Paycheck Protection Program Flexibility Act and Forgiveness Update

By July 15, 2020Small Business

The Paycheck Protection Program Flexibility Act was signed into law on June 5, 2020 creating a number of great provisions for existing and future borrowers. I have spent the past few weeks seeing what additional guidance would come from that act and now have a good understanding of how businesses should proceed.

Positive Changes

The Paycheck Protection Program Flexibility Act provided many changes that were beneficial to borrowers:

  • 24-week coverage period – Borrowers can use 24-weeks towards forgivable expenses. The 8-week coverage period is still and option for those who obtained a loan before June 5, 2020
  • EZ Form – there is also an EZ Forgiveness Application form for those who meet one of the following conditions:
    • The Borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form
    • The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent AND the Borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period.
    • The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent AND the Borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by HHS, CDC, or OSHA.
  • Loan Terms – new loans can now have the term of 5 years. Loans before June 5, 2020 may be extended if mutually agreed upon between the borrower and lender.
  • Forgiveness timeline – borrowers now have 10 months after the end of the covered period (24-weeks) to apply for forgiveness. They can also defer principal and interest payments for that time as well.

Forgiveness Considerations

With the changes in the program, here are some points to consider:

  • 24-Week Coverage – this is automatic and there is no paperwork to assume this
  • Maximum Forgivable Compensation – with the 24-week coverage period, the maximum an employee can be paid and forgiven is $46,154
  • Owner Forgivable Compensation – Owners now have a different set of rules for what compensation can be forgiven:
    • Based on a calculation of 2.5 months of 2019 compensation
    • Capped at $15,385 for an 8-week coverage period
    • Capped at $20,833 for the 24-week coverage period
  • Early Forgiveness Application – borrowers can apply for loan forgiveness before the end of the covered period if the borrower has used all of the loan proceeds for forgivable expenses.
    • What hasn’t been specified is whether the maximum payroll costs will be prorated, but that is a likely possibility.

 Your Loan is Public

In my May 4, 2020 article, Paycheck Protection Program Round 2 – Update on Loans and Forgiveness, I noted that loans might be public. That came true on July 6 when the Treasury Department released information on Paycheck Protection Program (PPP) loans.

If you loan was under $150,000, your information was anonymized. If it was $150,000 or more, the following information was listed:

  • Loan Range: ranges are $150k-350k, $350k – $1M, $1-2M, $2-5M, $5-10M
  • Business Name
  • Business Address
  • Business NAICS Code
  • Business Type
  • Owner’s Race \ Ethnicity
  • Owner’s Gender
  • Owner’s Veteran Status
  • Non-Profit – whether a non-profit or not
  • Jobs Retained – this was the jobs listed on the application
  • Date Loan Approved
  • Lender

This is where media outlets are getting information for borrowers for their story. The full story is more than this information on a spreadsheet but be aware in case you get spotlighted.

Changes That Didn’t Happen

The biggest change that still hasn’t happened (and really needs to) relates to tax consideration of forgivable expenses. The IRS has stated that forgiven expenses will not be considered deductible expenses effectively reducing a business’ tax deductions and creating greater tax liability.

There are many bills that are looking to change this, but it is a risk that businesses need to consider if it isn’t changed. The biggest action item is to set aside a portion of fund to cover the taxes should this remain in place. Fortunately, we have many months to see how this plays out.

Our Recommendations

In the early days of the Paycheck Protection Program, we saw a desire to maximize forgiveness on the 2.5 weeks of payroll costs in the 8-week coverage period. This resulted in unnatural actions like unplanned bonuses and extra payroll runs. With the 24-week coverage period, our guidance now as it was then is as follows:

  • Spend wisely and naturally – we don’t know the economic future and you just may need those dollars in week 24 and not just week 1-10
  • Take the 24-week period and don’t feel a need to rush the forgiveness application
  • Be aware of the tax liability and encourage your legislators to overturn the IRS guidance so that forgiven expenses can also be tax deductible
  • The direction of this program is positive so we can assume improvements

On that last note, the program application date was extended to August 8. Most small businesses without good accountants are the ones who didn’t apply and probably need the most help.

There has been much criticism of the PPP for perceived abuses (and in some cases real abuses), but we at LedgerGurus have seen the difference it has made in many businesses and thank Congress and the Executive Branch for this program in an economically challenging and uncertain time.