PPP Flexibility Act Q&A and New Forgiveness Applications
On June 16, 2020 the SBA released their new PPP Loan Forgiveness Applications and Instructions updated for the Paycheck Protection Program Flexibility Act of 2020 that was enacted on June 5, 2020. You can find links to the new applications and instructions below:
SBA PPP Loan Forgiveness Application
SBA PPP Loan Forgiveness Application Instructions
SBA EZ PPP Loan Forgiveness Application
SBA EZ PPP Loan Forgiveness Application Instructions
What are the Primary Enhancements That the Flexibility Act Provides?
Keep in mind that this Act provides amendments to the originally enacted PPP program under the CARES Act on March 27, 2020. The original mechanics as to calculating forgiveness still apply, but they are now layered with more flexibility and time to utilize the funds.
Some of the primary enhancements include :
- Extending the ‘loan forgiveness covered period’ from 8 weeks after loan origination to 24 weeks after loan origination
- Previous 75% ‘payroll cost’ spend has now been reduced to 60%, allowing for more room (40%) to spend on ‘non-payroll costs’.
- Replaces the June 30, 2020, date for the rehire safe harbor with December 31, 2020
- Opportunity to not reduce your FTE (full-time equivalent) headcount if:
- You can support the inability to rehire the individual or similarly qualified employees
- You can document an inability to return to the same level of business activity due to Federally driven restrictions, etc.
- Requirement to submit the loan forgiveness application within 10 months after the end of their ‘loan forgiveness covered period’
- Ability to defer principal and interest payments on the loan portion up through submission of the loan forgiveness application.
- Now allows businesses to also participate in the CARES Act payroll tax deferral opportunity previously disallowed if under the PPP program.
Which Borrowers Can use the EZ Application Form?
The EZ PPP Loan Forgiveness Application requires fewer calculations and less documentation than the full application. The EZ application can be used by borrowers that:
- Are self-employed and have no employees;
- Did not reduce the salaries or wages of their employees by more than 25% and did not reduce the number or hours of their employees; or
- Experienced reductions in business activity as a result of health directives related to COVID-19 and did not reduce the salaries or wages of their employees by more than 25%.
Can I Opt-Out of the 24 Week Coverage Period?
Yes. Banks now default to the 24-week calculation, but you can opt for keeping with the 8-week calculation if it is more advantageous for you. You will need to alert your bank that you will be using the 8-week calculation. Note that in light of the recent changes, many banks are still working on their forgiveness application submission process and may not be accepting forgiveness applications for several weeks (or months) after June 30th.
Do I Lose the Forgiveness Opportunity If Less Than 60% is Spent on ‘Payroll Costs’?
No. The SBA clarified that the borrower will still be eligible for partial forgiveness. Borrowers that spend less than 60% of their loan proceeds on payroll are eligible for proportional amount of loan forgiveness. For example, if a borrower receives a $100,000 PPP loan, and during the covered period the borrower spends $54,000 on payroll costs, then because the borrower used less than 60% of its loan on payroll costs, the maximum amount of loan forgiveness the borrower may receive is $90,000 ($54,000 / .60 = $90,000). The remaining $36,000 can be spent on ‘nonpayroll costs’ (rent, utilities, and interest).
With the Covered Period Extended to 24 Weeks, if We Meet the Forgiveness Requirements Before the 24 Weeks Are Up, Can We Submit the Forgiveness Application Early?
You will need to wait until the end of the 24 week period due to the fact that you must calculate your average FTE during the covered period to quantify any potential forgiveness reductions. Further, if you do have a reduction, you will want to wait until December 31, 2020 to see if you can fully restore your headcount under the safe harbor and avoid a forgiveness reduction (see next question).
Remind Us Again How the FTE Safe Harbor Works Under the 24 Week Spend?
While the 8 week spend utilized June 30, 2020 as the “cure all” to restore your FTE count, the 24 week spend utilizes December 31, 2020 as the “cure all” to restore FTE count. You will need to compute your total FTE figure as of December 31, 2020. If this figure is equal or greater than the average FTE for the pay period which includes February 15, 2020, this could prevent any reduction in forgiveness. Further the new application specifies :
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.
We await further guidance or clarity as to whether a forgiveness application can be submitted before December 31, 2020 if full FTE levels have been restored after the 24 week spend period by before the December 31, 2020 period.
Can You Expand On the New FTE Reduction Exceptions?
As long as you have appropriate support with your forgiveness filing, and FTE reduction will not hurt your forgiveness calculation for any of the following :
- Where the borrower is able to document an inability to return to the same level of business activity as such business was operating before February 15, 2020 due to compliance with requirements established or issued by the Federal government (CDC, SHHS, OSHA, etc.) during the period beginning on March 1, 2020 and ending December 31, 2020.
- Document good faith offer to rehire and employee declines: Must be written offer during the covered period at the same salary and hours as their last regular pay period, maintain records of offer and its rejection, Notify State unemployment t office within 30 days of employee rejection)
- Where the borrower is able to document an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020, and the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020
- Document changes in head count for employees: Fired for good cause, voluntarily resigns, voluntarily requests for a reduced schedule
Does the 24 Week Spend Period Apply to Owner-Employees As Well?
While non-owner employees making over $100,000 can be increased from the previous 8 week cap of $15,385 to $46,155, this is not the case for owner-employees. This increased limit does not carry to owner-employee compensation replacement. Rather owner compensation limit will be capped at 2.5 months of 2019 level profit/wage up to a maximum of $20,833 across all businesses.
What is the Revised Time-frame for Deferral of Principal and Interest Payments & Timing for Loan Forgiveness Application?
Borrowers must submit their loan forgiveness applications within 10 months after the end of their loan forgiveness covered period to avoid the conversion of their PPP grant into a term loan. Payments of principal and interest are not required to be made during this 10 month window, and can continue to be deferred until the date the SBA either remits the loan forgiveness amount to the lender or notifies the lender that no forgiveness is allowed. Interest does continue to accrue during this time. 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, including accrued interest.
What Changes Were Made to the Payroll Tax Deferral?
In addition to PPP loan changes, the bill allows all employers, even those with forgiven PPP loans, to defer the payment of 2020 employer’s Social Security taxes, with 50% of the deferred amount being payable by December 31, 2021, and the balance due by December 31, 2022. Previously, the CARES Act prohibited such payroll tax deferral after a borrower’s PPP loan was forgiven.
Have There Been Any Final Decisions on Whether or Not Businesses Can Deduct Expenses Forgiven?
The IRS has relayed their position that the forgiven expenses will not be deductible. Congress is currently working on an opposition to this ruling. We await the final outcome. This along with other fiscal year reporting questions will add complexity to your tax filings and are beyond the scope of this article.
We will continue to monitor this closely and pass along any additional information with regards to procedures and logistics, as we receive it.
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