The Paycheck Protection Program has given out over $511 billion dollars in small business loans since the program was put into effect.
The loans are forgivable as long as the funds are spent on certain areas of the borrower’s business such as payroll, health insurance, and utilities. However, the rules have been complicated and vague, making it difficult for small businesses to determine how and when to spend the funds to qualify for forgiveness.
The biggest challenge may be the requirement to spend the funds within the first 8 weeks following their receipt on permitted expenses in order to achieve loan forgiveness. The required spending categories aren’t always the best use of the funds for every business.
On top of that, many businesses, and entire industries, are still shut down, but are spending this money where it doesn’t make sense in order to apply for loan forgiveness. Or they’ve had to make the decision to spend the money elsewhere and either not have the loan forgiven at all, or have a portion of the loan forgiven.
To help ease this burden, on May 28th, the House passed the “Paycheck Protection Program Flexibility Act of 2020” (H.R. 7010), to help provide additional relief for borrowers.
This bill is now being considered by the Senate and tackles the following issues.
- Borrowers can extend the 8 week period to 24 weeks.
This will make it easier for borrowers to spend the money on approved expenses to achieve loan forgiveness. - The 75% rule becomes the 60% rule.
Under this rule, rather than requiring 75% of the funds to be spent on payroll expenses, 60% will be required to be spent on payroll to achieve loan forgiveness. - Penalties and Calculations for the Reduction in Workforce – June 30th rolled back to December 31st.
Currently, the forgiveness amount is reduced in proportion to the reduction of the company’s workforce during the 8 week period if the same number of employees are not hired or re-hired by June 30th. This new law would revise the 8 week period to 24 weeks and roll back the June 30th deadline to December 31st. - Some Businesses May Still Suffer
Some businesses will still be in trouble, while others may not when we begin to recover. - Exceptions For Businesses Who Tried To Rehire, But Couldn’t
An exception will be made for those businesses who tried to maintain their workforce, but could not, as long as one of two reasons is documented. - Loan Repayment Period Extended To 5 Years With 1% Interest
The repayment period for those businesses who don’t qualify for total loan forgiveness would be extended from 2 years to 5 years. - Two Year Deferral of Employer’s Share of Payroll Taxes for All Employers
Borrowers would be eligible for deferral of payment of the employer’s share of Social Security payroll taxes (6.2%), regardless of loan forgiveness. - Deductibility of Expenses Still an Issue
Whether or not money spent from PPP funds that are forgiven would or would not result in a tax deduction for the borrower is still unclear.
While the CARES Act is going to help many businesses in the long run, it also has the potential to be harmful to those who are not able to repay their loan in 5 years.
“While the result of this or similar legislation will be that fewer jobs come back immediately, and fewer workers will be off of unemployment because businesses will spend what remains of their PPP money more gradually, there should be a more efficient and effective use of the funds. This will give businesses a better chance to take a deep breath and plan ahead to recover from the horrific economic nightmare that so many are enduring, while also giving financial advisors and CPAs more time to wrap their arms around how the rules work in order to advise borrowers on how to best spend monies, and what their expected forgiveness will be.”