period.
Modifications Applicable to New Paycheck Protection Loan Borrowers
PPP loan borrowers receiving loans after the enactment of the Paycheck Protection Program Flexibility Act of 2020
Residual loan amounts attributable to amounts not forgiven will have a term of at least five years. The previous Act required a term of at least two years. The previous two year minimum still governs loans originated before the date this new Act is enacted. It is important to note that although this provision only explicitly applies to loans made after the enactment of this new Act, it does allow for lenders and borrowers to mutually agree to modify the terms of a covered loan.
Before defaulting to the newly afforded 24 week covered period, it is important to think through your businesses’ unique facts and circumstances. There are several items to consider as the 24 week period will not be the best option in all circumstances. Please reach out to your Keiter representative or a member of our Paycheck Protection Program Team, Scott Zickefoose or Matt Austin.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.