On June 3, 2020, the Senate passed the House legislation (H.R. 7010 – Paycheck Protection Program Flexibility Act of 2020) that amends the Paycheck Protection Program (“PPP”) portion of the CARES Act. The legislation is now headed to President Trump for his signature. It is expected that the SBA will be issuing interim rules and FAQs related to this new legislation that, based on prior experience, may alter the plain reading of the bill. However, these are some of the highlights of the bill:
- First, the new legislation extends the “covered period” from 8 weeks to 24 weeks or December 31, 2020, whichever comes first. The change helps many businesses that could not be up and running within 8 weeks, such as hotels, bars, and restaurants. These businesses now have more time to spend loan proceeds on forgivable costs. The legislation does not require you to go from an 8-week covered period to a 24-week covered period. If you received your loan before the enactment of this legislation and have met all the requirements for forgiveness during the 8-week period, you can apply for forgiveness now rather than wait.
- Second, the wage threshold has been lowered from 75% to 60%. Under prior guidance that was not in the statute, but which the SBA imposed through interim rules, a loan recipient was required to spend 75% of the loan proceeds on wages, while the remaining proceeds could be used on other forgivable expenses. The new bill specifies that 60% of the loan proceeds must be used for wages with the remaining amount to be used on other forgivable expenses. There is a trap for the unwary, however, in that under the new law, if the 60% wage requirement is not met, then no forgiveness will be allowed.
- It was widely understood that a borrower could spend 100% of the loan proceeds on wages, but still not receive 100% forgiveness based on the full-time equivalent (“FTE”) test and/or the average annual salary test. In other words, if the borrower did not maintain the FTE count during the covered period in relation to one of the elective base periods, or if the borrower significantly reduced salaries or hourly wages during the covered period as compared to the first quarter of 2020, the forgiveness would be reduced, unless the borrower restored the FTE count and salaries by June 30, 2020. The new legislation gives borrowers until December 31, 2020 to restore FTEs and wages.
- So what happens if a borrower’s employees won’t come back to work? The new legislation provides exceptions for borrowers who cannot fully restore their workforce. As provided in prior guidance, borrowers can exclude employees who refuse to come back. Be aware that there are documentation requirements must be met, and that the offer must be made in “good faith,” which is a broad term that will have to addressed in future guidance. Moreover, the new legislation allows borrowers to adjust if they cannot find qualified replacements or were unable to restore business operations due to COVID-19 operating restrictions. Again, there are technicalities that must be met for this exception. Feel free to reach out to your LaPorte advisor if you have further questions regarding this issue.
- With the limitations on forgiveness in mind (i.e., the 60% wage expenditure requirement, the FTE requirement, and the salary/hourly wage requirement), Congress has extended the repayment term for PPP loans from two to five years. However, to get this longer term, lenders may have to renegotiate the terms of any existing PPP loan. The interest rate remains at 1%.
- Finally, the new legislation changes the CARES Act incentive that allowed employers to defer their 6.2% share of 2020 Social Security tax until the end of 2021 for 50% of the tax and 2022 for the other 50%. Previously, only taxpayers who did not receive PPP loan forgiveness were eligible for the incentive. The new bill extends the incentive to all taxpayers – even those who have a PPP loan forgiven prior to December 31, 2020.
For more information about how this guidance will affect your unique situation, please reach out to a LaPorte professional.