PPP Loan Forgiveness Guidance 2020

Money Loans

Congress just passed the Paycheck Protection Flexibility Act of 2020 and improved the Paycheck Protection Program (PPP) for small-business loans. 

PPP Loan Forgiveness Guidance 2020. The bill enhances the PPP by increasing the time small businesses can use funds and receive forgiveness from eight weeks to twenty-four weeks and by reducing the payroll cost rule from 75 percent to 60 percent. The President is expected to sign the bill immediately, and the SBA and Treasury will be tasked to update their regulations, guidance and forgiveness application.

Following is a summary of the legislation’s main points compiled by the AICPA: 

  • Current PPP borrowers can choose to extend the eight-week period to 24 weeks, or they can keep the original eight-week period. New PPP borrowers will have a 24-week covered period, but the covered period can’t extend beyond Dec. 31, 2020. This flexibility is designed to make it easier for more borrowers to reach full, or almost full, forgiveness.
  • Under the language in the House bill, the payroll expenditure requirement drops to 60% from 75% but is now a cliff, meaning that borrowers must spend at least 60% on payroll or none of the loan will be forgiven. Currently, a borrower is required to reduce the amount eligible for forgiveness if less than 75% of eligible funds are used for payroll costs, but forgiveness isn’t eliminated if the 75% threshold isn’t met.  Rep. Chip Roy (Texas), who co-sponsored the bill in the House, said in a House speech that the bill intended the sliding scale to remain in effect at 60%. Senators Marco Rubio and Susan Collins indicated that technical tweaks could be made to the bill to restore the sliding scale.
  • Borrowers can use the 24-week period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. This must be done by Dec. 31, a change from the previous deadline of June 30.
  • The legislation includes two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce. Previous guidance already allowed borrowers to exclude from those calculations employees who turned down good faith offers to be rehired at the same hours and wages as before the pandemic. The new bill allows borrowers to adjust because they could not find qualified employees or were unable to restore business operations to Feb. 15, 2020, levels due to COVID-19 related operating restrictions.
  • New borrowers now have five years to repay the loan instead of two. Existing PPP loans can be extended up to 5 years if the lender and borrower agree. The interest rate remains at 1%.
  • The bill allows businesses that took a PPP loan to also delay payment of their payroll taxes, which was prohibited under the CARES Act.

Related : The Top 5 Strategies to Avoid PPP Legal Blunders

The U.S. Senate passed the House version of Paycheck Protection Program (PPP) legislation Wednesday night, tripling the time allotted for small businesses and other PPP loan recipients to spend the funds and still qualify for forgiveness of the loans.

The bill passed in a unanimous voice vote hours after Wisconsin Sen. Ron Johnson initially blocked it. Among the key provisions is a change in the threshold for the amount of PPP funds required to be spent on payroll costs to qualify for forgiveness to 60% of the loan amount. 

The Senate approval sends the House bill, called the Paycheck Protection Flexibility Act, to President Donald Trump, who is expected to sign it.

The vote had to be unanimous because the Senate is not officially in session. That meant that any senator could force the matter to be delayed until the Senate returned to Washington with enough members for a quorum and a vote.Leaders from both parties in the Senate pushed to pass the legislation on Wednesday as the clock on the initial eight-week window recently expired for the first recipients of PPP loans. Johnson dropped his objections after Senate leader Mitch McConnell agreed to add a letter to the Congressional Record clarifying that June 30 remains the deadline for applying to receive a PPP loan.

8-Week Forgiveness Period Extended to 24 Weeks

Under the original law, small businesses who received a PPP loan had eight weeks to use the funds, and so long as they used the loan proceeds for qualifying purposes, the entire loan could be forgiven. This eight-week timeframe is known as the “covered period” and is the timeframe in which qualified spending of the funds is eligible for forgiveness.

Under the new law, the eight-week period was extended to 24 weeks or December 31, 2020, whichever is first. Any funds not used for qualifying purposes within the “covered period” is not eligible for forgiveness and must be paid back by the small business. Many small businesses had their PPP loans funded in April and May were unable to open back up for business because of legal or health reasons, and others just had a fraction of business demand that they had pre-pandemic. They were seeing their eight weeks pass by while being unable to open back up. These small businesses were being hurt the most by the pandemic, and by extending the covered period to 24 weeks, Congress has greatly improved their ability to use their PPP funds to bring back workers to payroll.

Related: SBA Releases PPP Forgiveness Application and Makes Critical Clarifications and Documentation Requirements

Steven Nicokiris, CPA, Managing Director and Shareholder with the New York office of CBIZ MHM, LLC, calls the new law a game changer for small businesses in areas affected most by COVD-19. “We have several retail and restaurant clients that received PPP loans in early/mid April, and the eight-week covered period will be ending in mid-June,” he explains. “Many of these businesses will not even be able to re-open on a limited basis until late June or July or later. Realistically, many NYC businesses will need months to bring back employees in an intelligent manner as their businesses come back to life.”

The 75 Percent Payroll Cost Requirement Is Reduced to 60 Percent

PPP Loan Forgiveness Guidance 2020. The second-most significant change to PPP is a reduction to the payroll cost rule from 75 percent to 60 percent. This rule required forgiveness requests for a PPP loan to be comprised of at least 75 percent payroll costs, while the other 25 percent can be spent and used on other qualifying forgiveness purposes such as mortgage interest, rent and utilities. By reducing the payroll cost requirement to 60 percent, small business owners will be eligible to have more of their PPP funds forgiven. Many small businesses that had higher rent or mortgage payments were finding it difficult to use 75 percent of their PPP funds within the covered period of eight weeks.

Unfortunately, the language in the bill that changed the payroll costs rule to 60 percent specifically stated that this is 60 percent of the loan amount. It reads: “An eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs.”

This language of “covered loan amount” is a departure from prior SBA guidance which said that 75 percent of “the forgiveness request” must be for payroll costs. The language from the new bill implies that a small business is only entitled to forgiveness if they use 60 percent of the loan amount on payroll costs. The prior SBA guidance, on the other hand, did not consider the loan amount and instead only looked at the amount a small business requested to be forgiven. There’s a big difference between the two, as you can always reduce the forgiveness request based on what you use to meet the 75 percent requirement, but once you get the loan you can’t reduce the loan amount and are stuck at spending 60 percent of that number to get forgiveness at all.

For example, under the prior rule, if you received a PPP loan amount of $100,000 and used $50,000 on payroll costs, then under the old 75 percent payroll cost rule you would be able to request forgiveness of the $50,000, as you would just reduce your forgiveness request to match what you spent. Under the new law, the language seems to state that forgiveness would only be available if the small business used at least 60 percent — $60,000 in this example — on payroll costs and if the small business only spent $50,000 on payroll costs over their 24-week period, then they will be entirely ineligible for loan forgiveness, as they would not have spent 60 percent of the loan amount on payroll costs.

The change in the payroll cost rule from “75 percent forgiveness request” to “60 percent loan amount” will trip up some small businesses who received a large loan amount based on 2.5 months of payroll under a vibrant economy in 2019 and are unable to bring back workers or ramp up business quickly enough to spend 60 percent of the loan amount on payroll costs. House and Senate leaders have already been working with Treasury and SBA to see if they can provide favorable guidance on the rule and have also discussed a follow-up bill to fix it.

Bringing Back Workers

The original PPP law reduced the amount eligible for forgiveness if the small business did not bring back the same number of employees that they had pre-pandemic. The new law made changes to the requirements on bringing back workers and gives small businesses until December 31, 2020 to restore their workforce to pre-pandemic levels. The bill also created new exceptions to the new law that excuse a business from brining back workers if they can document that they were unable to re-hire a worker (e.g. the worker rejected an offer to return) or a similarly qualified worker. They can also be excused from bringing back their workforce to pre-pandemic levels if they can document a health or safety requirement related to COVID-19 that restricted their business.

Greater Flexibility in Spending

The other challenge the PPP loan borrowers were struggling with was that they felt forced to use the loan predominately on payroll when there were other pressing concerns to keep their businesses afloat.

“The Treasury and Small Business Administration set a level of 75% of the loan proceeds that needed to be spent on payroll in order to be eligible for forgiveness,” explains Streig. “Congress used this bill to lower the amount to 60%, so now businesses have some more options on how they spend the funds and still get their loan forgiven.”

This opens the door for many business owners who are trying to pay rent and utilities. Further the flexibility will allow these small businesses to have a longer lifeline to keep their monthly expenses going.

The law also will allow the loan period to be extended. Under the initial plan, the loan would have been a 2-year loan at 1% interest rate. This has been extended to up to 5 years. Again, this will alleviate some of the pressures felt by small businesses.

Still Hoping

But despite the benefits this new bill will provide, it does not address all the issues that tax professionals were seeking. 

Streig is quite pragmatic on what he hopes the SBA does next in its guidance on PPP loans.

“I would also like to see a blanket forgiveness for the smaller PPP loans,” he says. “For example, loans under $100,000 or $150,000 would only have a minimal amount of paperwork to get forgiveness. The effort to gather the information and prepare the application for forgiveness can be very burdensome for small businesses.” 

As we wait for the President to sign the Paycheck Protection Program Flexibility Act, we can only hope that additional guidance is on its way to continue to help small business owners.

Plan Moving Forward

Small businesses who received PPP funds and who were already planning to submit a forgiveness application with their bank will need to wait, as the SBA and Treasury will be updating guidance and the PPP Loan forgiveness application. The good news for many small businesses is that the additional 16 weeks will provide more payroll cycles and will result in more PPP funds being forgiven. The changes to PPP in this new bill are significant and will allow more small businesses to benefit from this popular small-business relief effort. 

SourcePPP Loan Forgiveness Guidance 2020




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