PRESIDENT SIGNS PAYCHECK PROTECTION PROGRAM FLEXIBILITY ACT OF 2020 INTO LAW

On Friday June 5th, the President signed the Paycheck Protection Flexibility Act of 2020 into law. Although I do not believe this is the last of changes that will be made this program, it does offer help and clarification. I have summarized the law below. The provisions are exactly what I covered on Friday May 29th as the bill passed the Senate without any changes being made to the House version.

Changes to PPP Loan Proceed Forgiveness

Covered Period

This bill changes 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.

Restoration date for FTE count

The law, as originally written, allowed employers whose Full time equivalent (FTE) employee count had 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 had dropped, forgiveness of loan proceeds was reduced. Let’s take an example where an employer had 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 had received PPP money but based on reduced business hired back 2 full time employees and the two-part timers then the FTE calculation was reduced to 3.0. This would cause a reduction in loan forgiveness, however, if the employer rehired one full-time employee (or 2 part time employees) by June 30th, then there would be no reduction. This law changes the June 30th date to December 31, 2020. Additionally, while the simplified calculation assigns a value of 1.0 to each individual that works 40 hours or more and 0.5 to any employee that works less than 40 hours, businesses can use an actual percentages if it benefits them. Using the actual percentages would assign someone who works 35 hours as 0.875 (35 hours / 40 hours). Again, while this method is more tedious to calculate, businesses may use this method if it is more beneficial than the simplified method.

Additional Section added Based on Employee Availability

The law 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

Previously, to receive forgiveness, borrowers must have spent 75% of the forgiven amount on payroll costs. The law changes the parameters from a minimum of 75% payroll costs to 60%. This means that up to 40% can be spent on nonpayroll costs. Nonpayroll costs include rent, utilities, and mortgage interest.

Change in Loan Deferral Period

The law previously allowed a deferral of loan repayments on any portion of PPP proceeds not forgiven for 6 months after receiving the proceeds. This law 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 previously allowed loan proceeds to be repaid over two years at one percent interest. This law 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.

Join me, Every Monday at 12:30pm (EST) here: https://www.facebook.com/jeffcpaworld/

If you’d like to book an appointment with me, please click on the link below:

Hang in there and stay safe,

Jeff Skolnick, CPA, M.S. Taxation