Paycheck Protection Program Flexibility Act of 2020 (PPPFA)
Over the last two weeks major developments have occurred with the signing of the Paycheck Protection Program Flexibility Act (PPPFA) and this week’s release of the updated loan forgiveness application(s).
The revised loan forgiveness applications hope to provide a more efficient process to make it easier for businesses to understand their full forgiveness. Although these new developments bring some much needed relief and guidance, in some situations the Treasury and SBA has put forth rules and instructions that are inconsistent with the law which adds confusion – and we have become accustomed to be left wondering what will be next and when clarification will come for certain items. Let’s break it down:
What has gotten better
It is important to remember that the borrowing under the PPP loan program was based on 2.5 months of a borrower’s 2019 payroll spend PLUS certain benefits. The original loan forgiveness provisions provided for only an 8-week covered period. Now with the PPPFA, forgiveness provisions have tripled that spending to a 24-week period. This is a major relief for all, but especially beneficial to companies that have not yet fully scaled up their operations. This expanded period increases the total qualifying payroll to over $46,000 per employee except for owners.
Another major change is the lowering of the required spend on payroll and benefits from 75% to 60% along with clarification that this is not an all-or-nothing proposition (either meet the 60% test or you get no forgiveness). Rather, it will be proportional so that if you spend only 59% on payroll, you will have some of the loan forgiven.
Effectively you only need to be at about 27% of the 2019 payroll levels you used on your borrowing base since you have 24 weeks to spend 60% on borrowing based on about 11 weeks (2.5 moths). For example, and excluding benefits for simplicity, if you had an average of $100,000 of monthly payroll in 2019, you would have borrowed $250,000. You now need to spend 60% or $150,000 over 24 weeks which is about $27,000 monthly or 27% of your 2019 average. Of course, you still must meet the other spending criteria, the FTE rules and are limited with owners’ compensation – not under the law but per the SBA’s instructions.
This expanded covered period also makes it much easier for borrowers to fill up the non-payroll bucket with rent, utilities and interest. This had been a significant challenge for many.
Another positive but rather intriguing change is the addition of another safe harbor law for the FTE calculation, which provides relief if a borrower is unable to return to the same level of business activity as they were accustomed to operating at before February 14, 2020 due to compliance with established requirements or guidelines issued by the Secretary of Health and Human Services (HHS), the Director of the CHC or OSHA. Given the broad guidelines that imposed many practical restrictions on businesses, a simple but maybe liberal reading could lead one to question: Who would not qualify for this?
The SBA has also released an EZ application that requires fewer calculations and less documentation for eligible borrowers. This application can be used by:
- Self-employed individuals with no employees
- Anyone who didn’t reduce any salary or hourly wage by 25% and didn’t reduce hours
- Anyone who meets the new FTE safe harbor and the 25% reduction limit
Where they came up short
In the new forgiveness form instructions, the SBA has limited owners’ compensation to the 2.5 month borrowing base. While this is an increase from the $15,385 to $20,833, it is not how the law is written or applied to non-owners for the 24 weeks.
They also clarified that most owner employees cannot add on health insurance or retirement benefits. Based on the instructions to the PPP schedule A, health insurance cannot be included except for owners of C corporations, and retirement plan contributions cannot be included for any non-corporate owner (self-employed individuals or partners). However, it specifically mentions “general partners” with no reference to LLC members – it is unclear whether there is some distinction or not. The rational is that these items are already included in the owner’s compensation, but it fails on true economics. For example, an S corporation shareholder’s health insurance is included in their W-2 if they own more than 2% of the stock but it isn’t for a non-owner employee. For an employee with a salary over $100,000, they can count their health insurance, but an owner cannot which causes a different economic answer.
In addition, the PPPFA did not address the IRS ruling that expenses paid with funds from the loan that are forgiven will not be deductible. This is inconsistent with the expressed intent of Congress and leaves many unanswered questions including how to handle payments of non-expense items such as payments of prior year accrued profit sharing or partner income allocations that qualify as payroll but are not an expense.
Interestingly, the application has an expiration date of October 31, 2020 which is likely before most borrowers can even apply. It is also unclear if you can apply once you have met the spending amounts as the FTE test is based on the earlier of the entire covered period or a restoration provision of December 31, 2020.
There has also been discussion on automatic forgiveness for smaller loans but so far nothing official has been put out on this. We look forward to further guidance which hopefully will include examples and specifics on timing of applications and well as a reversal of the IRS ruling on tax deductibility.