- Loan Forgiveness
- Covered Period
- Loan Maturity
- Limit on Expenses
other than Payroll Reduced
- Exemptions for Those
Unable to Rehire or Replace Employee
- Both Loan forgiveness
and Payroll Tax Deferral Allowed
If you are the owner of a small business that
was able to obtain a Paycheck Projection Program (PPP) Loan, you have probably
already started worrying about how you are supposed to spend the loan proceeds to
maximize loan forgiveness.
When these loans were first offered, the
keyword business owners heard was “forgiveness,” and that created a national
stampede to apply for these loans. Most potential borrowers had little or no
knowledge of how the loan proceeds were to be used to qualify for loan
forgiveness. This, combined with the lack of initial guidance from the Treasury
and Small Business Administration (SBA), added to the confusion.
The CARES Act, the legislation that created
this loan program, specified that loan proceeds were to be used for business
payroll, lease payments, mortgage interest, and utility payments. It also
specified the loan funds were to be used during the eight-week “covered period”
that commenced immediately after receiving the loan proceeds. That meant the
forgiveness clock started ticking the day the loan proceeds were deposited in
the employer’s bank account.
To add to the confusion, the SBA decided to
limit uses other than payroll to 25% of the amount forgiven—a limitation not
included in the CARES Act.
Because the CARES Act includes generous
unemployment benefits that, in many cases, provide income in excess of what the
employer was paying as wages, many employees are resisting returning to work. This
makes it difficult for employers to maintain their pre-COVID payroll and head
count, which are also requirements for forgiveness.
confusion and consternation caused by the forgiveness issue, Congress has
passed the Paycheck Protection Program Flexibility Act (PPPFA) of 2020, which makes
substantial changes to the program:
- The covered period has been extended from 8 weeks to 24 weeks after
the origination of the loan or December 31, 2020, whichever occurs first,
giving employers substantially more time to comply with the forgiveness
requirements and other terms of the loan. If the loan was received before the
enactment of the PPPFA, the borrower may choose either the original 8-week
period or the new 24-week/December 31, 2020 period.
- Loan maturity has been increased from 2 years
to a minimum of 5 years, giving borrowers a longer amount of time to pay back
the portion of the loan that is not forgiven. For loans finalized prior to the
PPPFA, the lender and borrower can agree to change to the longer term.
- Congress has rebutted the administration’s
attempt to limit the uses of the funds for other than payroll to no more than
25% of the forgiveness. The Act instead requires at least 60% of the loan
proceeds to be used for payroll and up to 40% can be used for business rent,
mortgage interest (but not for pre-payment of the interest or for payment of
principal) and utility payments. CAUTION: This means if less than 60%
is used for payroll there will be zero forgiveness.
- To alleviate employers’ rehiring problems, the Act provides an
exemption for employers that are unable:
- To rehire an employee who was working for the
employer on February 15, 2020,
- To hire similarly qualified employees on or
before December 31, 2020, or
- To return to the same level of business activity as such business was operating at 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 and Prevention, 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
- The deferral of payments of the PPP loan principal, interest
and fees that was originally 6 months to one year is changed by the Act to be
until the date the loan forgiveness amount is remitted to the bank by the SBA.
- The original rules of the CARES Act prevented employers who
received PPP loan forgiveness from being able to defer payment of payroll tax,
another provision of the CARES Act. The PPPFA changes that rule to allow
qualified employers to take advantage of deferring 2020 payroll tax payments even
if they’ve received PPP loan forgiveness. The deferral allows 50% of the
eligible payroll taxes to be deferred until December 31, 2021 and the balance
to December 31, 2022. Taxes that can be deferred include the
6.2% employer portion of the Social Security (OASDI) payroll tax, and the
employer and employee representative portion of Railroad Retirement taxes (that
are attributable to the employer’s 6.2% Social Security (OASDI) tax rate),
effective for wages paid March 27, 2020 through December 31, 2020.
This will certainly require the SBA to revise
the PPP loan forgiveness application. If you have already reviewed the current
application, you are aware of just how complicated it is. Hopefully, this will give
the SBA additional time to work on simplifying the application. If you have
questions about how these changes might apply to your situation, please give
this office a call.