Over the last couple of months, we have been fielding questions from many clients about the CARES Act – especially the loans and the forgiveness of loans available for small businesses that we outline in our Coronavirus Resource Center. I actually co-wrote an article back in March with Jennifer Mailhes, CPA from Doeren Mayhew entitled “Five Things Small Businesses Should Know About the COVID-19 Disaster Loan Relief”.
In that article we discussed the Paycheck Protection Program (PPP) Loans, how they work and how they can actually be both a lifeline for businesses while keeping many of their employees on payroll – protecting families as well. Our goal at Avidian Wealth has been to stay on top of these changes.
With that in mind, on June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act (PPPFA), bringing welcomed changes by small businesses to the Paycheck Protection Program (PPP) forgiveness rules initially created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The new legislation makes it easier for millions of PPP borrowers to increase the likelihood of their loans being forgiven. I met with Jennifer Mailhes of Doren Mayhew to write this article highlighting changes enacted by the new legislation.
After reading the information below, you should also consult with your attorney, banker and/or CPA. The following is a summary of the new legislation:
Loan Availability: Previously PPP loans were available to applicants until June 30, 2020.
Flexible Loan Forgiveness Periods: The CARES Act provided PPP borrowers an eight-week covered period to spend the PPP funds in order to have those amounts eligible for forgiveness. Under the new act, this covered period for PPP loan forgiveness has been extended to either 24 weeks after the loan origination or Dec. 31, 2020, whichever comes first. Any borrowers who received their loans before this change can elect to continue to use their existing eight-week covered period.
Extended Loan Maturity: Initially PPP loans were determined to have a maturity date of two years for all amounts not forgiven. This has been extended under the new law by creating a minimum five-year and maximum 10-year maturity date for PPP loan amounts not forgiven. PPP loans made after the June 5 enactment date of the PPPFA will get this loan maturity extension automatically. Loans disbursed before this date would retain their original two-year term unless the lender and borrower renegotiate the loan into a five-year term.
Modified Employee Rehire and Salary Safe Harbor: The CARES Act reduced forgiveness amounts for PPP borrowers who did not maintain average full time equivalent (FTE) employee levels during the covered period as compared to certain lookback periods, or keep each FTE’s salary level during the covered period at least at 75% of the employee’s salary level during the last fiscal quarter they worked before the borrower applied for the PPP loan. It had also created a safe harbor date for PPP borrowers to restore their FTE employee levels and salary levels by June 30, 2020, to ensure their forgiveness amounts were not reduced if they didn’t meet the original parameters outlined for forgiveness.
The safe harbors still exist under the PPPFA legislation, however, businesses have until Dec. 31, 2020, to rehire and restore their FTE levels to prior levels. It also provides a provision to not reduce loan forgiveness if the borrower has a lower FTE level due to any of the following:
- Unable to rehire individuals who were employed by the employer on Feb. 15, 2020 or hire similarly qualified employees for unfilled positions on or before Dec. 31, 2020.
- Unable to return to the same level of business activity the business was operating at before Feb. 15, 2020, due to compliance with requirements or guidance issued between March 1, 2020 and Dec. 31, 2020 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, related to worker or customer safety requirements related to COVID–19.
There is still some uncertainty on whether a borrower who elects to stick with their eight-week covered period will be able to use the June 30, 2020 rehire safe harbor, or if they can take advantage of or be required to use the Dec. 31, 2020 date.
Payroll Tax Deferral Expanded: The PPPFA eliminates a CARES Act provision that made recipients of PPP loan forgiveness ineligible to defer certain payroll tax deposits. Employers, even those with forgiven PPP loans, are allowed to defer the payment of 2020 employer’s Social Security taxes, with 50% of the deferred amount being payable by Dec. 31, 2021, and the 50% balance due by Dec. 31, 2022.
Loan Deferral Period Modified: The PPPFA changes the six-month deferral period for loan repayments and interest accrual so payments on any unforgiven amounts will begin on either the date on which loan forgiveness is determined or 10 months after the end of the borrower’s covered period if forgiveness is not requested.
Expanded Fund Usage: The Small Business Administration guidance related to the CARES Act limited borrowers to using 25% of the loan proceeds to pay for non-payroll expenses such as mortgage interest, rent or utilities. The PPPFA now allows borrowers to use up to 40% of the loan proceeds on these non-payroll costs. If the borrower does not use at least 60% of the loan on payroll costs, then it appears that no forgiveness would be available, however this may change. At this time, the Internal Revenue Service has deemed loan forgiveness expenses non-deductible, however, this is expected to be challenged by legislators in the weeks to come.
With growing pressures to continue to revamp the advantageous program, the PPPFA is likely not the last major change in store for the PPP. We will continue to be on the lookout for new legislation and are ready to assist your business in navigating the PPP and other Coronavirus related issues. We wish you all the best in this difficult time.
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