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New Law Makes PPP Loans More Flexible for Borrowers
While many business owners scrambled to qualify for and receive a Paycheck Protection Program (“PPP”) loan, the realization set in that the loan period to use the funds was actually quite short, only an 8 week window, and came with significant reporting requirements. Some business owners were still waiting on funds as June approached, and the period to restore their workforce levels and wages to pre-pandemic levels required for full forgiveness was June 30th. While June 30 remains the deadline for applying to receive a PPP loan, fortunately, the dilemma of the short timeline for utilizing funds has now been addressed by the Paycheck Protection Program Flexibility Act of 2020 (“PPPFA”). This Act is effective as of June 5, 2020. As a result, note the following positive changes to the existing CARES Act provisions of the PPP:
- The “covered period” was expanded from 8 weeks to 24 weeks (not to extend beyond December 31, 2020). Note that borrowers who already received their funds may elect to keep the original period if that covered period was not an issue for them.
- Originally, the borrower was required to use 75% of the proceeds for payroll costs in order to qualify for forgiveness. This requirement has now been reduced to 60%. Although not addressed in PPPFA, the SBA and Treasury announced after its enactment that partial forgiveness will still be available if the borrower falls below the 60% mark. However, the current language considers a cliff test, appearing to say that failure to meet the 60% would result in none of the loan being forgiven, rather than the pro-rata test that existed under the 75% rule.
- The loan term has been expanded to five years for new borrowers. Existing borrowers can ask for a loan modification with their lender. However, no guidance was provided on whether it needs to be mutually agreed to by the lender and borrower, what the deadline to extend might be, or whether extensions for less than 5 years will be permitted.
- Safe harbor has been extended to allow forgiveness for borrowers who have lost headcount and have been unable to replace due to inability under local laws to fully restore their business or being able to rehire qualified employees, as long as they are able to do this by December 31, 2020, rather than the prior safe harbor date of June 30, 2020. This is especially helpful to the restaurant and hospitality business sector, who may have been limited in their ability to remain open due to stay-in-place orders.
- The CARES Act did not allow deferral of Social Security taxes if a PPP loan was forgiven. PPPFA now allows PPP borrowers to take advantage of the payroll tax deferral from March 27 to Dec. 31, 2020, with payments due over the following two years.
As noted, many questions remain unanswered and the SBA and Treasury will be issuing additional guidance for interpreting this new Act and other guidance previously set forth. For example, note that currently any expenses paid with PPP funds that are forgiven are not tax deductible. However, the CARES Act provides that receipt of the loan is tax-free. Many legislators support changing the position on deductibility, but that has yet to get passed.
Borrowers will need to complete Form 3508 and submit to their lender in order to request forgiveness; it is NOT automatic. It is important to keep detailed records on headcount (FTEs), payroll costs, and other expenses paid by the loan proceeds. Please consult your tax advisor regarding completion of this form and recommendations for proper documentation. HPG would be happy to assist.