It is a New Ball Game for PPP Forgiveness: Paycheck Protection Program Flexibility Act of 2020
Yesterday, the Senate unanimously voted to approve the Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010) (click here to learn more), a bill designed to help fix many of the problems that have burdened the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid Relief, and Economic Security Act (the “CARES Act”). The bill now heads to the President for his signature as early as later this week. The President is expected to sign it. Not coincidentally, this move comes just in the nick of time for many early PPP borrowers whose initial eight (8) week forgiveness period is just about to expire.
As our readers will recall, on March 27, 2020, the CARES Act was signed into law by President Trump (click here to learn more). The $2.3 trillion relief package was headlined by the PPP which was designed to help millions of American small businesses stay afloat during the COVID-19 pandemic.
The PPP made available nearly $600 billion for small business owners to pay payroll and other essential expenses; however, the lack or structure and ever changing guidance has made the PPP the bane of many small business owners existence. It went from a program designed to provide “forgivable” money to those small businesses that needed it most, to a logistical nightmare of confusing hurdles and protocols that needed to be strictly followed or risk having the loan not forgiven and potentially called back by banks for non-compliance.
Hopefully, later this week, with the signing of H.R. 7010, significant relief will be provided to the millions of small business owners PPP loans. While this is great news, it also will likely cause many owners to largely redesign their strategy for using these funds. Starting this week, we will share with our clients some of the key ways this new legislation could change your PPP strategy.
Key Highlights of H.R. 7010
Easier Forgiveness Terms
The key benefits, for most borrowers, under H.R. 7010, is the significantly increased ability to have PPP loans forgiven. H.R. 7010 does this in several ways:
Extended Forgiveness Period
H.R. 7010 extends the time period during which owners can spend PPP proceed and have these expenses forgiven for eligible expenses from the initial eight (8) week period to the earlier of twenty-four (24) weeks or December 31, 2020. This additional time is critical, especially for non-essential small businesses (like restaurants, bars, salons, gyms, retail, hotels, etc.) which are just now beginning to ramp back up with the re-opening of their states. This one change may drastically change how borrowers plan to spend their loan proceeds.
More Flexibility to Spend on Non-Payroll Costs
H.R. 7010 raises the 25% forgiveness cap on non-payroll “other” expenses to 40%. Thus employers now have an additional 15% of their loans to spend on other expenses like rent and utility costs and up to 24 weeks to incur these costs. Again, this change can dramatically change how employers plan to spend their PPP money.
This good news does come with a catch. Previously, PPP borrowers were required to spend 75% of the loan on payroll expense and thus non-payroll expenses were capped at 25%. If a borrower exceeded the 25%, the only penalty was a reduced amount to be forgiven based on the final ratio of payroll vs. non-payroll expenses. However, H.R. 7010 adds a dangerous twist, as it appears to create a cliff for borrower’s who fail to spend at least 60% of the loan on payroll costs.
H.R. 7010 states, “to receive loan forgiveness under this section, an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs….” Experts read this language to mean if a borrower fails to achieve the 60% threshold NONE of the loan will be forgiven.
More Time to Replace Lost Employees
In the wake of COVID-19, many small businesses reduced headcount. These actions were permitted under the initial terms of the PPP without risking loan forgiveness, provided head count was restored by June 30, 2020. Unfortunately, many small businesses are not close to being back to pre-COVID-19 levels and as a result will not restore headcount by the June 30 deadline. Thankfully, H.R. 7010 extends this deadline to December 31, 2020 to avoid reductions to forgiveness amounts.
More Headcount Relief
H.R. 7010 creates additional loan forgiveness protections for small businesses which are unable to return to pre-COVID-19 employment levels prior to the new December 31, 2020 deadline. For these borrowers, no reduction of forgiveness will occur if they can in good faith show any of the following:
1. An inability to rehire prior employees;
2. An inability to hire similarly qualified employees for vacated positions; or
3. An inability to return to the same level of business activity the company had on February 15th resulting from complying with governmental requirements established related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirements.
Exception 3 above is critical for small businesses which continue to feel the effects of COVID-19 at the end of 2020. It allows businesses (like restaurants, bars, salons, hotels, retail, gyms, etc.) which are not able to fully re-open due to government orders, not to have their forgiveness negatively impacted because of reduced FTE’s in their loan forgiveness calculation.
Longer Loan Term for Unforgiven Amount
The loan term will be extended from two (2) years to five (5) years for any amounts that are not forgiven. Critics argue this technically only applies to loans made after H.R. 7010 is signed into law, and not for prior PPP loans; however, most believe the intent is for banks to work with existing borrowers to extend all existing loans for the full five (5) years. Banks will likely not be happy with this change as they generally find the interest rate is just not profitable and extending the term could cause hardship down the road when loan rates return to more realistic levels.
Longer Deferment Period
Initially the period of deferment before repayment obligations commenced was six (6) months from the time the loan was taken. Under H.R. 7010, the deferral period will be extended until the time the lender receives the forgiveness amount from the SBA, which is expected to be significantly longer than the initial six (6) month period.
Two Year Payroll Tax Deferral
The final change provided for in H.R. 7010 is to allow borrowers to defer payment of their share of Social Security payroll taxes (6.2%). Such deferment is being made available to all borrowers whether the loan is forgiven or not. Fifty percent could be deferred until 2021, with the remaining 50 percent due in 2022.
H.R. 7010 will go a long way in helping small businesses maximize the benefits of the PPP.
Unfortunately, the complexity of the program still remains the biggest problem for PPP borrowers as many small business owners will continue to need the assistance of lawyers and accountants to fully understand its nuances and to abide by its ever changing rules and regulations. This is especially true for the proper calculation for loan forgiveness, the uncertainties of future SBA audits, and the new “cliff” on forgiveness being introduced for borrowers who fail to spend a minimum of 60% on qualified payroll expenses.
As with the initial legislation, we expect continued guidance from the SBA on how these new rules will be applied. As such guidance is provided, we at Brody and Associates will continue to keep you updated. Good luck and get ready to re-evaluate your PPP strategy!
The subject matter discussed in this post can be very technical. It is an evolving area of law and very fact specific. Our goal here is to simply alert you to some of the key issues involved. We urge you to seek competent legal counsel before applying these ideas to your specific situation. Brody and Associates stands ready to discuss your particular needs.