Last week we wrote about how the House of Representatives passed a law to ease the terms of Forgiveness for the Paycheck Protection Program. Wednesday afternoon the Senate unanimously passed the same bill by voice vote. The bill will now head to the President’s desk to be signed into law.
Due to the fact that there is still about $130 billion of PPP funds left for small business owners in need, the criticism of the program has started to die down and now firms are starting to figure out how to attain forgiveness. This new bill will give business owners more flexibility as they try to turn this loan into a forgivable grant.
What’s in the new PPP fogiveness guidelines?
Increased Covered Period: This new bill would allow employers 24 weeks to attain forgiveness instead of the previous 8-week period. This extended time frame gives employers more time to open up and hire back their employees, which can be important if they are still shut down or their industry is still facing headwinds from social distancing guidelines. There is a clause that allows borrowers to make an election to have the original 8-week period apply to them instead. If a borrower has already spent the proceeds according to the old rules, the will most likely want to utilize this election.
More Flexibility in Spending: This bill will also lessens the percentage that needs to be spent on payroll from 75% to 60%, which will free up more PPP proceeds to be spent on rent, utilities, and interest. This is important, because as the forgiveness period is moved to 24 weeks, the added costs of rent and utilities will also increase. This provision, though is less likely to help the self-employed as they do not usually have a lot of overhead expenses, and their compensation replacement is already set at 8/52 of their 2019 net schedule C income.
There is a caveat, though. While the old rules allowed for partial forgiveness if a borrower spent less than 75% on payroll costs, now there is no partial forgiveness. If a business spends less than 60% of the PPP amount received, none of the loan will be forgiven and they have 5 years to pay it back at 1% interest (see it below).
Longer Payback Period: Finally, this bill will allow the loan period to be moved from a 2-year loan to up to 5 years. This will only matter when forgiveness cannot be attained. Also, payment are not required to be made until the date that the SBA makes a determination on your particular forgiveness (which could take up to 5 months). For instance, maybe you are not able to hire back your employees due to the uncertainty your business is still facing. By extending the payback period, the payments will be smaller and more manageable for the PPP loan recipients. Businesses could still pay back the loan early, though if your business seems to be regaining some clarity.
Deadline for Rehiring Workers is Extended – While the current rules will reduce forgiveness if the number of employees you had is not restored by June 30th, this new law would extend that date to December 31st. This means that as long as at least 60% of your PPP amount is spent on payroll costs and the rest on covered rent, interest and utilities, and you restore your employee count to pre-COVID-19 levels by December 31st, you will receive complete forgiveness.
Again, if you are confident that you will attain forgiveness using the previous 8-week covered period, you should make that election, because who knows what business will look like 6 months from now.
Clarity on Rehiring Issues: This new bill also provides guidance on whether or not you are able to rehire back workers. This has been discussed at length by the Treasury and SBA in their guidance and FAQ and now it will be written into law. If the employer is able to show in good faith that they could not find qualified employees to hire on or before December 31st including those who were employed on February 15, 2020, they would qualify for this exemption. This may be harder to qualify now that the deadline has been extended to December 31 and expanded unemployment benefits currently are set to expire on July 31.
Another exemption to employee head count can attained if the borrower can show that it is not able to return to the same level of business activity it was experiencing on February 15 of this year due to the restrictions put in place by the CDC and other organization from March 1 to December 31 that involve maintenance of standards for sanitation, social distancing guidelines, or other customer safety requirements related to COVID-19.
Two Year Deferral on Payroll Taxes for All Borrowers: Our final bit of clarity involves the employer share of payroll taxes. The Social Security portion of the employer part of payroll taxes or 6.2% can be deferred. Once deferred, 50% of the deferred taxes will need to be paid by 2021, and the other 50% will be due in 2022. While this could be very helpful for cash strapped businesses, it could end up being an administrative headache.
While these new changes increase flexibility and will no doubt help more businesses attain the PPP forgiveness they so badly desire, it could add increasing complexity by pushing deadlines out to the end of the year, where there is likely to be less clarity. If you are able to attain forgiveness using the previous 8-week period, it may be a good idea to go ahead and apply for it when your covered period is over, which could save you some headaches later.
If you would like to watch a webinar on PPP Forgiveness, the Indiana Chamber will have one next Thursday June 11th at Noon, which is presented by Ice Miller, LLP.
Disclaimer: Please note that we are not CPA’s, so anything you see on our blog is just for your information and should not be considered advice as we do not know your specific needs or issues. Please consult your CPA or Advisor.