On Friday May 28th, the House passed the Paycheck Protection Flexibility Act of 2020. This bill, while obviously not law unless it passes the Senate eases restrictions on the use of PPP funds. This is a very narrow bill and my feeling is while there will be revisions to this bill or changes when it is reconciled with a Senate proposed bill this bill is worth discussing.
Proposed Changes to PPP Loan Proceed Forgiveness
Covered Period
This bill proposes changing the covered period from 8 weeks beginning on the day proceeds are received by the borrower to the earlier of 24 weeks or December 31, 2020. While I do not know what the Senate response to this will be, I did see an interview earlier this week where Marco Rubio (republican senator) was discussing a 16-week covered period. I believe this to be encouraging because it appears that borrowers should be getting an extension beyond the 8-week covered period.
Restoration date for FTE count
The law, as currently written, allows employers whose Full time equivalent (FTE) employee count has fallen to restore the workforce by June 30th and avoid a reduction in PPP loan forgiveness. Part of forgiveness is calculated by looking at the total FTEs a business had in place and if that number has dropped, forgiveness of loan proceeds is reduced. Let’s take an example where an employer has 3 full time employees (40 hours per week employees) and 2 part time employees (20 hours per week each). The calculation would assign each full-time employee a value of 1.0 and each of the two-part timers would count as 0.5 FTE. Based on this calculation the employer would have a total of 4.0 FTEs ((3 X 1.0) + (2 X 0.5)). If the employer receives PPP money but based on reduced business hires back 2 full time employees and the two-part timers then the FTE calculation is reduced to 3.0. This would cause a reduction in loan forgiveness, however, if the employer rehires one full-time employee (or 2 part time employees) by June 30th, then there will be no reduction. This bill changes the June 30th date to December 31, 2020.
Additional Section added Based on Employee Availability
The bill adds a new paragraph to the existing law which states the following:
(7) EXEMPTION BASED ON EMPLOYEE AVAILABILITY.—During the period beginning on February 15, 2020, and ending on December 31, 2020, the amount of loan forgiveness under this section shall be determined without regard to a proportional reduction in the number of full-time equivalent employees if an eligible recipient, in good faith—
“(A) is able to document—
“(i) an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and
“(ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
“(B) is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.
The above standard gives employers additional protection against having their forgiveness reduced if circumstances out of their control prevent them from restoring their workforce to pre pandemic levels.
Change to the 75% Payroll cost rule
Currently, to receive forgiveness, borrowers must spend 75% of the forgiven amount on payroll costs. The bill proposes changing the parameters from a minimum of 75% payroll costs to 60%. This would mean that up to 40% would be allowed to be spent on nonpayroll costs. Nonpayroll costs include rent, utilities, and mortgage interest.
Change in Loan Deferral Period
The law currently allows a deferral of loan repayments on any portion of PPP proceeds not forgiven for 6 months after receiving the proceeds. This bill changes this to the date on which the amount of forgiveness determined is remitted to the lender or a maximum of 10 months after the last day of the covered period if the borrower does not apply for forgiveness within 10 months after the last day of the covered period.
Change in Repayment Period
The law currently allows loan proceeds to be repaid over two years at one percent interest. This bill changes the repayment period from two years to five years.
Key Item excluded
Deductibility of expenses paid with PPP forgiven funds. I have discussed in previous writings that the IRS has ruled that since PPP funds forgiven are considered nontaxable income, then expenses paid with these funds (both payroll and nonpayroll expenses) are not considered deductible. 19 senators, in a bipartisan effort, sent a letter to Treasury Secretary Mnuchin declaring this was not the intent of the law and they would like a ruling that allows expenses paid with PPP funds to be deductible even though the proceeds are not taxable. My belief is the easiest way to fix this would be for congress to pass a provision that allows these expenses to be deducted.
Conclusion
Although this bill passed the House only and has not been presented to the Senate, it passed 417-1, therefore I believe that while these provisions will be tweaked, we are getting closer to seeing more clarification on PPP forgiveness.
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Hang in there and stay safe,
Jeff Skolnick, CPA, M.S. Taxation