The House of Representatives passed HR 7010 last week to make alterations to the Paycheck Protection Program (PPP), mainly concerning the forgiveness provisions. On June 3, 2020 the Senate passed the same bill by unanimous consent (UC). It has been sent to the White House and is expected to be signed by the President.
Some Senators raised concerns about the structure of the bill and some technical corrections that they felt were needed, but due to the pending June 30 deadline, they agreed to pass the House bill as written and are expected to draft additional legislation in the coming weeks to make the additional changes.
This bill is short but introduces some new terms and criteria that are likely to require additional guidance from the SBA (likely Interim Final Rule changes or FAQs) to ensure taxpayers have the information needed to comply with the new law.
Maturity for Loans with Remaining Balance After Forgiveness
Any new PPP loans will have a maturity of 5 years, instead of the original legislation which allowed for a 2 year term. The extended term does not apply automatically but can be applied to loans retroactively if the lender and the borrower mutually agree.
Amendments to PPP Loan Forgiveness
The covered period for forgiveness is extended from 8 weeks to 24 weeks with a final deadline of December 31, 2020. The legislation does not explicitly extend the alternative payroll covered period, if elected, but we expect this will be corrected in a future bill or guidance. Borrowers are not required to extend the period to 24 weeks, they will still have the option to use 8 weeks.
Amendments to Full Time Employee (FTE) Headcount Levels
The safe harbor for restoring FTE headcount is extended from June 30, 2020 to December 31, 2020 if the borrower meets either of the following tests:
- FTE restoration test 1:
- Inability to rehire individuals who were employed on February 15, 2020, and
- Inability to hire similarly qualified employees for unfilled positions by 12/31/2020
- FTE restoration test 2:
- Inability to return to the same level of business activity as such biz was operating at before 2/15/20, due to compliance w/ requirements or guidance of HHS, CDC, or OSHA issued between 3/1/20-12/31/20 related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
Restoration test 1 requires that you meet both requirements to qualify for the safe harbor. Restoration test 2 is going to require additional guidance to clarify and define some of the terms used. For example, is the “level of business activity” defined by revenue, customers, orders, some other metric? It is not clear from the legislation.
Amendments to Payroll Threshold Requirements
To obtain PPP loan forgiveness the proceeds must be used 60% or greater for payroll costs and 40% or less for non-payroll costs (as defined by the interim final rule). This overrides the Small Business Administration (SBA) policy of 75% payroll costs.
As written, this change lowers the threshold for payroll costs to 60% but also creates a “cliff”, meaning that any borrower utilizing 59% or less of the loan proceeds for payroll costs will receive no forgiveness not a proportional reduction. This is a drafting error and is expected to be corrected in future legislation.
Deferral of PPP Loan Payments
Deferral of PPP loan payments are extended from 6 months to 10 months.
Employee Retention Credit (ERC)
PPP borrowers who have their loans forgiven are now eligible for the ERC. The original CARES Act only allowed taxpayers to utilize one of the programs.
Unresolved Issues
- The cliff threshold for 60%/40% payroll (discussed above)
- This bill does not discuss inclusion of expenses related to personal protective equipment (PPE) or COVID-19 related costs as eligible for forgiveness.
- This bill does not contain any legislative change that would make expenses used for eligible forgiveness also remain deductible for tax purposes.
- No clarification of what are eligible “transportation” costs.
- Are interest payments on debt held by related parties and/or rent/lease payments on leases with related parties still eligible for forgiveness?
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