On June 8, 2020, President Trump signed The Payroll Protection Program Flexibility Act into law, which allows the following changes to the PPP loan program. The SBA, in consultation with Treasury, will issue rules and guidance, a modified borrower application form, and a modified loan forgiveness application implementing the amendments to the PPP made in the new law. In addition confirms that June 30, 2020, remains the last date on which a PPP loan application can be approved, the new rules will implement the following changes:
Extended Covered Period
The covered period may be extended from 8 weeks to 24 weeks: businesses with existing PPP loans may elect to keep the 8 week covered period, or may extend the covered period to 24 weeks. New borrowers who are approved after June 3, 2020 will automatically have 24 weeks to use the loan proceeds.
The percentage of the loan that is used to determine forgiveness that must go toward payroll costs was decreased from 75% to 60%. Prior to H.R. 7010, the requirement was only that 75% of the loan that was used had to be on payroll costs. This is an important point to note, but with the generous extension of the covered period, most businesses should easily reach 60% on payroll costs.
Full Time Equivalents and Restoring Wage Levels
You now have until December 31, 2020 to restore the level of FTEs and restore their wages. This was extended from the original date of June 30, 2020.
Additionally, there is an exemption added to the FTE reduction calculation if the borrower can document the inability to hire employees who were employed as of February 15, 2020 and the inability to hire other employees with similar qualifications as of December 31, 2020. If you are unable to hire other employees by December 31, 2020 due to compliance requirements with the CDC, OSHA, or the Secretary of Health and Human Services, you will also be allowed an exemption for these employees.
All PPP loans issued after June 3, 2020 will have a loan term with of a minimum of 5 years. Borrowers that have a 2 year term with their PPP loan may renegotiate the terms to follow the terms for new loans if the lender and borrower mutually agree.
H.R. 7010 also allows the deferral of payment until the date the lender receives the forgiveness amount from the SBA, which will likely be longer than the initial deferral period of 6 months.
Deferral of Payroll Taxes
Employers can now defer all of its 2020 Social Security (50% to 2021 and 50% to 2022), even if the loan is forgiven before December 31, 2020. The original Act only allowed deferral until the loan was forgiven.
Taxability of PPP Loan
There is still a major issue with the taxability of the PPP loans. Although the PPP states that the forgivable loan amount is not taxable, the IRS has taken the position that employers cannot deduct expenses like payroll and rent that are paid with PPP funds. The IRS claims not allowing the deductions will prevent employers from receiving a “double tax benefit.” Members of Congress have already spoken out that it was their intent to have the forgiven loan amount be tax free while still allowing the deductions. Without a legislative fix to this issue, employers should plan for the additional tax ramifications from the PPP loan.
Still unclear? If you have any questions, please feel free to contact us and we’ll sit down and discuss!