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Paycheck Protection Program Flexibility Act of 2020

 

Last week, we posted a series of recommendations regarding PPP forgiveness. We cautioned that bills in front of congress could drastically change the program.

Yesterday, Congress passed the Paycheck Protection Program Flexibility Act of 2020.  When signed by the President, this bill will dramatically increase the likelihood of full loan forgiveness for most borrowers. The most impactful change will be increase of the covered period from 8 weeks to 24 weeks.

Some lawmakers have stated they will continue to work on legislation to close loopholes. While this is good news, it appears it will be some time until we have final legislation and guidance to hang our hats on.

As we continue to navigate this process together, we summarized the bill and its initial impact in the following sections. Note: all commentary assumes the bill is signed into law.

  1. Likely PPP Changes
  2. Potential Pitfalls
  3. Open Questions
  4. Updated To Do List

The Kane Firm will continue to monitor the new legislation, SBA and IRS guidance and keep you apprised of changes.

 


SUMMARY OF CHANGES

Assumes Presidential Approval of the Paycheck Protection Program Flexibility Act of 2020

 

 

 

Old  

New

Terms

 

 

 


2 years at 1% interest

 

 

 


Loans Made After Passage: 5 years at 1% interest

 

Loans Made Before Passage: Lenders and Borrowers can renegotiate to match the 5 year term at 1% interest.


 

Forgiveness Application Deadline


 

Undefined


10 months after the last day of covered period


 

First Payment Due


 

7th month after receiving funds.


The date forgiveness is remitted to the lender.


 

Covered Period


 

8 Weeks


 

24 Weeks

(However, borrowers can choose the original 8-week period)


 

 

Payroll / Non-Payroll Cost Mix


 

Payroll: 75%

Non-Payroll: 25%


Payroll: 60%

Non-Payroll: 40%

Of Loan Proceeds (**See Potential Pitfalls**)


 

 

Last Date to Restore Employees


 

6/30/2020

 


 

12/31/2020

 


Exceptions from FTE Reduction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employees:

  • Fired for cause
  • Voluntarily resigned
  • Voluntarily requested reduction in hours
  • Rejected a written, good faith offer to return.

 

 

 

 

 

 

 

 

Employees:

  • Fired for cause
  • Voluntarily resigned,
  • Voluntarily requested reduction in hours
  • Rejected a written, good faith offer to return.

Business

  • Could not rehire 2/15/20 employees
  • Could not rehire qualified employees before 12/31/20
  • Inability to return to the 2/15/20 level of business activity due to COVID-19 government requirements.

 


POTENTIAL PITFALLS

 

  • Forgiveness Cliff. At least 60% of the loan amount must be used for payroll costs to receive any forgiveness.Payroll costs include wages, bonuses, commissions, employer paid health and retirement benefits, and state or local employer taxes.While there are rumors that this will be softened in the subsequent SBA guidance, we would recommend planning to spend a minimum of 60% of the funds received on payroll costs in the covered period for the time being. Assumes Presidential Approval of the Paycheck Protection Program Flexibility Act of 2020
    • UPDATE: In the June 8, 2020 press release, this administration eliminated this cliff:“If a borrower uses less than 60 percent of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs.”
  • Tax Year Problem. A month ago, the IRS ruled that expenses paid for with forgiven PPP funds are not tax deductible. This prevents doubling up on the tax benefit.However, with the new timelines, it is possible that forgiveness for some borrowers will not be determined until tax season 2021 or later.  Guidance is needed to for the circumstance that the loan forgiveness amount is not determined until after tax filing deadlines.  Additionally, the additional interplay with existing tax law.
  • More Legislation & Guidance to Come. Majority Leader Mitch McConnell stated that Senate Small Business and Entrepreneurship Chairman Marco Rubio, and Sen. Susan Collins will continue to work on technical fixes.

OPEN QUESTIONS

Assumes Presidential Approval of the Paycheck Protection Program Flexibility Act of 2020

  • With the expanded timelines, will the SBA maintain the magical “Paid or Incurred” language?
  • Will the limit of cash compensation per employee increase from $15,385 (to $46,153? (8/52nds of $100,000) vs (24/52nds of $100,000)?
  • If yes, will the limits on owner compensation increase to 24/52nds of 2019 compensation?
  • Will borrowers be able to apply for forgiveness at the point that all the funds have been spent and FTE’s restored? Or will borrowers be required to wait the full 24 week covered period (or longer)?

UPDATED TO DO LIST

Assumes Presidential Approval of the Paycheck Protection Program Flexibility Act of 2020

  • Reconsider Prepayments. Last week we advised to prepay expenses like rent, monthly leases, health insurance and pension plans. It is likely in most cases; this recommendation is no longer relevant.
  • Prepare for Forgiveness Cliff. Plan to spend 60% of the loan proceeds on payroll costs within the 24-week period to prevent loss of all forgiveness. Keeping in mind, subsequent guidance could ease this requirement.
  • Schedule Strategy Call. Schedule a phone call with us the earlier of 1. Spending all proceeds on eligible costs or 2. the 20th week after you received PPP funding. Together, we will develop a strategy to optimize the guidance issued at that time.
  • Keep in Contact with Your Banker. Maintain a strong relationship with your banker. Keep an eye out for trainings, calculation templates and tips.
  • Continue to Collect & Organize Documentation. The Kane Firm created a checklist available for download here.

FURTHER READING

Disclaimer: All Online PPP Resources are Regularly Updated. Be aware of version changes. You may need to clear browsing data to view the most recent version.

Nitty, Tony “Congress Agrees on Favorable Changes to Paycheck Protection Loans: What Does It Mean for Borrowers?”, Forbes

The Kane Firm COVID-19 Updates

 

 


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