PPP Forgiveness Terms Substantially Relaxed
The terms of the usage of PPP loans were just substantially relaxed by the Paycheck Protection Program Flexibility Act of 2020 – H.R. 7010. PPP recipients now have 24 weeks (the “covered period”), to use the loan proceeds instead of the original eight weeks and still receive forgiveness of the loan amounts. However, recipients of already issued loans can elect to still use the original 8 week period for purposes of their forgiveness application calculations if that is more favorable.
The PPP Flexibility Act also provides significant relief involving the provisions that reduce loan forgiveness amounts where staffing levels have declined. It adds additional time to cure cuts in staffing or compensation levels that reduce forgiveness amounts, extending the deadline from June 30 to December 31, 2020. It also adds a provision that allows two exceptions to the forgiveness penalties for staffing reduction. Where the loan recipient can document that it was unable to rehire staff because their prior employees, and similarly qualified employees, were not available, the forgiveness reduction will not apply. It also will not apply where the recipient is unable to return to the same level of business activity as before February 15, 2020 due to sanitation, social distancing or any other customer or worker safety requirements related to federal COVID-19 requirements or guidance.
It also eases the prior restriction developed through the regulatory process that 75% of PPP loan funds were required to be spent on payroll costs. The new PPP Flexibility Act provision requires only 60% of funds be used on payroll costs, allowing 40% to be spent on other specifically allowed costs of mortgage interest, rent and utility payments.
Further, it substantially extends the original PPP loan payment deferral terms. Originally, no payments of principal, interest or fees were required for six months. Now, no payments are required at all until a forgiveness determination is made, so long as the forgiveness application is filed within 10 months of the end of the “covered period.” That works out to a total of more than 15 months from when the loan is originated without any payments – the 10 months begin to run after the end of the extended 24 week period for using the funds. If the forgiveness application is not filed by the 10 month deadline, payments on the loans begin.
Finally, the PPP Flexibility Act removes a restriction on those that receive PPP loan forgiveness from also taking advantage of a delayed payment of employer payroll taxes. Now, PPP loan recipients who seek loan forgiveness will also be able to use the deferred payroll tax payment provisions of Section 2302 of the CARES Act. Those provisions allow for payment of 50 percent of specifically defined applicable employment taxes for 2020 to be paid by December 31, 2021, and the remainder by December 31, 2022.
Additional Information on Paycheck Protection Program and SBA Disaster Loan Programs
The U.S. Department of the Treasury announced today, March 31, that the SBA and the Treasury expect the CARES Act programs to be up and running by this Friday, April 3, 2020. You can find resources related to the CARES Act programs on Treasury’s website here, which is updated often and currently includes an application for borrowers for the Paycheck Protection Program (PPP). Additionally, the SBA has a resource page for small business that can be accessed here.
Significantly, the SBA is now indicating that 75% of PPP loan amounts will need to be spent on payroll as opposed to other allowed uses in order to qualify for loan forgiveness. It has also provided details on the loans, which will have relatively short, two year terms for the balance that is not forgiven, but with very low interest rates of 1%.
The Treasury and the IRS also have posted resources regarding the Employee Retention Tax Credit. But note that you cannot receive the payroll tax credit if you receive a PPP loan. Additional information on the tax credit is now on Treasury’s Frequently Asked Questions page here, and on the IRS FAQ page here. The IRS has created a new tax form for advance credits and is currently in the process of finalizing the instructions for the form.
Here are some additional details on the available loan programs:
The Paycheck Protection Program (PPP) in the CARES Act will be administered under the U.S. Small Business Administration’s loan provisions. The SBA and Treasury Department will be releasing additional regulations and guidance to lenders on the program. The loans will be obtained directly from banks, so you should contact your bank to learn if and how it plans to participate in the program.
Eligible employers can borrow 2.5 times their monthly payroll costs and other specific costs as described below. Loan amounts can be up to $10 million. An employer must either already meet the list of eligibility by number of employees maintained by the SBA, or have up to 500 employees, whichever is greater. Wineries can have up to 1,000 employees; other employers can check their industry size limit at https://www.sba.gov/size-standards/.
The PPP loans have significant benefits, most notably that 8 weeks of payroll costs and other specific expenses will be forgiven as long as the employer maintains its prior headcount, with some ability to reduce salary levels (discussed below). Employers that have already reduced headcount can rehire employees and still obtain the full forgiveness amount. The loans are capped at 4% interest, and have deferred payments for at least six months, and up to one year. The interest on the loans will not be forgiven, so some payments on the loans need to be made. The loans can have up to 10 year terms; have no recourse to a businesses’ shareholders, partners or members; and require no collateral or personal guarantee.
The PPP is a separate program from the SBA’s existing Economic Injury Disaster Loan (EIDL) program. Businesses apply directly to the SBA for these loans, at https://covid19relief.sba.gov. The EIDL program provides loans of up to $2 million to cover economic injuries incurred in a disaster. The CARES Act has broadened the eligibility for those loans as well, similar to the Paycheck Protection Program. For now, a borrower can apply for an EIDL loan and also be eligible for a Paycheck Protection Loan, and can refinance the EIDL loan into a future paycheck protection loan. However, the EIDL loan is still a loan, and needs to be paid back. It will not be forgiven, and the proceeds of an EIDL cannot go to cover payroll or other costs that a business would seek to borrow and have forgiven under the PPP. Note that once the PPP loans become available, business will no longer be eligible for both programs, and there is thus a narrow window to obtain an EIDL and still participate in the PPP. Also, participants in the PPP loan forgiveness will not be able to use the employment tax credit or payroll tax deferrals in section 2301 and 2302 of the CARES Act.
As for the PPP loans, the loan amount can include 2.5 times the prior year’s average total monthly payroll costs (modified for seasonal employers or new businesses), subject to important limits below. Payroll costs include:
(aa) the sum of payments of any compensation with respect to employees that is a—
(AA) salary, wage, commission, or similar compensation;
(BB) payment of cash tip or equivalent;
(CC) payment for vacation, parental, family, medical, or sick leave;
(DD) allowance for dismissal or separation;
(EE) payment required for the provisions of group health care benefits, including insurance premiums;
(FF) payment of any retirement benefit; or
(GG) payment of State or local tax assessed on the compensation of employees; and
(bb) the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period…
Importantly, in calculating the payroll costs, the total does not include:
(aa) the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period;
(bb) taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 during the covered period;
(cc) any compensation of an employee whose principal place of residence is outside of the United States;
(dd) qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116–127); or
(ee) qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act (Public Law 116–127)….
Thus, in determining eligible loan amounts, the pro rata monthly portion of salary for an employee earning over $100,000 per year is not included (but the amount under $100K annualized is included.)
The loan proceeds can be spent on a variety of business costs and expenses set out in the SBA Act; however only a narrow category of costs can be forgiven under the CARES Act. These are the amounts incurred and payments made over the 8 weeks after the loan is obtained (not to exceed the principal amount of the loan) for:
(1) Payroll costs.
(2) Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation).
(3) Any payment on any covered rent obligation.
(4) Any covered utility payment.
PPP loan proceeds used for any other purpose will not be forgiven. The lender will require documentation to prove that the funds to be forgiven were spent on allowed items. The Treasury Department will be providing regulations as to how the loan forgiveness program is to be implemented.
The amount of forgiveness will be reduced if the business reduces its employee headcount below its previous average full-time employee level, based on the average number of full-time equivalent employees for each pay period within a month, either during the period from February 15, 2019 to June 30, 2019; or from January 1, 2020 to February 29, 2020, at the business’s election. Seasonal employers are required to use the February to June period. Employers have the opportunity to re-hire employees that have been released as a result of the current crisis and still take advantage of the full loan forgiveness amount, as long as employee full-time equivalent returns to their prior levels by June 30, 2020.
There is more flexibility as regards to salary reductions without losing the full forgiveness amount. The amount of forgiveness will be reduced by the amount of any reduction in salary that exceeds 25%, but only for each employee that did not make more than $100,000 on an annualized basis during any single pay period in 2019. In other words, salaries for those making less than $100,000 per year can be reduced by up to 25% without impacting the loan forgiveness amount. This also means employees who earned more than $100,000 on an annualized basis in any pay period in 2019 (even those that received a raise to $100,000 annualized only in the last pay period of 2019) could have their salaries reduced by more than 25% without decreasing the available loan forgiveness. Employers also have the opportunity to remedy any reductions in salary by June 30, 2020 as well.
For a list of Coronavirus related resources, please see our Resources Page.
Employer Focused CARES Act Summary
While numerous summaries and reports on the stimulus bill enacted on Friday are circulating, the following are the key provisions in the CARES Act that will impact employers, and small employers in particular. “Small” under the CARES Act includes all business of up to 500 employees in addition to the existing definition of small business maintained by the U.S. Small Business Administration. For wineries, that limit is 1,000 employees. Other employers can check their industry limits at https://www.sba.gov/size-standards/.
Important Changes to Families First Coronavirus Response Act (“FFCRA”):
- Allows an employee who was laid off by an employer on March 1, 2020 or later to have access to paid leave under the EFMLA if they are rehired by the employer and they worked for the employer for at least 30 of the last 60 calendar days prior to being laid off.
- Allows employers to receive an advance of the payroll tax credit provided under the FFCRA for qualified wages paid for EMLA and EPS leave. Forms and instructions for this process are to be provided by the Secretary of the Treasury.
- Emergency increase in unemployment compensation benefits:
- Provides an additional $600/week recipients of UI benefits or Pandemic Unemployment Assistance from the date the State enters into the agreement with the Secretary of Labor through July 31, 2020.
- Payments will be processed through each State along with regular state UI benefits and can be provided in the same check or a separate check, but must be provided on a weekly basis.
- Federal Funding For First Week of Unemployment Period with No Waiting Period:
- Provides 100% reimbursement to States for benefits paid during the first week of unemployment if States waive the one week waiting period for UI benefits. California has already waived the 1 week waiting period.
- Pandemic Unemployment Assistance Program:
- Creates a new Pandemic Unemployment Assistance program (through December 31, 2020) to help those not traditionally eligible for unemployment insurance (UI) benefits, including self-employed individuals, independent contractors, those with limited work history and those who are unable to work as a result of the coronavirus public health emergency.
- Pandemic Emergency Unemployment Compensation:
- Provides an additional 13 weeks of UI benefits to those who remain unemployed after all weeks of state unemployment are no longer available.
- The amount provided is the same as above – the regular amount provided by the State plus an additional $600/week.
SBA Loan and Loan Forgiveness Provisions
- Creates a loan program for employers with fewer than 500 employees and other SBA defined small businesses to borrow up to 2.5x their monthly payroll (with a maximum loan amount of $10 million). Sole proprietors and independent contractors are also eligible.
- Loans can be used to cover payroll and other specified compensation including: healthcare costs, mortgage interest (but not principal), rent, utilities, and interest (but not principal) on other preexisting debt obligations.
- Payroll costs means any compensation given to employees that is a salary, wage, commission, payment of cash tip or equivalent, payment for vacation, family, medical, or sick leave (but not wages paid under the FFCRA), allowance for dismissal or separation, health care benefits including premiums, retirement benefits, and state or local tax assessed on compensation.
- Payroll costs cannot exceed $100,000 annually for an individual employee (prorated).
- Payroll costs do not include qualified sick and family leave wages under the FFCRA for which a credit is already allowed, among other specified exclusions.
- Interest rates cannot exceed 4%, and all payments must be deferred for at least 6 months and up to 1 year. Note that interest on the loans will not be forgiven.
- Loans do not require a personal guarantee or collateral, and are nonrecourse to businesses’ shareholders, partners and members. Employers are also not required to show that they were unable to obtain credit elsewhere.
- The principal amount that is used to cover payroll, mortgage interest, rent and utilities (but not the other allowed uses) for the 8 weeks following the loan approval will be forgiven as long as employee numbers and payrolls are maintained
- Allows forgiveness for extra wages provided to tipped employees.
- The forgiveness amount is reduced proportionately by any decrease in the number of employees as compared to the prior year. Forgiveness is also reduced if any employee who earns under $100K on an annualized basis has their wages reduced by more than 25%. There may be de minimis exceptions to these restrictions described in forthcoming regulations.
- Exemption for Re-Hires: To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period. This applies to a reduction in force or reduction in salary for 1 or more employees during the period beginning on February 15, 2020 and ending 30 days after the enactment of the Act. Employers must re-hire employees (or eliminate the reduction in wages) no later than June 30, 2020.
- The remaining balance after forgiveness can have a maturity up to 10 years. Prepayment penalties are not allowed.
Additional Business Provisions
- Payroll Tax Credit for Employee Retention:
- The provision provides a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose: (1) operations were fully or partially suspended, due to a COVID-19-related shutdown order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.
- The credit is based on qualified wages paid to the employee.
- For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related shutdown order.
- For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shutdown order.
- The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. This does not include any wages paid to employees under the FFCRA for EFMLA or EPS leave.
- The credit applies to wages paid after March 12, 2020, and before January 1, 2021.
- The credit is reduced by any amounts credited under the FFCRA for wages paid under EMFLA or EPS leave.
- Employers who receive a covered loan from the SBA (see above) are not eligible for the credit under this section.
- Delay of payment of payroll taxes:
- Allows employers to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees.
- The deferred employment tax is required to be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022.
- The payroll tax deferral period runs from the date of enactment of the Act until December 31, 2020.
- This section does not apply if an employer had their indebtedness forgiven under the provisions of this Act for a covered SBA loan.
- Modification of Net Operating Losses (“NOL”):
- An NOL arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. It also temporarily removes the taxable income limitation to allow an NOL to fully offset income.
- Modification of Limitation on Business Interest:
- Temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns, by increasing the 30-percent limitation to 50 percent of taxable income (with adjustments) for 2019 and 2020.
- Amendment Regarding Qualified Improvement Property:
Enables businesses, especially in the hospitality industry, to write off costs associated with improving facilities immediately, instead of having to depreciate those improvements over the 39-year life of the building.
For a list of Coronavirus related resources, please see our Resources Page.