On Wednesday, June 3, 2020, Congress passed the Paycheck Protection Program Flexibility Act of 2020, which President Trump is expected to sign into law. The legislation gives businesses more flexibility in how they spend PPP loans and when they can apply for loan forgiveness. Here is what you need to know.
Changes to PPP loan terms
Under the Flexibility Act:
- Businesses now only have to spend 60% of the loan on payroll costs. Previously, 75% had to be spent on payroll, leaving only 25% for other qualifying non-payroll costs such as mortgage interest, rent and utilities, including electricity, gas, water, telephone or internet access. Now, up to 40% of the loan can be used on qualifying non-payroll costs.
- The amount of time given to businesses to use the loan has been extended from eight weeks to 24 weeks from the date of the loan’s origination or until December 31, 2020, whichever date comes sooner. You can also elect to apply the original eight-week period.
- The June 30 deadline to rehire workers or restore salaries has now been extended to December 31, 2020.
- Businesses that have a PPP loan will be allowed to defer 2020 employer FICA payroll taxes for two years, which was not allowed under the earlier terms of the loan. This is applicable even if the loan is forgiven before December 31, 2020. Half of the deferred payroll taxes will be due at the end of 2021, with the rest due at the end of 2022.
Changes to forgiveness
Payroll and qualifying non-payroll cost forgiveness
- Since businesses now have 24 weeks instead of eight, or until December 31, 2020 to use their PPP loan, the extension of the covered period gives businesses more time to ensure the money is spent on costs that will be forgiven. Cash compensation costs are still limited to $100,000 per employee on an annualized basis.
- The extended covered period and increased allowance of up to 40% of the loan for qualifying non-payroll costs means businesses have more time and more money to spend on non-payroll costs that will be eligible for forgiveness.
- A downside of the change is that if businesses do not spend at least 60% of the loan on payroll costs, none of the loan amount will be forgiven. Previously, if up to 75% was not spent on payroll, the amount to be forgiven would be reduced. There is some speculation that this rule will be addressed by more favorable SBA guidance to be issued.
Applying for forgiveness
- Businesses now have up to 10 months from the last day of the period covered by their PPP loan to apply for loan forgiveness. This previously had to be done within six months of the last covered day.
- If a business applies for loan forgiveness, it will not have to make any payments on the PPP loan interest or payment of the principal and any fees while waiting for the lender to approve forgiveness.
- Businesses that have already spent all of their loan money and qualified for full forgiveness after the original eight-week covered period can elect to apply for forgiveness immediately. They do not have to wait until the end of the year to apply for forgiveness.
Forgiveness for businesses with employee losses
- Loan forgiveness will no longer be dependent on businesses rehiring employees, hiring replacements or operating at the same capacity as before the pandemic (February 15, 2020) if they can prove they could not find qualified employees or were restricted by social-distancing guidelines and other health policies from authorities or the Centers for Disease Control and Prevention.
Portion not covered by forgiveness
- Businesses with portions of the loan that do not qualify for forgiveness will now have up to five years, instead of two, to repay the loan. The 1% interest rate still applies. It is expected that lenders and borrowers with existing PPP loans will work on renegotiating the terms of the loan to reflect this five-year period.
- Presumably, the cash compensation annualized cap per employee increases to $46,153 from $15,385, but this is not clear. Nor is it clear as to how this will apply to owner-employees.
- The same question remains unclear for self-employed taxpayers.
- For those who have not already spent all the loan money and qualified for full loan forgiveness, there remains a question as to whether you will have to wait until the end of the 24 weeks to apply for forgiveness or if you can apply as soon as you meet the requirements.
- Since forgiven expenses are currently not deductible for tax purposes based on IRS guidance, tax returns and related taxes may be due before a business knows whether its PPP loan has been forgiven.
While these changes are welcomed and generally favorable, we continue to wait for further guidance that we will pass on to you as it is released. As always, these rules are complex and the above is a general summary. Please do not hesitate to contact us with any specific questions.