Submitted by Joel Shabsin, CPA
Congress has been busy trying to further define the rules for PPP Loan Forgiveness. As we all know, the CARES Act provided billions of dollars in potentially forgivable loans for small businesses to help them keep paying their employees during the COVID-19 pandemic slowdown or in some cases, complete shutdown. Although it took a while for the lenders to get up and running in approving loans and for the SBA to formulate the preliminary rules, many businesses applied for the loans and received funds based
on payroll levels they reported in their application for the loan. Those businesses were counting on not having to repay the loan based on some very vague wording in the original CARES Act.
Defining the rules surrounding loan forgiveness was delegated to the SBA and eventually, although 3 weeks later than they were supposed to be delivered, were published. The rules left a lot of confusion about what was forgivable and what could not be used to gain forgiveness. And to make matters worse, the rules kept changing. Finally Congress stepped in and passed H.R. 7010, “An Act to amend the Small Business Act and CARES Act.” The bipartisan legislation was signed by the President on June 5, 2020 and
made several major favorable changes to the SBA proposed rules that will make it much easier for a borrower to get loan forgiveness. It also left several questions unanswered that the SBA will, most likely issue guidance on in the near future.
- Probably the biggest change is that businesses applying for forgiveness no longer have to spend 75% of the loan proceeds for payroll costs. The bill reduced the original percentage determined unilaterally by the SBA from 75% to 60%. But beware! Before the bill was passed, if the 75% level for payroll costs was not met, a borrower could still get some portion of the loan forgiven. If for example, a client borrowed $40,000 and spent $20,000 for payroll costs and another $20,000 for Rent, utilities, and mortgage interest, they could get $26,667 of the loan forgiven ($40,000/75%). The law now states “To receive loan forgiveness under this section, an eligible
recipient shall use at least 60% of the covered loan for payroll costs…” It now appears, based on the verbiage in the Act that if less than 60% of the loan proceeds are not used for payroll costs, the borrower will get no loan forgiveness. But both the Treasury Department, the Act’s sponsors in Congress and the SBA claim this was not the intent and that final regulations from the SBA will clarify that partial forgiveness is still possible even if 60% of the loan proceeds are not used for payroll costs.
- Loans that do not get full forgiveness may have a longer maturity period than stated in the original CARES Act. The new law allows loans made after June 5, 2020 to have a 5 year maturity date instead of the two year maturity date assigned by the SBA. It also allows borrowers and lenders to renegotiate maturity terms on loans made before the June 5th date.
- Under the original Act, lenders were required to defer the payment of both principle and interest for six months from the date of the loan. The new bill changes this deferral period to the date the date the lending bank receives the forgiveness amount from the SBA, which most likely will result in more than a 6 month deferral. However, if the borrower doesn’t apply for loan forgiveness within 10 months after the last day of the covered period, the first payment is due then.
- Another major change is an extension of the covered period from 8 weeks to 24 weeks from the loan origination date or December 31, 2020 whichever comes earlier. This extension was done because many businesses such as restaurants, bars, hair salons, hotels, etc. were reaching the end of their 8 week period but were not allowed to open by governmental order at the state or local levels.
- The original act set a cap on salaries and wages of $100,000 and therefore, for the original 8 week period, the maximum that could be paid to any one individual was 8/52 of $100,000 or $15,385. With the extension to 24 weeks, this per person cap, pending further regulations from the SBA, appears to be increased to 24/52 of $100,000 or $46,153 of cash compensation.
- A borrower, under the new Act, can elect to stay within the 8 week covered period rather than wait for the 24 week time span to elapse before applying for forgiveness. Clients may want to do this because they don’t think they will be able to maintain the required FTE levels and/or salary levels. The FTE calculation and salary reductions were not modified by the Act and are still measured as averages over the covered period. In effect the loan amount calculation based on 2.5 X payroll only gave borrowers 10 weeks of funds. A client who maintained their payroll from the beginning would run out of PPP funds in week 10 but would still have to maintain their FTE’s and salaries at the levels they were at during the base period. This means they would have an additional 14 weeks of payroll and FTEs to maintain even though they ran out of loan proceeds in the first 10 weeks. If they can’t maintain the base period levels they can lose forgiveness for a portion of the loan unless they qualify for the rehire exemption or the FTE exclusions.
- The re-hire exemption in the new law extended the June 30th deadline for restoring FTE’s or salary/wages to their February 15th levels to December 31, 2020. It also provides that FTE reductions to forgiveness amounts will not apply if the borrower is able to document either:
a. An inability to re-hire an employee who was on the payroll on February 15, 2020 and an inability to hire a different similarly qualified employee by December 31, 2020. To qualify for this exclusion the borrower must first attempt to re-hire prior employees before attempting to hire replacements for them.
b. An inability to return to the same level of business activity that it had before the February 15th pandemic shutdown due to having to comply with government interventions related to COVID-19 safety requirements.
- The CARES Act expressly prohibited employers from being able to defer the payment of the employer’s share of Social Security tax if they received a PPP loan. This prohibition has been rescinded by the new Act.
The above items are the main provisions of H.R. 7010’s amendments to the CARES Act and SBA rules. There are still several questions that need to be answered by the SBA or by Congress.
- The expenses paid with the forgiven PPP loan amounts still are not deductible. It appears that Congress has given up trying to convince the IRS to allow the expenses paid with non taxable loan proceeds as a deduction. This can present a problem with the covered period running for
24 weeks or the end of the year and with borrowers having up to 10 months to apply for forgiveness and banks having 60 days to respond to the application, it’s possible that clients will not know the amount of forgiveness before filing their 2020 tax return, even with extensions.
- Will borrowers be required to chose between an 8 week covered period or a 24 week covered period or, if PPP funds are fully spent by week 15, and FTE’s and salary levels are restored will they be able to apply for forgiveness at that time or will they have to wait the full 24 weeks?
- Will the SBA agree with the 24/52 rule for the amount of salary and wages allowable to each individual? The new law really didn’t address the maximum amount that could be used for sole proprietors, owner employees and partners in a partnership.
As of the date of this writing the SBA has not updated their web site for the changes in the Paycheck Protection Flexibility Act. So stay tuned for more updates. IAAI is sponsoring a Chris Bird Webinar on June 16th designed to update the regulations and provide a new spread sheet for calculating loan forgiveness. Sign up now for this webinar to stay on top of the ever changing rules and regulations so you can help your clients get their loans fully forgiven.