News Flash … for Those Who Really Care About PPP
One flash for everyone is this: The Treasury has decided to NOT extend the deadline for filing tax returns for 2019 beyond July 15. Sorry everyone, but you can still file for an extension.
The next flash is that the deadline to submit an application to the SBA for guaranteed loans under PPP has been extended until August 8. To date, there’s about $130 billion left in the program.
The Paycheck Protection Program Flexibility Act, signed on June 5, 2020, provided changes to key provision of the PPP related to maturity of loans, deferral of loan payments, and the forgiveness of PPP loans. We have covered some of these changes in past blasts, but there is plenty in the Flexibility Act that deserves additional attention. While not exhaustive, here are a few items to keep in mind.
SBA is expected to issue a separate set of Interim Final Rules related to their review of the PPP applications both pre and post forgiveness.
The Flexibility Act decreased the amount that must be spent on payroll to be eligible for full forgiveness. If 60 percent of loan expenditures are for payroll costs (defined to include health care and retirement benefits as noted in our prior blasts), the full amount of the loan may be forgiven.
Loans made after June 5 must be for a minimum term of five years. Borrowers whose loans were granted before June 5 may request to extend the term of the loan to five years from the previous two-year minimum term. Note both borrower and lender must agree to this extension. Thus far, we have not heard of any lender reaching out to borrowers to make this accommodation, so be proactive.
Loan Forgiveness Process
The new form 3805EZ may be used by certain borrowers to request forgiveness.
There is a revised Form 3805 dated June 16.
As before, the lender has 60 days from receipt of a complete application to issue a decision to the SBA regarding forgiveness. At that time, the lender requests payment by the SBA to the lender. The SBA, subject to review by the SBA, will then pay the lender the forgiven amount plus accrued interest within 90 days. The SBA will deduct any EIDL advance amount from the forgiveness approved by the lender.
The guidance makes it clear that the borrower has ten months from the last day of the covered period to make an application for forgiveness.
The SBA may determine that the borrower was ineligible but must do so under the guidance that had been issued at the time of the PPP loan application. If that happens, the loan will not be forgiven and must be paid by the maturity date of the loan (two years, or five years, as the case might be).
Payroll Costs Eligible for Forgiveness
The Flexibility Act extended the length of the covered period from 8 to 24 weeks from the date of the loan origination.
That period must end no later than December 31, 2020. Since the last day an application can be submitted to the SBA is August 8, it is possible that further guidance will push the covered period beyond December 31.
A borrower who received their loan before June 5 could continue to choose to use the eight weeks from their loan origination as the covered period to measure loan forgiveness. If you received your loan after June 5, you must use the 24-week covered period.
The covered payroll costs may be accounted based on the 24-week or 8-week period, commencing on either: 1) the loan origination date, or 2) an alternative payroll covered period that begins the first day of the first payroll cycle after the covered period begins. To opt to use the alternative payroll period, the employer must use a bi-weekly or more frequent payroll cycle. Payroll cycles that are semi-monthly or monthly are not given the option and must use the covered period that begins on the loan origination date. Refer to the IFR for an example to demonstrate this.
The questions as to whether payroll costs need to be paid or incurred during the covered period have been answered. Payroll expenses must be both paid and incurred during the covered period (or alternative covered period) to be eligible for forgiveness. Payroll is considered paid when the paychecks are distributed or an ACH transaction is originated. The last payroll of the covered period will be considered for forgiveness so long as it is paid before the next payroll date (namely the first payroll date that ends outside the covered period). Payroll is considered incurred on the day the employee works.
The guidance makes it clear what self employed and owner-employees may claim for the differing covered periods. The maximum for the 8-week covered period is $15,385. The maximum for the 24-week period is $20,833. Be mindful that owner-employees of C-Corps are capped by the amount of their 2019 compensation including wages, retirement and health insurance paid. Owner employees of S-Corps don’t get to include health care benefits in their 2019 payroll as they are already included in what is considered cash compensation for S-Corp purposes. Sound a bit confusing? Ask your advisor to help navigate this. People who file a Schedule C or F must use the bottom-line net profits reported for 2019 to determine their caps.
The guidance declares that non-payroll costs may be forgivable if they are paid during the covered period or incurred during the covered period and paid on the next regular billing date after the covered period even if that billing date is after the covered period. This is a good thing, as there was some lack of clarity around what incurred or paid really meant. Note, for example, what happens if you have a non-payroll cost that includes days in the covered period. If two weeks of the next billing occurs in the covered period and two weeks is outside the covered period, you may include 50 percent of that payment for forgiveness.
The language in the guidance appears to say that a bill that you paid during the first several days of the covered period should be okay to submit in full for the forgiveness computation, even if it includes days before the loan origination.
Reductions in Loan Forgiveness
The Flexibility Act clarifies that forgiveness will not be reduced under circumstances where your business activity or employee availability are beyond your control. That means if you made work available to your employees for the same hours and pay rate, you will not be penalized if they turn the work down or are otherwise unable to work.
In order to qualify for this exemption, the employer must be able to document two things.
- The employer must document that it is unable to rehire an employee who was in their employment on February 15, 2020.
- The second condition that the employer must document is an effort to hire a similarly qualified employee for the unfilled position on or before December 31, 2020.
In the alternate, an employer can document an inability to return to the same level of business activity as the business was experiencing at February 15, 2020 “due to compliance with requirements established or guidance …” with the government agencies related to sanitation or safety. Talk to your advisors about the appropriate documentation needed here. There is some discussion about it in the Interim Final Rule.
Re-hiring your FTEs and restoring wages to those who have had wages reduced must occur before December 31, which is a change from the original guidance that FTEs and wages be restored by June 30. Those who expect to rehire and/or restore by December 31 might wait to claim their forgiveness after December 31, 2020. Fortunately, everyone has 10 months from the end of the covered period to file for forgiveness.
In the case where you file for forgiveness before the end of a 24-week period, but there is a reduction of greater than 25 percent in pay rate, the reduction in forgiveness will still be accounted for by multiplying 24 (weeks) by the dollar reduction.
For example, let’s say you reduce an employee who previously was paid $1,000 per weekly pay period to $700 per weekly pay period. You have a $300 per week reduction. Since the first 25 percent reduction is okay under the law, $250 per week does not count against you. The $50 per week that does count against you will be multiplied by 24 weeks, resulting in a $1,200 absolute reduction in forgiveness for that employee. Note, even if you only use 12 of the 24 weeks as the measurement for forgiveness, the entire $1,200 will count against you. Of course, if you use an eight-week period, the reduction would be $50 time eight, or $400.
Since the details are important, this summary highlights some items. Even then, what I have presented is complicated. Filing for forgiveness is a serious matter, and you would be well advised to engage your advisors to help with it. We have had no reports from clients or anyone about their experience requesting forgiveness but, to be sure, it will be interesting.
Every institution that lent money will have a process, and processes all will be slightly different for sure. That means the required documentation, as well as the process itself, will vary.
When in doubt, ask a question. Don’t procrastinate, but be mindful in the filling out of the form. Read the instructions and follow them from the government itself but also from whatever institution you are dealing with. Never believe that you are exempt or favored in the process, so no running from home to second base on this. Do the work, follow the instructions, and then be flexible regardless of what is thrown at you. This is the way to assure you can maximize the forgiveness on the PPP.