The President signed this bill on June 4th, 2020 that modifies some crucial parts to the Payroll Protection Program (PPP) Loan Forgiveness process. Many provisions regarding the usage of your funds have been modified. While we hope that this is the final iteration of this legislation, we must consider that it will most likely not be. These updates include but are not limited to the following:
PPP borrowers now have the option to retain the original 8 week covered period for spending forgivable funds (for loans obtained before June 4, 2020) or adopting an extended covered period of 24 weeks (or December 31, 2020, whichever is earlier). This is intended to help owners achieve a greater, if not complete forgiveness of their PPP Loan proceeds.
- The allowable ratio of payroll vs overhead costs is modified to be no less than 60% payroll and related costs and no more than 40% on allowable overhead to achieve maximum forgiveness. Unlike the original Cares Act provisions, you are now required to spend no less than 60% of the total PPP loan proceeds on payroll and related cots or NONE of the loan will be forgiven. Originally, your allocation of 75%/25% applied to the funds spent, vs this provision which states 60%/40% of the total loan amount.
- Borrowers who elect the 24 week covered period now have until December 31, 2020 to restore their full time equivalents to pre-pandemic levels. Some guidance suggests that if an employer has restored their FTE count to pre pandemic levels before the end of the new 24 week covered period, they must maintain that level for the duration of the covered period. Other guidance suggests that so long as your FTE count is restored to pre pandemic levels by December 31, 2020 and you spend your funds entirely as prescribed, the entire loan will be forgiven. These will be areas that we focus on for updates in guidance over the coming weeks.
- All borrowers that obtain PPP funds after June 3, 2020 will be subject to the 24 week covered period and will not have the election to utilize the original 8 week period.
- The final date of application for PPP Loan Funds is June 30, 2020.
- Borrowers now have five years to repay unforgiven loan proceeds, vs. the original provision of two years, while the interest rate remains at 1%.
- Borrowers now have up to 10 months to apply for forgiveness of their PPP Loan proceeds.
- Payments for the unforgiven portion of the loan proceeds are now deferred past the original 6 month provision to the time when the SBA compensates the lender for the forgiven portion.
- New exceptions in restoring your full time equivalents (FTE’s) were added to the Act. This includes the ability to gain an exception to restoring FTE’s if you could not in good faith find qualified employees or you were unable to restore business operations and FTE’s to February 15, 2020 pre pandemic levels due to COVID-19 related operating restrictions imposed by compliance with HHS, CDC, or OSHA requirements and guidelines. Meeting these provisions would permit forgiveness of your loan without regard to reductions that would otherwise be imposed for failing to comply with FTE requirements.
- Employers that receive loan forgiveness are permitted to defer their employer portion of payroll taxes for the remainder of 2020 through year end vs. the previous act provision that prevented this possibility. Deferred tax amounts are still due in two equal payments in December 2021 and 2022.
These changes will require the modification of the loan forgiveness application, as well as the interim final rules on forgiveness so expect those to get released in the coming weeks. No doubt, there will most likely be additional surprises included by the SBA just as there were with the original rules and loan forgiveness application. It also remains possible that the original forgiveness application will still be used as is for those borrowers that utilize the 8 week covered period.
Adjustments and tweaks to this act are not only possible, they are probable. Anticipated updates include restoring the sliding scale of spending percentage to be 60%/40% of funds used versus total loan amount (matches the original act, only with the updated percentages).
Below is the link to the actual bill should you desire to read it in all its glory.
CLARIFICATION ON APPLICABLE PAYROLL COSTS FOR LOAN FORGIVENESS
We have been giving you all guidance on your allowable payroll costs as those either paid or incurred during your covered period. What we interpreted this to mean is that you can essentially select either Cash basis (wages paid) or Accrual basis (wages incurred) to report on your forgiveness application. New interpretations of this now demonstrate that you have the ability to have your cake and eat it to a point. While you can utilize all of your cash wages paid during the covered period, you can also include the wages incurred at the tail end of your covered period so long as they are paid in the first payroll immediately following the end of the covered period.
As an example, you pay your employees every two weeks and have a 1 week lag between the end of the pay period and the pay date. You receive your PPP loan proceeds on Thursday April 30, 2020 and your next payday is May 1, 2020. Clearly, none of these wages were incurred during the covered period, however they are paid and will count towards your eligible payroll costs. Your covered period will end on June 24, 2020 (8 weeks after funding). You have already included 8 weeks of salary paid on May 1, May 15, May 29 and June 12. That last pay period on June 12th was for wages incurred (earned by employees) through June 5th. Thus, you have incurred wages from June 6th through June 24th that would be eligible for inclusion under this interpretation. In this example, if you pay your employees after June 24 , 2020 in one payroll for all wages incurred between June 6th and June 24th, these wages will be included in your PPP Loan forgiveness as includable, incurred payroll. This gets you nearly 3 additional weeks of wages included at the tail end of the covered period. This may allow some employers to fully use their funds within the original 8 week covered period if they were already close but not fully utilized using Cash or Accrual only for wage inclusion. Keep in mind that you must adhere to the annualized payroll limits for each employee and owner in this scenario. We interpret that this means for the wages included, even though it is potentially over 8 weeks of paid and incurred payroll that you cannot exceed either 8/52 x $100,000 or $15,384.64 per employee or 8/52 of 2019 wages for each owner in your forgiveness application for the 8 week covered period. If we determine that there is flexibility in this calculation when you include both paid and incurred wages, we will be sure to update you accordingly.
As always, we will stay on top of developments and keep you informed as frequently as possible and necessary. I anticipate that in the coming weeks we will present a new webinar to go over these changes in detail with examples once we get some clarification on some key areas, so stay tuned for further information on this as it becomes available.
Thank you all once again for allowing us to be your Trusted Advisors during this ever changing legislative landscape.