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  • PPP Loan Forgiveness - Changes in Provisions


  • PPP Loan Forgiveness - Changes in Provisions

    The much awaited and much discussed changes pertaining to the PPP loan forgiveness provisions are finally here! Yes, after much deliberations, the required flexibility which the businesses were longing for regarding the use of the Paycheck Protection Program (PPP) loan funds is eventually passed into a law.

    On Friday, June 5, 2020, the President signed into law: H.R. 7010, the “Paycheck Protection Program Flexibility Act of 2020,” which modifies certain provisions related to forgiveness of loans under the Paycheck Protection Program and allows loan forgiveness recipients to defer their payroll taxes.

    This article summarizes these modified provisions in a comparative format along with the erstwhile provisions.

    • What is the purpose of the “Paycheck Protection Program Flexibility Act of 2020”?

    The purpose of this bill is to amend the Small Business Act and the CARES Act to modify certain provisions related to the forgiveness of loans under the Paycheck Protection Program, to allow recipients of loan forgiveness under the Paycheck Protection Program to defer payroll taxes, and for other purposes. It provides some flexibilities regarding provisions related to the forgiveness of loans made to small businesses under the Paycheck Protection Program implemented in response to COVID-19.

    • What are the changes to the PPP Loan Forgiveness Provisions?

    The below table compares the old provisions versus the updated provisions with regards to the PPP loan forgiveness:

    Sr. #

    Old Provisions

    Updated Provisions

    1

    Period of Availability of PPP Loan Funds

    Per the CARES Act, the SBA had the authority to provide the PPP loans only until June 30, 2020.

    The Paycheck Protection Program Flexibility Act of 2020 amends this provision of the CARES Act. As such, the SBA now has the authority to provide the PPP loans until December 31, 2020.

    2

    Loan Maturity Period

    The maturity date of the loan was 2 years from the date of disbursement.

    Existing borrowers: Those businesses who have already taken this loan can make a mutual agreement with their respective lenders to agree to modify the term of the loan from 2 years to 5 years.

    New borrowers: For those businesses who take this PPP loan now onward, the maturity date of the loan will now be a minimum of 5 years from the date of disbursement.

    The unforgiven PPP Loan amount needs to be repaid within the maturity period.

    3

    Time period for use of PPP loan funds for potential 100% forgiveness

    The loan funds were required to be used up over an 8 week covered period following the date of the loan disbursement.

    Existing borrowers: They have an option to choose either an 8 week covered period or a 24 week covered period during which the loan funds needs to be used up, following the date of the loan disbursement.

    New borrowers: Businesses who take this PPP loan now onward will have a 24 week covered period to utilize their loan funds, following the date of the loan disbursement.

    The 24 week covered period under both the above cases cannot extend beyond December 31, 2020.

    4

    Ratio of use of PPP loan funds for potential 100% forgiveness

    The ratio of allocation of loan funds in order to get potential 100% forgiveness was as under:

    Minimum 75% - Was to be used for “Payroll Costs”.

    Maximum 25% - Was allowed be used towards “Non-payroll Costs”.

    If the above ratio was not maintained, there was a provision of a pro-rata decrease in the amount eligible for forgiveness.

    The ratio of allocation of loan funds in order to get potential 100% forgiveness is now as under:

    Minimum 60% - Must be used for “Payroll Costs”.

    Maximum 40% - Can be used towards “Non-payroll Costs”.

    We should expect more clarifications from the SBA on this provision because from the statutory language of the Act, it seems like the borrowers are required to spend "at least 60%" on payroll costs in order to get the loan forgiven. In other words, if utilization towards payroll costs is 59%, then none of the loan amount would be eligible for forgiveness. As such, this provision is still unclear and we should be expecting further guidance on this. It’s wait and watch, as always!

    5

    When should the application of forgiveness be made? When shall repayments of unforgiven loan amounts begin?

    The forgiveness application was required to be made to the lending bank after the 8-week period was over. The deferral period for repayment of principal and interest amounts was 6 months from the date of origination of the loan.

    According to the Paycheck Protection Program Flexibility Act of 2020, the borrowers are allowed to make the forgiveness application up to 10 months following the date on which the covered period (8-weeks or 24-weeks) expires.

    If the borrower makes this forgiveness application within the above-stated timeframe, then the payment of the principal and interest amounts shall be deferred until the date on which the SBA remits to the lender the amount of forgiveness.

    If the borrower does not make the forgiveness application within the above-stated timeframe, then the repayment of principal and interest amounts shall begin 10 months after the last day of the covered period (8-weeks or 24-weeks).

    6

    Extension of time period for restoring the reduced workforce and wage/salary reductions to the pre-pandemic level

    The time period to rehire employees that were laid off during the "covered period" and to restore any decrease in wages or salaries wages during the "covered period" had a deadline of June 30, 2020.

    According to the Paycheck Protection Program Flexibility Act of 2020, the new deadline to rehire employees and to restore the decrease in wages or salaries is now December 31, 2020.

    7

    Exemptions to the rule regarding restoration of pre-pandemic workforce and wage/salary levels

    The existing guidance contained the below stated exemptions.

    The borrowers were allowed to exclude from the forgiveness reduction computation those employees who were:

    (1) Given good faith offers to get rehired and such offers were rejected by the employees.

    (2) Fired for a reasonable cause, resigned from their position voluntarily or got their work-hours reduced voluntarily.

    In addition to the existing exemptions as stated on the left, the Paycheck Protection Program Flexibility Act of 2020 adds two more exemptions.

    The forgivable amount must be determined without regard to a reduction in the number of employees if the recipient is:

    (1) Unable to rehire former employees and is unable to hire similarly qualified employees, or

    (2) Unable to return to the same level of business activity due to compliance with federal requirements or guidance related to COVID-19.

    8

    PPP Loan Forgiveness and Deferral of Payroll Taxes - Coordination

    Under the provisions of the CARES Act, employers are allowed to defer the deposit and payment of the employer's portion of Social Security Taxes through December 31, 2020. Half of the deferred amount is due on December 31, 2021 and the other half is due on December 31, 2022.

    The CARES Act also states that those employers who had taken the PPP loan and who had obtained forgiveness of such loan may not defer deposit of payroll taxes. But thereafter, the SBA issued a FAQ clarifying that employers who take the PPP loan will be able to defer their payroll taxes, but only until the date on which any or all of the PPP loan amount is forgiven. After this date, the employer must start making the timely deposits for payroll taxes. Such deferred amount shall be due 50% on December 31, 2021 and the remaining 50% on December 31, 2022.

    The Paycheck Protection Program Flexibility Act of 2020 makes just one change to this rule as stated hereunder:

    Those employers who receive the PPP loan forgiveness (in full or part) will also be able to defer their payroll tax payments (employer's share of Social Security Tax) through December 31, 2020, without any consideration to the date of forgiveness of the PPP loan.

    • More guidance:

    There might be a handful of unclarified questions at present which hopefully shall be addressed in subsequent guidance by the SBA.

    • How can tax & accounting professionals help?

    The tax & accounting professionals can help you in getting the maximum amount of the PPP loan forgiven, can provide guidance on the documentation which is necessary to be maintained, and also for assisting in maintaining proper accounting records. These professionals can also guide you regarding the proper allocation of funds between payroll and non-payroll costs. And most importantly, these professionals shall constantly stay in touch with all the guidance on this issue released by the Department of Treasury and the SBA and constantly provide you with information necessary to take full benefit of this loan forgiveness provision.

    • End note

    The SBA will probably issue more guidance for further clarification regarding these updated provisions. We are continuously monitoring the situation and shall be providing updates on subsequent developments on this topic as and when they are released.

    Rest assured, we are always there to get the best out of the law for you and your business!

    • Contact persons at Fulton CPAs:

    • Disclaimer

    The information contained within this “Update Alert” is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from a professional accountant.


    Sanjiv Gohil | 06/08/2020



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