the US Senate unanimously passed the House bill that brings some further clarity to the PPP Loan Forgiveness plan. The new law named the Paycheck Protection Flexibility Act includes several monumental changes to the PPP Loan program. As of the drafting of this message, we are still awaiting the President’s signature. Given that the covered period on some of the earliest loans is coming up to eight weeks very soon, conventional wisdom indicates he will sign it.
Here is a brief synopsis.
- Safe harbor.
While there is still a bit of a safe harbor on SBA review for loans under $2 million, the SBA clarified that they may still review loans of any size in terms of the actual need the business had for loan and will consider whether the business could have obtained credit elsewhere or whether the business had excess liquidity it could have used instead of this particular loan. Speculation is this will be applied to some of the larger loans obtained by large public company, but the SBA wants to be clear that it has the authority to review any loan.
- Document retention.
Employers need to retain loan-related documents used to obtain forgiveness for six years. Important documents include payroll records, lease agreements, utility bills and cancelled checks.
Upon filing the forgiveness application, banks will have 60 days to review the material followed by a 90 day period for the SBA to review (total of about 5 months). It is unclear at this point what the timing of the filing of the forgiveness application is.
- Borrower responsibility.
Borrower bears the sole responsibility for calculating forgiveness. Banks are charged with reviewing the application in good faith. Initially the banks were responsible for calculating forgiveness.
- Loan repayment period.
New loans will have a repayment period of five years from the current two years. Existing loans can increase the repayment period to five years IF the bank AND the borrower agree. Speculation is the bank will agree in most cases.
- Covered period extended.
The covered period will be pushed from 8 weeks to 24 weeks from the date of the loan. Everyone saw this one coming and it is definitely good news for most borrowers. Borrowers retain the option to stick with an 8 week period.
- Rehire staff extended.
The date to rehire pre-COVID staffing levels has been changed from June 30, 2020 to December 31, 2020. This is huge for businesses that have not fully restaffed due to lagging business, especially in areas hurt by the ongoing protests.
- Rehire exemptions granted.
Two really big developments here. Borrowers may claim a forgiveness reduction exemption if you made good faith efforts to rehire former staff AND replace them with similarly qualified staff but were unsuccessful. Documentation will be key here. You must maintain records of communications with former and prospective employees as well as documentation of the efforts made.
In a bow to the restaurant business, which was very active lobbying in this process, an exemption may be claimed by businesses that are unable to return to former staffing levels as a result of health-related requirements or guidances from CDC, HHS, local health depts and others. This is very good news for the restaurant / bar business (among others) that may be slower to come back due to COVID related rules.
- Employer match on social security payroll tax (6.2%) deferred.
Under the previous plan, employers could either delay paying this tax OR get a PPP loan. Now employers who choose to may do both. The first half of the deferred tax is due Dec 31, 2021 and the second half a year later.
- The payroll percentage requirement reduced to 60%.
In order to prevent forgiveness reduction, borrowers had to spend at least 75% of loan proceeds on payroll. That number has now been reduced to 60%. There is a big caveat here though, at least for now. If your other allowable expenses exceed 40% of loan proceeds, then none of those expenses will be forgiven. This is likely to change back to the former sliding scale of the previous plan.
- What’s next?
There are still over $100 B in funds available. If you haven’t applied and your business has been negatively impacted by COVID, there is still time. There may be a deadline of Jun 30 imposed, so if you want to, do it now.
There is a strong lobbying effort underway by the banking business for automatic forgiveness of any loan under $150,000. These loans account for 86% of the loan volume but only 26% of the loan values. Banks figure it will save them millions of hours and as much as $7B in not having to review forgiveness applications for these loans. That is a strong argument from a traditionally powerful lobby.
The text of the law can be found here.