PPP Update – PPP Flexibility Act, New Interim Rules and PPP Loan Forgiveness ApplicationJune 21, 2020 | Category: Asset Protection, Corporate and Taxation, Estate Planning and Probate, News
As addressed in previous Legal Beats, the Payroll Protection Program (PPP) Flexibility Act included a number of revisions to intended to increase the likelihood that borrowers will receive full loan forgiveness. More recently, new interim rules, together with a new PPP loan forgiveness application, both issued by the SBA, provide additional guidance, further increasing the likelihood of loan forgiveness!
The highlights of these pronouncements include the following:
Extension of the 8-week covered period applicable to loan forgiveness to 24 weeks (borrowers that received loans prior to June 5th, 2020, the date of enactment of the PPP Flexibility Act, can elect to use the original 8-week period covered period).
The maximum allowable cash compensation (including salary, wages, and tips) eligible for forgiveness is $100,000 annualized per employee (equivalent to $15,385 per employee if the 8-week covered period is selected or $46,154 per employee if the 24-week covered period is selected).
For self-employed individuals and independent contractors, such cash compensation is limited to $15,385 for the 8-week period or $20,833 for the 24-week period, provided their 2019 Schedule C net profit was at least $100,000. This change should allow employed individuals and independent contractors to receive full forgiveness of their PPP loans!
Reduction in the minimum amount of the PPP loan proceeds that must be spent on payroll costs from 75% to 60%.
Inclusion of new safe harbors with respect to the Full Time Equivalent (FTE) forgiveness reduction, to provide borrowers with more opportunities to avoid reduction of their PPP loan forgiveness due to in staff reductions.
Extension of the loan term for loans obtained on or after June 5, 2020 from two years to five years However, while the maturity date can be extended for loans made before June 5th by mutual agreement between borrowers and lenders, lenders are unlikely to agree to such extensions, due to the low interest rates on PPP loans!
Extension of the FTE and Salary/Hourly Wage reduction safe harbors from June 30, 2020 to December 31, 2020. This extension is a double-edge sword, as PPP borrowers may have met this exception on June 30, 2020 but may not meet it on December 31, 2020, due to a potential second wave that is feared later this year, to coincide with the flu season!
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!
We are here to help!
A more detailed explanation of these changes are as follows:
--Covered Period. The Covered Period is either (1) the 24-week (168-day) period beginning on the PPP Loan Disbursement Date, or (2) if the Borrower received its PPP loan before June 5, 2020, the Borrower may elect to use an eight-week (56-day) Covered Period. For example, if the Borrower is using a 24-week Covered Period and received its PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, October 4. In no event may the Covered Period extend beyond December 31, 2020.
--Eligible payroll costs. Borrowers are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the 24-week (168-day) or 8-week (56-day) Covered Period (or Alternative Payroll Covered Period) (“payroll costs”). Payroll costs are considered paid on the day that paychecks are distributed or the Borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period). For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the Covered Period. Payroll costs that were both paid and incurred can only be counted once.
--Cash Compensation. The sum of gross salary, gross wages, gross tips, gross commissions, paid leave (vacation, family, medical or sick leave, not including leave covered by the Families First Coronavirus Response Act), and allowances for dismissal or separation paid or incurred during the Covered Period or the Alternative Payroll Covered Period. For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the Covered Period. For an 8-week Covered Period, that total is $15,385. For a 24-week Covered Period, that total is $46,154!
--Average FTE. The average full-time equivalency (FTE) during the Covered Period or the Alternative Payroll Covered Period. For each employee, this is the average number of hours paid per week, divided by 40, and rounded the total to the nearest tenth. The maximum for each employee is capped at 1.0. A simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the Borrower.
This calculation will be used to determine whether the Borrower’s loan forgiveness amount must be reduced due to a statutory requirement concerning reductions in full-time equivalent employees. Borrowers are eligible for loan forgiveness for certain expenditures during the Covered Period or the Alternative Payroll Covered Period. However, the actual loan forgiveness amount that the Borrower will receive may be less, depending on whether the Borrower’s average weekly number of FTE employees during the Covered Period or the Alternative Payroll Covered Period was less than during the Borrower’s chosen reference period. The Borrower is exempt from such a reduction if the FTE Reduction Exceptions or either of the FTE Reduction Safe Harbors discussed below applies.
--FTE Reduction Exceptions. Applies to (1) any positions for which the Borrower made a good-faith, written offer to rehire an individual who was an employee on February 15, 2020 and the Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020; (2) any positions for which the Borrower made a good-faith, written offer to restore any reduction in hours, at the same salary or wages, during the Covered Period or the Alternative Covered Period and the employee rejected the offer, and (3) any employees who during the Covered Period or the Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours. In all of these cases, you include these FTEs only if the position was not filled by a new employee. Any FTE reductions in these cases do not reduce the Borrower’s loan forgiveness.
FTE Reduction Safe Harbors
Two separate safe harbors exempt certain borrowers from any loan forgiveness reduction based on a reduction in FTE employee levels:
- The Borrower is exempt from the reduction in loan forgiveness based on a reduction in FTE employees described above if the Borrower, in good faith, is able to document that it was unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
- The Borrower is exempt from the reduction in loan forgiveness based on a reduction in FTE employees described above if both of the following conditions are met: (a) the Borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and (b) the Borrower then restored its FTE employee levels by not later than December 31, 2020 to its FTE employee levels in the Borrower’s pay period that included February 15, 2020
--Deferral Period for PPP Loans. The PPP Flexibility Act extended the deferral period on PPP loans. If you submit to your lender a loan forgiveness application within 10 months after the end of your loan forgiveness covered period, you will not have to make any payments of principal or interest on your loan before the date on which SBA remits the loan forgiveness amount on your loan to your lender (or notifies your lender that no loan forgiveness is allowed).
The ‘‘loan forgiveness covered period’’ is the 24-week period beginning on the date your PPP loan is disbursed; however, if your PPP loan was made before June 5, 2020, you may elect to have your loan forgiveness covered period be the eight-week period beginning on the date your PPP loan was disbursed. Your lender must notify you of remittance by SBA of the loan forgiveness amount (or notify you that SBA determined that no loan forgiveness is allowed) and the date your first payment is due. Interest continues to accrue during the deferment period.
If you do not submit to your lender a loan forgiveness application within 10 months after the end of your loan forgiveness covered period, you must begin paying principal and interest after that period. For example, if a borrower’s PPP loan is disbursed on June 25, 2020, the 24-week period ends on December 10, 2020. If the borrower does not submit a loan forgiveness application to its lender by October 10, 2021, the borrower must begin making payments on or after October 10, 2021.
--Loan Forgiveness. The PPP Flexibility Act amended the requirements concerning forgiveness of PPP loans to reduce the amount of PPP loan proceeds that must be used for payroll costs in order to be forgivable. While it provides that a borrower shall use at least 60 percent of the PPP loan for payroll costs to receive loan forgiveness, the SBA interprets this requirement as a proportional limit on nonpayroll costs as a share of the borrower’s loan forgiveness amount, rather than as a threshold for receiving any loan forgiveness.
--Owner Compensation Replacement. For self-employed individuals and independent contractors, this amount is calculated based on 2019 net profit, with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an eight-week covered period or 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period, but excluding any qualified sick leave equivalent amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act (FFCRA) or qualified family leave equivalent amount for which a credit is claimed under section 7004 of FFCRA.