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.
Updated PPP Guidance Deems Smaller Loans ‘Necessary’
Today, May 13, 2020, the Treasury Department issued a major revision to its interpretation of the Payroll Protection Program’s requirement that loans under the program be “necessary.” On April 24, it had issued proposed rules regarding the required certification that the “current economic uncertainty makes this loan request necessary,” and provided a safe harbor for entities that may have certified this under a misapprehension of the standard to return funds that were obtained previously. It emphasized that borrowers must “certify in good faith that their PPP loan request is necessary,” under the threat of potential criminal prosecution for certifications made without sufficient need.
In a near-complete reversal, it has now said, effectively, never mind. With a newly provided FAQ answer, Treasury now says that all PPP loan recipients of amounts of less than $2 million “will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” While this gives additional comfort to those that accepted and retained loans in the past, it is too late and highly disappointing for those that, in good faith, considered the prior interpretation and decided to return their loans out of fear of the risk it could later be found to be unnecessary.
The potential risk for those with loans above the $2 million threshold has also been substantially pared back. The updated guidance tempers the potential consequences to repaying the funds: “If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.”
COVID-19 Employment Update Emails By Date
Sample Notice Throughout the COVID-19 crisis our employment department has kept clients informed. Below are the emails by date with the newest at the top. As we send each new update we will update this resource page so that people can review as needed.
Note: These posts are made available for general informational purposes only and none of the information provided should be considered to constitute legal advice.
Additional Paycheck Protection Program Funding Approved; Disaster Loan Program Expanded To Farmers
On April 24, H.R. 266, the Paycheck Protection Program and Health Care Enhancement Act, was signed into law. In addition to providing significant funding for health care providers ($75 billion) and testing ($25 billion), the stimulus package revives the CARES Act’s Paycheck Protection Program (PPP) with an additional $310 billion in funding for forgivable loans. This expanded stimulus and relief package sets aside a portion of that funding for smaller lenders. The additional funding does not change the limits on the availability of the PPP’s forgivable loans, nor change the priority of borrowers in obtaining those loans.
However, in reaction to various reports on public companies obtaining PPP loans, the Treasury Department updated its PPP FAQs and this morning, April 24, issued additional proposed rules regarding the required certification that the “current economic uncertainty makes this loan request necessary,” and provided a safe harbor for entities that may have certified this under a misapprehension of the standard to return funds that were obtained previously. Borrowers must “certify in good faith that their PPP loan request is necessary.”
The legislation also makes one significant change to the CARES Act, by now allowing agricultural enterprises (i.e., farmers) to seek Economic Injury Disaster Loans. The SBA’s EIDL Program is typically not available to agricultural enterprises, which would normally turn to the USDA’s FSA Emergency Farm Loan program in a natural disaster. However, that program covers actual damages to crops. With the change to the provision made in H.R. 266, agricultural enterprises can now seek EIDLs from the SBA for economic losses, including a $10,000 advance that does not need to be repaid. However, even with the additional funding whether new applicants will be able to obtain EIDLs is unclear. Applications are processed on a “first come, first served” basis, and reports indicate a very large volume of applications that have not been funded already. The SBA had paused accepting applications for EIDLs pending additional funding. Details on the EIDL program are available on the SBA’s website here.
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.