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Key Takeaways:
More time to use PPP loan proceeds and hire employees.
Employers might not be penalized if they can’t restore headcount.
Only 60% of PPP loan has to be used for payroll costs.
More time to repay unforgiven amounts
A new bill was passed yesterday that relaxes rules related to PPP loans. The new rules will make it easier for some borrowers to reach maximum forgiveness and may make PPP loans more attractive to businesses who have not yet applied. The program still has $120 billion to lend. Applications must be submitted by June 30th.
Please keep in mind that the bill does not become law until signed by the President, which is expected in the coming days.
Quick PPP Recap: PPP loans are available to employers impacted by COVID-19. The maximum loan amount is 250% times average monthly payroll. The loan program is intended to encourage employers not to terminate employees. Employers who use PPP funds for certain purposes – primarily to cover payroll costs – may have all or part of the loan forgiven, meaning they might not have to repay the loan. Any portion of a PPP loan that is not forgiven must be repaid.
Extended time to rehire employees and use loan proceeds.
Old Rule: 100% of a PPP loan could be forgiven if Employers restored their workforce to pre-COVID levels within 8 weeks after their loan was approved. PPP loan proceeds must be spent during this 8-week period.
New Rule: Loan recipients can choose to extend the time period to spend the loan from 8 weeks to 24 weeks (no later than December 31st) and now have until December 31st to restore their workforce. The 24-week period will automatically apply to employers who receive PPP loans after the law goes into effect.
Practical Impact: If you have already restored your workforce and expect to qualify for 100% forgiveness, then consider sticking with the 8-week period. Speak with your accountant first to see if you might benefit from deferring payroll taxes (discussed below). If you are struggling to spend the entire loan proceeds, consider extending to 24 weeks. Either way, contact your bank to discuss how to elect the appropriate time period.
Allowable reasons for not rehiring 100% of pre-COVID workforce
Old Rule: Forgiveness will be reduced if an employer does not restore workforce to pre-COVID levels, unless the employer can show they tried, but were unable to rehire terminated employees or find “similarly qualified employees.”
New Rule: In addition to the old rule, employers who cannot restore their workforce to pre-COVID levels may still be eligible for 100% forgiveness if they can document an inability to return to the same level of business activity as prior to February 15, 2020 due to complying with Federal guidelines issued after March 1st related to sanitation, social distancing, and worker or customer safety requirements.
Practical Impact: Don’t feel bad if you re-read the last sentence multiple times and still have no idea what it means. It is entirely unclear how “same level of business activity” will be measured or what employers will need to show to prove sanitation, social distancing, and worker or customer safety requirements kept them from returning to pre-COVID business levels. Be certain that you will have to provide ample documentation, and the more clearly your documentation tells your story the better. At a minimum, you should have the following:
Accurate financial statements that show pre- and post- February 15, 2020 revenues and profits
Year-to-year and month-to-month comparisons that show your financials were negatively impacted by COVID
A report with pre- and post-COVID headcount along with a rational explanation of how reduced revenue necessitated reduced headcount
If your business was “non-essential” and required to close, copies of the applicable laws and orders that show when the requirement to close began and when it was lifted
A written “return to work” plan or written policies that show the sanitation and safety measures you put in place and how those measures relate to applicable Federal guidelines from the CDC, OSHA, or HHS. We recommend you print out copies of the guidelines now.
Copies of communications with employees and customers about the sanitation and safety measures you took during COVID
Copies of any government-provided materials you relied on when figuring out how to operate your business during the pandemic
More flexibility to spend loan proceeds
Old Rule: PPP loans would not be forgiven unless 75% is spent on payroll costs.
New Rule: 60% of the loan proceeds must be used for payroll costs.
Practical Impact: Employers who couldn’t spend 75% of the loan proceeds on payroll costs now have an opportunity to reach 100% loan forgiveness. Other eligible expenses include interest (but not principal) on mortgages or other existing debt; rent; and utilities. If you have excess PPP funds, use them for these expenses. Note you will likely need to take advantage of the new 24-week time period to do so.
More time before repayment
Old Rule: PPP loan recipients must begin repaying unforgiven loan amounts within 6-12 months of the loan date. PPP loans mature in two years.
New Rule: Repayment beings either (a) when the amount of loan forgiveness is remitted to the lender or (b) for borrowers who do not apply for forgiveness, 10 months after the last day the borrower could have applied for forgiveness. PPP loans mature in five years.
Practical Impact. This rule change suggests that the loan forgiveness process is going to move slowly. Be mentally prepared to not know how much of your PPP loan is going to be forgiven for a long time. At least you will have more time to repay any unforgiven portion of your loan.
Payroll Tax Deferral
Old Rule: PPP loan recipients whose loans are forgiven cannot defer remitting payroll taxes to the Federal government.
New Rule: Payroll taxes can be deferred.
Practical Impact. New rules have been implemented by the IRS to allow employers to delay paying payroll taxes. This is purely a cash flow issue. Talk to your accountant to see if you might benefit from deferring payroll taxes.
As with all things PPP related, the new rules leave many questions unanswered. We will continue to give you practical updates to help navigate the uncertainty.
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