The Latest PPP Loan Revisions that Borrowers Need to Understand
It seems that much of the PPP- induced anxiety has dissipated over the last few weeks. Maybe it is the impact of the borrower favorable provisions of the Paycheck Protection Program Flexibility Act, the fact that most borrowers who sought funds have now received them, or perhaps it is just PPP fatigue. The fatigue is understandable. On June 14, The Wall Street Journal reported that the “Treasury Department and SBA have issued 18 “interim final rules” and 48 pieces of guidance in the form of “frequently asked questions” for the program” since it launched in April. The fatigue is real and understandable; the last few months have felt like an eternity. Nevertheless, there are some important points to highlight from the Act and the SBAs subsequent issuance of rule revisions and loan applications that borrowers need to understand.
The Act made several changes of real significance. The first was to give borrowers more time to spend the funds to qualify for forgiveness by extending the Covered Period from 8-weeks to 24-weeks. This change is for all loans issued under the program with one exception. Borrowers with loans issued before June 5, 2020, may elect to retain the original 8-week Covered Period. We get many questions on this change, and based on our reading of the Act, we understand that:
- The 24-week Covered Period is automatic for all loans regardless of when they were issued.
- Only borrowers with loans issued before June 5, may elect to use an 8-week Covered Period.
- Borrowers may not elect a period of another length, for example, ten weeks.
The second significant change was to increase the amount of non-payroll costs eligible for inclusion in the forgiveness calculation from 25% to 40%. Non-payroll expenses include mortgage interest, rent, and utilities. This change is particularly impactful for businesses that could not fully reopen or those with higher rent and other overhead expenses. Correspondingly, the requirement to use 75% of the loan proceeds for payroll costs changed to 60%. Initially, based on the wording in the Act, there was concern that 60% was an absolute threshold for forgiveness that would prevent any forgiveness if the borrower did not reach the 60% threshold. In the revisions issued on June 16, the SBA clarified that the 60% is a sliding scale similar to the 75%, and not an absolute threshold.
Along with lengthening the Covered Period, the Act extended the FTE reduction and salary reduction safe harbor dates from June 30, 2020, to December 31, 2020. Borrowers now have until December 31, 2020, to restore FTE and salary levels to avoid forgiveness reductions.
The Act also changed the maturity of all loans issued after June 5, from two to five years. Loans issued before June 5, retain the original maturity of two years unless the borrower and the lender mutually agree otherwise.
The SBA has subsequently clarified a few additional items that the Act did not address. One of the questions on the longer Covered Period was whether or not this changed the amount of cash compensation per employee eligible for forgiveness. Under the 8-weeks, the maximum cash compensation per employee borrowers could include in the forgiveness determination was $15,385, and the Act didn’t specify if this amount increased when the Covered Period increased to 24-weeks. The SBA has clarified that the amount of cash compensation per employee eligible for inclusion in the 24-week Covered Period is $46,154.
It is important to note that this does not apply to owner-employees. Borrowers may not include more than $20,833 for cash compensation paid to owner-employees during the 24-week Covered Period. The limit for the 8-week Covered Period for owner-employees remains at $15,385. There are other factors to consider when determining the amount of eligible owner-employee cash compensation to consider, and borrowers should work with their advisors to ensure understanding.
Finally, the SBA has issued new loan forgiveness applications. The previous form has been updated for the changes brought about by the Act. They also issued a simplified form “EZ”. Borrowers can use this form if they meet one of the following conditions. These are summarized for brevity, and we encourage you to read the full definition if you think they might apply to you.
- The borrower is a self-employed individual, independent contractor, or sole proprietor who did not have any employees at the time of the loan application and did not include any employee salaries in the calculation of average monthly payroll used in the loan application
- The borrower did not reduce the annual salary or hourly wage of employees by more than 25% during the Covered Period and did not reduce the number of employees or average paid hours during the Covered Period.
- The borrower did reduce the annual salary or hourly wage of employees by more than 25% during the Covered Period and was unable to operate during the Covered Period at the same level of activity as before February 15, 2020, due to federal, state or local requirements, such as stay-in-place orders.
The subtitle to The Wall Street Journal’s June 14, article reads, “Repeated changes to program complicate process of getting loans forgiven, raise prospect of costly errors; looks like the bar exam.” Truer words have not been written. We believe many small businesses will struggle with the process, and we are finalizing our templates to ensure we are prepared to support you. Please contact us to discuss how we can best do just that.