Important Changes to the Payment Protection Plan! ***Paycheck Protection Flexibility Act***
On Friday, June 5th, President Trump signed the Paycheck Protection Flexibility Act into law. The goal of the law is to make it easier for borrowers to reach full forgiveness.
Summary of Changes:
Current PPP borrowers can choose a 24-week period, rather than an 8-week period to spend PPP funds.
New PPP borrowers will have a 24-week covered period which cannot extend beyond December 31, 2020.
The payroll expenditure requirement is now 60%, rather than 75%. If at least 60% of loan proceeds are not spent on payroll costs, there is no loan forgiveness.
The June 30 deadline to restore workforce levels and wages is extended to December 31.
There are two new alternatives for a borrower to restore a potential reduction in forgiveness:
An inability to find qualified employees to replace those let go, and
An inability to restore the business operations to February 15, 2020, levels due to COVID-19-related operating restrictions.
The PPP loan term is extended from two years to five years. An updated loan agreement with the bank may be required. (Borrowers should reach out to bankers regarding loan modifications.)
Companies that participate in the Payroll Protection Program Loan program will be eligible to defer the company portion of payroll taxes throughout 2020. This is a change from being eligible for the payroll tax deferral only through the date a company receives loan forgiveness.
Eligible payroll costs include payroll costs paid and incurred during the covered period, which is now a 24-week period commencing on the date the business receives PPP funds from a financial institution. Payroll costs are considered incurred on the day an employee’s pay is earned. In addition, payroll costs incurred during the 24-week period and paid on or before the next regular payroll date are eligible for forgiveness.
The maximum payroll for any one individual has not changed in this legislation, it is still $15,385. This also means that the maximum compensation of owner-employees, self-employed individuals, and self-employed partners’ has not changed either
There is presently no guidance related to wages for relatives, spouses, or children of owners. It appears that these wage costs will count toward forgiveness. There may be additional guidance in the future that could clarify this further.
MINIMUM AMOUNT OF FUNDS TO BE USED FOR PAYROLL COSTS
The new law indicates that 60% of loan proceeds must be used for payroll costs, with up to 40% of loan proceeds eligible to be used for non-payroll costs. If the 60% payroll cost threshold is not met, there is no loan forgiveness. Several Representatives and Senators have indicated they intended the new law to have a sliding scale, rather than a cliff. Further interpretations may be addressed with future guidance.
Non-payroll costs must be paid or incurred during the 24-week period and paid on or before the next regular billing date, even if that falls outside of the 24-week period. Non-payroll costs may not be pre-paid, but it does appear that accrued costs may be allowed.
For practical purposes, it appears that non-payroll costs paid during the 24-week Covered Period may be included as part of the loan forgiveness application, in addition to the portion incurred during the 24-week period that is paid on the first bill following the 24-week period.
Borrowers can elect to exclude any amount of non-payroll costs as part of their loan forgiveness application.
LOAN FORGIVENESS REDUCTIONS
FULL-TIME EQUIVALENTS (FTE)
The new law adds an exemption from a reduction in the forgiveness amount for reduced FTEs to the extent the borrower is unable to re-hire a former employee or hire a similarly qualified employee, and if the business is unable to restore business operations to February 15, 2020, levels due to COVID-19 operating restrictions. Further guidance may indicate how to document a company’s qualification for this exemption.
FTE is not reduced for anyone who:
1. Receives a good-faith written offer of employment that is rejected.
2. Was terminated for cause.
3. Voluntarily resigned.
4. Voluntarily requested a reduction of hours.
5. Is unable to hire a former employee or hire a similarly qualified employee.
6. Is unable to restore business operations to February 15, 2020, levels due to COVID-19-related operating restrictions.
The PPP Loan Forgiveness Application provides borrowers with a foundation for planning and compliance in the use of their loan proceeds. Borrowers will undeniably have their own specific situations that will still need to be addressed with their banks and advisors. Applying the above interpretation of the PPP Loan Forgiveness Application will be the best path forward as we wait for any additional information from the SBA.