PPP Flexibility Act of 2020 Signed Into Law

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The Senate unanimously approved the Paycheck Protection Program Flexibility Act of 2020 yesterday, and the bill is on its way to President Trump’s desk. As the name of the Act indicates, it provides some much-needed flexibility for PPP borrowers. The specific changes are explained below:

Extends the Covered Period from 8 weeks to 24 weeks

• Recall that the Covered Period is the length of time during which a PPP borrower can use the loan proceeds to remain eligible for forgiveness. 
• By increasing the Covered Period from 8 weeks to 24 weeks, borrowers have more time to spend the loan proceeds on authorized expenses (payroll, rent, mortgage interest, and utilities).
• The maximum cash compensation that is forgivable under the current rules is $15,385 per employee. Based on our interpretation, under this new Act, the maximum cash compensation per employee would be $46,154 [$100,000 x (24/52)].
• Per the Act, the Covered Period begins on “the date of the origination of a covered loan.” The language in the proposed Act seems to contradict the Interim Final Rule on Loan Forgiveness, which states that the Covered Period begins on “the date of disbursement of the borrower’s PPP loan proceeds from the Lender.” You should review your PPP loan documents to determine if the origination date is different than the date the loan proceeds were deposited in your bank account.
• Borrowers can still elect to use an 8-week Covered Period if they so choose.

Increases the non-payroll portion of the forgivable amount from 25% to 40%

• Current guidance mandated that at least 75% of PPP loan proceeds must be spent on payroll costs, which meant that only 25% of the loan could be spent on non-payroll costs.
• The Act reduced the percentage of the loan proceeds that must be used on payroll costs to 60%.  Therefore, 40% of the loan proceeds can now be used on rent, mortgage interest, and utilities.
• There has been a lot of debate over the last several weeks about whether current PPP rules cause a “cliff effect.” If 75% of the total loan proceeds are not spent on payroll, there is concern that the borrower would not be eligible for any forgiveness whatsoever. The loan forgiveness application seemed to calm nerves by stating that loan forgiveness is equal to whatever was spent on payroll divided by .75. Some interpreted this to mean that you could spend more than 25% of the loan proceeds on non-payroll costs; you just wouldn’t be eligible for total forgiveness. The language in the new Act, though, seems to indicate that 60% of the loan proceeds must be used on payroll costs to receive loan forgiveness. Clearly, more guidance is needed on this issue.

Adds exemption to loan forgiveness rules based on employee availability

• Recall that current rules reduce the amount eligible for loan forgiveness if there is a reduction in full-time equivalent (FTE) employees. Employers can avoid this reduction if they restore their FTE counts by June 30, 2020 to what they were at February 15, 2020.
• The proposed Act extends the restoration deadline to December 31, 2020 so that employers now have until the end of the year to restore their FTE count.
• Furthermore, under the proposed rules, a borrower’s loan forgiveness amount will not be reduced by a decrease in FTEs if the borrower can, in good faith, document:
  • an inability to rehire individuals who were employees on February 15, 2020, and
  • an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020, OR
  • an inability to return to the same level of business activity that was in existence at February 15, 2020 because of business restrictions, sanitation standards, social distancing guidelines, or any other worker or customer safety requirements related to COVID–19.

Extends the period of time to repay amounts that are not forgiven

• Under current guidance, any amounts not forgiven are treated as a 2-year loan with payments deferred for 6 months. 
• The proposed Act extends the length of the loan from 2 years to 5 years. Additionally, payments can be deferred until the lender receives the forgiveness amount from the SBA.
• Additionally, the proposed Act also states that borrowers who do not apply for loan forgiveness have 10 months following the last day of the covered period before they have to begin making payments of principal, interest and fees.
• Technically, the new terms apply only to loans made after this proposed bill becomes law, but lenders and borrowers can certainly negotiate the terms of existing PPP loans.

Delay of payment of employer payroll taxes

• As explained in our previous article, the CARES Act provided a deferral of the 6.2% employer share of social security tax through the end of the year. An employer who received a PPP loan, but whose loan had not yet been forgiven, could defer deposit and payment through the date the lender issued a decision to forgive the loan.
• The proposed Act changes this rule.  Now PPP borrowers can defer payment through December 31, 2020 even if their PPP loans are forgiven before that date.

Conclusion

While this bill is not yet final, President Trump is expected to sign it. ATKG will update you if and when the bill becomes law. ATKG is committed to keeping you informed with the latest changes during these challenging times. Though overwhelming, these changes pave the way for opportunistic tax and financial planning. Please contact your ATKG advisor with any questions or concerns.