PPP Forgiveness Period Extended to 24 Weeks
On June 5, 2020, the President signed the Paycheck Protection Program Flexibility Act, previously passed by the House and agreed to by the Senate in a voice vote with no amendments on June 3, 2020. This law significantly liberalizes the Paycheck Protection Program (“PPP”) loan forgiveness rules, and extends the payroll tax deferral to loan recipients for periods after the loan is forgiven. The changes will simplify the qualification for loan forgiveness for many employers by allowing expenses to be incurred over a 24-week period instead of an eight-week period and extending the rehire date from June 30, 2020, to December 31, 2020. In addition, only 60 percent of the maximum loan forgiveness, not the current 75 percent, will need to be “payroll costs,” as defined under PPP. Any borrower who received a loan before June 5, 2020, can choose to continue to use the eight-week period for covered expenses.
Many small businesses have been struggling to incur enough wage costs to maximize their loan forgiveness, often as a result of reduced workforces. The law makes a number of changes to help employers reach complete forgiveness of their PPP loans. First, the time during which wages, group health plan contributions and retirement plan contributions can be paid is extended from eight weeks to 24 weeks after the loan disbursement date, but no later than December 31, 2020. With the longer forgiveness period, it becomes significantly easier for businesses to continue with current payroll levels, even if they are lower than pre-COVID periods, to obtain 100 percent forgiveness. Also, by extending this covered period, the maximum loan forgiveness for any individual increases from $15,385 to $46,153.
There are also some changes to the requirement that the borrower reduce the maximum loan forgiveness if employment levels decline during the forgiveness period compared with a reference period. The safe harbor date at which employees can be rehired to eliminate a reduction in employment levels is extended from June 30, 2020, to December 31, 2020. The law codifies the current regulatory rule permitting employers to count as an employee any individual who was offered employment and declined that employment, unless another individual was hired. Finally, and perhaps most importantly, the reduction of a borrower’s maximum loan forgiveness as a result of declining employment levels is eliminated for any borrower who can document an inability to return to the February 15, 2020, level of business activity as a result of compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director for the Center of Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
In addition, only 60 percent of the loan forgiveness needs to be “payroll costs” (primarily wages and employer portion of group health benefits and retirement contributions), leaving 40 percent of the loan forgiveness to be based on rent, utilities and mortgage interest, now incurred over a 24-week period. These amounts still need to be for services, mortgages and leases in place on February 15, 2020.
Many borrowers are also taking advantage of the ability to defer the employer share of Social Security Taxes (6.2 percent of wages up to $137,700) until 2021 and 2022. The bill would eliminate the need to discontinue deferrals once a loan is forgiven. Thus, deferrals of these amounts will be able to continue through December 31, 2020. Some employers who decided not to take advantage of this for the relatively short period before loan forgiveness may want to reconsider this. The deferrals can be taken advantage of by reducing payroll tax deposits, with reconciliation on each quarter’s Form 941. Thus, deferral of these taxes for the second quarter can be made as late as June 30, 2020, by reducing payroll tax deposits for wages paid before that time.
These changes create some additional unanswered questions, and we can expect further FAQs from SBA. While we await further clarifications on these changes and other items, there are significant planning opportunities for businesses to work toward 100 percent loan forgiveness. Please contact Cherry Bekaert to discuss how we can assist with PPP forgiveness planning and processing.