Paycheck Protection Program Flexibility Act of 2020
Unless you’ve been overdoing sheltering-in-place by avoiding all news sources, you’ve heard of the Paycheck Protection Program (PPP). And if you’re a business owner you have most likely taken advantage of the “forgivable loan” offered to qualifying employers.
In this article we’ll take a look at what the PPP was designed to accomplish, changes that bring the provisions to where they are today … and touch on those items that remain up in the air awaiting further clarification or revision.
PPP as Initially Rolled Out – Round 1
In brief, the PPP was created by Congress on March 27 of this year as part of the $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act. The legislation authorized Treasury to fund up to $10 million in loans to eligible small businesses - guaranteed through the Small Business Administration (SBA). The primary objective was to pay employees during the COVID-19 crisis to avoid increased unemployment and help employers to retain quality help.
The loans were to be forgiven if qualifying businesses maintain payroll for eight weeks at employees’ normal salary levels and use the loan proceeds only for qualifying expenses, i.e. payroll, mortgage interest, rent and utilities.
Virtually all U.S. employers in operation on February 15, 2020, with 500 or fewer employees may qualify including not-for-profits, veterans’ organizations, Tribal concerns, self-employed individuals, sole proprietorships, and independent contractors.
OK … other than the over-abundance of acronyms … the above seems to be a pretty straightforward description of the Program. That said, an unintended consequence proved to be the $10 million allocation for loans was depleted within two weeks. Additionally, businesses successful in obtaining a loan were those with strong existing bank relationships.
But wait! As ever with new regulations, the devil is in the details as questions arise that require guidance and clarification by the SBA. In this article, we’ll address the more compelling examples and strongly urge you to contact Blair + Assoc with others or for further clarification of those presented.
PPP Revisions – Round 2
Round 1, as described above, was directed at “bricks & mortar” businesses. Regrettably, many small businesses, including the self-employed, were precluded from participation when the original funding quickly ran out.
Employers who were unable to conduct business due to C-19 restrictions reported considerable difficulty in complying with the “8 week” provision triggered upon receipt of the loan. Business owners complained that paying workers while they were shut down by government mandate made little sense while other expenses mounted. Additionally, having such a short amount of time to use the funds also was a limiting factor.
There was evidence of wide concerns by business owners about the uncertainty of the effectiveness of the PPP, including not receiving total forgiveness. It is widely believed that uncertainty around PPP and the fear of not receiving complete forgiveness prevented many businesses from applying for the loans. Consequently, pressure was brought to bear on regulators to alter the program to allow for a “rolling 8 weeks” to begin upon the date the loan is received.
On June 5, 2020, Congress responded to perceived deficiencies in the original PPP regulations and passed the PPP Flexibility Act. This bill modifies provisions related to the forgiveness of loans made to small businesses plus provides additional funding for loans.
The key provisions of the new legislation are:
• extended the covered period for loan forgiveness from eight weeks to 24 weeks
• reduced the amount of the loan needed for payroll from 75% to 60%
• allowed 40% of the loan for expenses such as rent, mortgage payments, utilities, and loan interest, up from 25%.
• clarified the self-employed as qualifying businesses.
PPP – Questions and Clarifications
Self-employed – Solopreneurs: The original rule was that the loan could equal a maximum of 2½ months of the “bottom-line” of 2018 IRS form Schedule C. So, for example if that number was $120,000 the maximum loan amount would be $25,000 … $120,000 divided by 12 multiplied by 2½.
The rule has been changed to cap the forgivable loan amount at $20,883. Any excess is to be repaid to the lender and in turn returned to the IRS. Note: There is speculation that there may be a further revision to permit some additional forgiveness amount.
When Can Loan Forgiveness Be Requested: A major question about the new rules is whether a borrower must choose to apply after eight weeks or must wait for 24 weeks. Here’s an outline of the rule:
• Application may be made anytime between eight and 24 weeks or before the maturity date of the loan. Note: Early reports indicate that many banks are not yet accepting applications.
• Borrowers who received loans prior to June 5 can elect eight weeks as the covered period prior to applying for forgiveness, and borrowers have 10 months from after the covered period ends to apply for forgiveness.
• Note: There is a change to the above rules if a borrower has reduced salaries or wages of employees by more than the 25 percent allowed under PPP. It’s somewhat complicated, so suggest you contact Blair + Assoc for further clarification of how it may apply to your unique circumstances.
• There may be further complications if head count under the 8-week rule and the expanded 24 week provision are different. If head count remained stable … not to worry.
Taxability: From the inception of the PPP, borrowers’ expectations have been that deductions for expenses funded with “forgivable” loans would not result in taxable income. For example, a $100,000 loan applied to payroll would result in ultimate forgiveness of the loan while permitting a tax deduction for the corresponding payroll expense.
In a recent notification, the IRS was specific in clarifying that no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
This is likely to be highly debated and subject to interpretation and perhaps revision. Right now, it presents a decision point as to when to apply for forgiveness and how to treat expense deductions for items to which the PPP loan funds were applied.
Summary & Takeaways
On balance the PPP has proven to be a transitional boon during the economic and health scourge of C-19. As with any new, complex set of regulations there are unintended consequences, ongoing IRS guidance and the potential for continuing revisions.
So, you get the picture. “We Don’t Know What We Don’t Know!” There are many questions … some answered and more yet to be. Stay tuned. We’ll keep you posted as further developments surface.
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