For many businesses, the Paycheck Protection Program (PPP) under the CARES Act has been a lifeline to continue to pay employees and to generally stay in business altogether. Most businesses that sought PPP money have received funding, and are now considering how they will fare under the PPP rules for loan forgiveness as the end of the original 8-week “covered period” was approaching quickly, and the anxiety about how this would work was building.
On June 5, 2020, the President signed the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”). The bill had previously passed the Senate by unanimous consent, and passed overwhelmingly by the House.
The Flexibility Act makes the following changes –
- Changes the covered period from 8 weeks to 24 weeks, but not beyond December 31, 2020. The additional 16 weeks should make all of the difference to many clients in being able to spend all PPP funds on employee compensation.
- Some businesses would prefer to keep the prior 8-week testing period due to the nature of their business, and perhaps their facts provide for full forgiveness with only an 8-week testing period. These businesses will be able to elect to keep their original period.
- Provides that the core forgiveness requirement that 75% of the funds must be spent on payroll expenses to receive full loan forgiveness is now moved to 60%. Unfortunately, the wording of the provision indicates that this is now a cliff test, not a pro-rata test. The original 75% test allowed for forgiveness of most of the funds for those who were just short of this target (a pro-rata test), but the new 60% test appears to say that failure to meet the 60% would result in NONE of the loan being forgiven (a cliff test). The concern over this wording caused the Senate to hesitate before passing the bill, but ultimately they passed the bill as it was written in the House.
- Moves the full-time equivalent (“FTE”) tests from June 30 to December 31. This test allows a business that was forced to lay off, furlough, or reduce wages to their employees during the pandemic to return back to normal full-time equivalents by December 31 and receive no reduction to their loan forgiveness amount.
- Creates an exception for the FTE tests for businesses such as restaurants, hotels, and entertainment venues that are “… 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 health and safety compliance requirements.
- Extends the repayment period from two years to five years for PPP funds that are not forgiven.
- Allows PPP participants to defer employer FICA payments. The CARES Act provided that those businesses participating in the PPP funding could not use the alternative tax relief of a deferral of employer FICA taxes. The Flexibility Act removes that CARES Act provision, so now these PPP participating businesses can utilize that relief as well.
Things we still do not know
- Will the new 60% payroll spending requirement be a cliff or pro-rata test? UPDATE. On Monday June 8, 2020, the SBA issued a joint statement with Treasury Secretary Mnuchin to say that the Flexibility Act will be administered in a pro-rata manner, not with a cliff test.
- When can or do businesses apply for forgiveness? Is there a deadline?
- Will the expenses paid with PPP funds be deductible (see the next section)?
Where do we go from here?
Businesses seeking guidance on how their forgiveness application will fare should stand by for revising guidance from the SBA after passage of the Flexibility Act.
It is unlikely that we have heard all developments in the tax issues of the PPP regime. Previously, the Internal Revenue Service issued Notice 2020-32 where the agency published their position on the taxability of such funds. The CARES Act provides that the forgiven funds are tax-free, but the Notice said that the expenses paid with the tax-free funds are now not deductible. Many legislators have said that this position does not reflect the intent of the CARES Act, and are considering legislation to change this position. Senate Bill 3612, the “Small Business Expense Protection Act of 2020” would provide that the expenses paid with PPP funds would remain deductible. Given the broad-based support for this clarification and for the Flexibility Act, it seems that both of these changes could have been enacted together. But that did not happen. Further, S.3612 would also stipulate that the business owners would get an increase in basis for these funds.
Businesses that are projecting their income for 2020 should stay informed on these developments as these will dramatically impact the tax effect of 2020 operations. Your DMJ contact can help you will these matters, and stay tuned for further developments.
Please contact us if you would like to discuss further.