Yesterday evening the Senate unanimously passed the Payroll Protection Program Flexibility Act of 2020 (H.R. 7010), with no changes to the House-passed version. The bill now goes to President Trump’s desk for signature. The bill brings significant relief for small business owners who have been struggling for months to comply with the provisions of the poorly executed Paycheck Protection Program. The bill, only four pages long, focuses on providing more flexibility for business owners to qualify for loan forgiveness, a cornerstone of the original CARES Act legislation passed on March 27, 2020. The provisions of the bill include:
• Extends the covered period, which is currently eight weeks, to the earlier of 24 weeks or December 31, 2020. This would give the business owners more time to use funds for qualified expenses, such as payroll costs, and apply to have them forgiven.
• Changes the 75/25% rule for spending PPP funds to 60/40%, which relaxes the amount mandated to be spent on payroll costs during the covered period. With the extension of the covered period, there is a significant chance that 100% of the PPP loan proceeds could be forgiven. However, the way the provision is written it also appears to create an “all or nothing” result wherein if the borrower does not spend 60% of the proceeds for payroll costs, then no part of the loan will be forgiven. We may see some “clarification” on this, however it is not clear if this was an intended compromise or not.
• Doubles the term of the loan from 2 years to 5 years at 1% interest on any amount of the loan that is not forgiven.
• Extends the June 30, 2020 deadline to December 31, 2020 to rehire employees. It also expands the exceptions to rehire employees to include several additional new provisions, with one significant addition being an “inability to return to the same level of business activity as such business was operating at prior to February 15, 2020.” If the business can demonstrate its continued reduced capacity, the FTE/wage requirement reductions could be waived. With this extension and added exception, it is likely that many businesses may not have to deal with the cumbersome and complex rules for reducing the amount of the loan which is forgiven. Many businesses should now have the time they need to rebuild their businesses and get people working again in time to qualify for loan forgiveness.
• Lifts the prohibition to defer FICA taxes for businesses that have any part of their loans forgiven. The bill allows all PPP borrowers to utilize the section 2302 credit for the full year until December 31, 2020.
• Provides an exception for any business that wishes to continue to use the eight week period may make this election. It is unclear as to whether this election will require the application of the old 75/25% rule or if the new provisions of the bill would be used in the loan forgiveness calculation. But for those businesses that have spent the proceeds and are ready to apply for forgiveness, this provision will allow them to do so without having to wait until December 31, 2020.
Over the next few weeks it is highly likely that the Treasury and SBA will issue new FAQs to clarify these new provisions. Issued FAQs and guidance, such as the maximum $15,385 for employee and 8/52 for owner wages (which will likely be updated for the extended period to $46,153 and 24/52 respectively), when loan forgiveness can be applied for (i.e. will the borrower be able to apply prior to December 31, 2020?) and many other rules will need to be revised.
The Treasury and SBA are working to get 25-30 FAQs ready to release pending the outcome of this bill. The provisions of H.R. 7010 would bring welcome breathing space for business owners to survive the shutdown, shelter in place and stay at home orders issued to combat the COVID-19 Pandemic. It is expected that President Trump will sign the bill this week. With the passage of this bill, PPP borrowers will stand a significant chance of getting their loans forgiven, which will bring vital resources to business owners to reopen and rehire their employees in a timeframe that makes more sense.
You may view a copy of the bill here.
We will continue to keep you updated. Should you have any questions, please don’t hesitate to reach out to your tonneson + co representative.