One of the more popular comments in recent weeks regarding the PPP Loan program by many borrowers has been that the original 8-week window was ultimately too short a period to use the funds. Many borrowers are still unable to resume full or even partial operations, and the short window left many with the prospect of paying employees to not work or not using the funds at all, thereby losing their forgiveness window.
An expansion of the Covered Period was originally discussed a few weeks ago, having nearly bi-partisan support and an initial hope it could be done “administratively” rather than with a new congressional law. When an administrative solution was not available, both the House and Senate took up bills to extend and modify the program. The House last week passed the Paycheck Protection Program Flexibility Act of 2020 and after some posturing over the changes, the Senate passed the bill unanimously last night. The Act now goes on to the President for a signature, which is all but assured.
The PPP Flexibility Act has 7 changes to the program. While this may sound like a broken record at this point, these changes do bring up many questions for which we have yet to receive guidance and as a result, we do not have all the answers yet as to how some of these will fully work. There are also still many lingering questions on the PPP Loans that are waiting to receive answers from the SBA on, such as retirement costs.
The key changes in the Act are:
1. Extension of the loan program to December 31, 2020.
Prior to this change, the loan program was active from February 15, 2020 to June 30, 2020. While the first round of funding went quickly and was replenished, the second-round of funding has been relatively stagnant after the initial flurry of borrowers. Borrowers who were waiting now have more time to apply.
2. Extension of the forgiveness Covered Period from 8-weeks to 24-weeks.
This is the change many borrowers were looking to see. This extension allows for a longer period to use the funds. This change is the most impactful, but also brings with it more questions. It is important to note that borrowers can still elect to have an 8-week Covered Period if they desire.
3. Expanded relief for FTE Exemptions.
The FAQs and Interim Final Rules (IFR) provided several exemptions in the FTE Reduction calculation, and the Act further introduces 2 more. Borrowers can have an FTE Exemption if:
a. They can document an inability to rehire employees AND they are unable to rehire similarly qualified employees for the unfilled positions by December 31, 2020.
b. They can document an inability to return to a similar level of business activity because of compliance with HHS, CDC, or OSHA regulations by December 31, 2020.
4. A reduction of the 75% payroll requirement down to 60%.
Many borrowers, particularly in the NY Metro Area, found that the 25% limitation was an issue given the high rent costs. This Act changes the formula to allow that AT LEAST 60% of the forgivable amount must be used on Payroll Costs, down from the 75%. One area that partially held up the passage of this bill, and there are concerns about, is that this now makes a “cliff” for spending on payroll costs; that is, if a $100,000 loan was spent $55,000 on payroll and $45,000 on rent, nothing would be forgivable as not at least 60% was spent on payroll. Under the prior guidance, $73,333.33 would have been forgivable. Senator Rubio addressed this during the bill and was hoping that the SBA interpretations would not cause this cliff to happen.
5. Change in loan terms.
This program still is a loan program at its core, with a forgiveness component. The PPP Flexibility Act made the following changes to the loans themselves
a. A minimum maturity of 5 years for any unforgiven portion, which is an increase from 2 years.
b. Expanding the payment deferral period until a forgiveness decision has been made by the lender.
c. A new rule that allows a borrower that does not apply for forgiveness, to defer payment until 10-months after the end of their Covered Period.
6. PPP Borrowers can defer payroll taxes.
The CARES Act allowed for employers to defer payment of the employer portion of Social Security through December 31, 2020, with 50% of the payment due December 31, 2021 and 50% of the payment due December 31, 2022. However, any PPP Borrower that received forgiveness was ineligible to make such deferral. Given that it was a temporary deferral and many borrowers were concerned about having to start paying when the PPP Loan was forgiven, many opted to forgo this deferral. However, this change opens the door for these borrowers to do so.
7. Change of the safe-harbor measurement date to December 31, 2020.
The CARES Act allowed a safe harbor measurement date for borrowers that had a decline in FTEs or Salary that allowed for borrowers who corrected these reductions by a certain date to not have any forgiveness reductions. The date was originally June 30, 2020 but has now been pushed to December 31, 2020. This safe harbor remains an “all or nothing proposition.”
Impacts & questions of the extension of 8-weeks to 24-weeks Covered Period
The biggest and most welcome change for many borrowers is the extension of the Covered Period from 8-weeks to 24-weeks. This change should have the following impacts on borrowers:
1. Presumably, but unconfirmed, this also changes the dollar value of the upper cap of compensation of any one employee to $46,154 (up from $15,385) as the CARES Act caps the compensation above $100,000 pro-rata for the covered period.
2. Given the loan was based on roughly 10-weeks of Payroll Costs and now the Covered Period is 24-weeks, using the funds to cover Payroll Costs should be substantially easier. This also may help with some of the lingering questions on allowable costs, as borrowers could presumably use the entire loan for payroll costs over the 24-week Covered Period. This extended period should also assist government funded agencies who may only be able to claim a portion of employee compensation as a forgivable cost as this allows for a longer period to claim the forgivable component.
3. Self-employed and owner-employee borrowers should also see an increase in the forgivable amounts, as the prior amounts were based on 8/52 and they should now be based on 24/52.
At this time, without formal guidance, we can only make educated guesses on some of these impacts. The following questions now arise because of the extension of the Covered Period:
1. How will the FTE Reduction calculations be impacted? The reference periods likely will not need to be changed for the FTE calculation, but if the FTEs are to be calculated over the full Covered Period of 24-weeks with only 10-weeks of funding, many borrowers could inadvertently have an issue meeting the FTE calculations.
2. Will there be any changes to the Salary Reduction calculation? This is unlikely since the Salary Reductions were based on annualized salaries or hourly wage amounts, but it is possible.
3. Will the SBA limit the forgiveness to an 8-week period in the 24-weeks? While the Covered Period is now longer, there is a potential that the SBA may interpret this to allow a selected period within the Covered Period for forgiveness. This would then still have the prior caps in place.
4. Will there be a streamlined process for smaller borrowers? Recently banking lobbyists have pushed for a streamlined forgiveness process for smaller borrowers. One of the major trade groups called for “automatic” forgiveness for loans less than $150,000, which would be only 26% of PPP loan dollars but would benefit an estimated 85% of borrowers.
One item that was not addressed in this bill, and has lost steam after an initial outcry, is the ability for borrowers to deduct the expenses that are related to PPP Loans. The IRS has ruled that expenses that were funded by PPP Loans were nondeductible which caused many of the drafters of the CARES Act to claim this was against congressional intent. This Act was an opportunity to address that issue, but it ultimately was not included.
For some borrowers, particularly those in the first tranche of loans, these changes may end up being “too little, too late” as any loan originated prior to 4/10/2020 would have their covered period ending by June 4th, the date of passage. While this does NOT preclude those borrowers from taking advantage of the changes, many have already implemented plans and spent their funds under the old guidance and these changes may not help them much. Other borrowers who received funds later in the program, or made the decision to not use the funds during the original 8-week period, may find these changes beneficial.