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Paycheck Protection Program Flexibility Act – A Deep Dive

June 8, 2020 | Category: Asset Protection, Corporate and Taxation, Estate Planning and Probate, News

The Senate has approved a bipartisan measure that would give more time and flexibility to employers who receive forgivable loans from the Small Business Administration's Paycheck Protection Program (PPP), sending the House-passed bill to President Donald Trump, who is expected to sign it.

The PPP Flexibility Act (Act) passed the Senate by unanimous consent, meaning no senator objected or demanded a vote. The House previously approved the measure with a 417-1 vote, but it stalled as several Republican senators raised concerns about a variety of unintended consequences for the $660 billion program meant to sustain small businesses and nonprofits and their employees while the pandemic locked down much of the U.S. economy.

The Act gives employers 24 weeks to spend the money and have the loans forgiven, tripling the current covered period of 8 weeks. While an earlier version of the bill would have eliminated any requirement about how much companies must spend on payroll, the final version instead lowers the threshold from 75% to 60%.

The following are the highlights of the Act:

1.  Borrowers can elect to extend the 8-week forgiveness period to 24 weeks.  The House bill provides that “an eligible recipient that received a covered loan before the date of enactment of this subsection may elect for the covered period applicable to such covered loan to end on the date that is 8 weeks after the date of the origination of such covered loan.” As such, borrowers who have already received their PPP loan can choose to extend the 8-week period to 24 weeks, or they can keep the original 8-week period. Borrowers who have not yet received their PPP loan will have a 24-week covered period, which cannot extend beyond December 31, 2020. This flexibility is intended to make it easier for more borrowers to achieve full or substantial forgiveness.

This election would make sense for borrowers that have already spent or will spend their PPP funds on eligible expenses, prior to the expiration of their eight week forgiveness period, tp provide them with full forgiveness, to enable them to confirm their loan forgiveness, be in a better position to borrow down the road, if necessary, and not have to worry that future changes in their staffing, in the event of a second wave of COVID-19 outbreaks, which may adversely affect their PPP loan forgiveness!

2. The 75% test is now a 60% Cliff?! While an earlier version of the House bill would have eliminated any requirement about how much borrowers must spend on payroll, the final text instead lowers the threshold from 75% to 60%. Under the language in the current House bill, “to receive loan forgiveness under this section an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs, and may use up to 40 percent of such amount for any payment of eligible non-payroll expenses [rent, utilities and interest on mortgage obligations].”  While the payroll expenditure requirement drops to 60% from 75% it now appeared to be a cliff, meaning that borrowers must spend at least 60% on payroll or none of the loan will be forgiven.

Sen. Ron Johnson, R-Wis., expressed concern to that effect, that the bill's language could prevent any loan forgiveness at all for businesses that spends less than 60% on payroll (59.99% or less), rather than allowing a proportional forgiveness that many lawmakers seemed to support. Small Business Committee Chairman Marco Rubio and other senators hammered out an understanding with the Trump administration about interpreting and implementing the law in a way that avoids the all-or-nothing threshold.

3.  FTE Reductions Calculations and Penalties delayed from June 30 to December 31. 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 December 31, a change from the previous deadline of June 30.

4.  New exceptions for FTE Reductions. 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 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.

For the first exception, borrowers would have to establish an inability to rehire individuals who are employees on February 15, 2020, and an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020. While this requirement may be easy to satisfy in certain industries, it will not be so easy to satisfy in others.

For the second exception, the borrower must establish an inability to return to the same level of business at which it was operating at or before February 15, 2020, due to compliance with requirements established or guidance issued by the secretary of Health and Human Services, the Director of the Centers for Disease Control, or the Occupational Safety and Health Administration, during the period beginning on March 1, 2020 and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement related to COVID-19.  This is a somewhat vague standard, as businesses may not be able to resume full staffing due to reasons, directly, or indirectly, related to COVID-19.                    

5.  Repayment Period Extended to Five Years. New PPP borrowers will have 5 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%.

6.  Two year deferral of employer payroll taxes now applies to PPP borrowers. The bill allows businesses that took a PPP loan to also delay payment of their payroll taxes, which was originally prohibited under the CARES Act. PPP borrowers will be eligible for the deferral of payment of employer’s share of Social Security payroll taxes (6.2%). They can defer the payment of the employer’s share, with 50% of such taxes repaid in 2021, and the balance due in 2022.       

Small businesses will have a big decision to make, in the next few weeks, as to whether or not to elect the 8-week forgiveness period or stay with the new 24 week period, with significant consequences in the event the wrong decision is made!















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