Why Changes To PPP That Are About To Become Law Will Help Borrowers Obtain Loan Forgiveness

Paycheck Protection Plan or PPP loan borrowers are breathing a huge sigh of relief. In the afternoon hours of June 3^rd, the Senate unanimously passed by voice vote the Paycheck Protection Plan Flexibility Act. This bill had been approved by the House last week on May 28^th. The House’s vote was 417-1 with the lone dissent by Representative Thomas Massie (R-Ky).

As the bill heads to President Donald Trump’s desk for signature, across the country, tax professionals are starting to get greater guidance to help their clients who took PPP loans.

“The bill doesn’t include everything, but it’s a good start,” says Brian Streig, CPA and Tax Director of Calhoun, Thomson + Matza, LLP in Austin, Texas. “I do think this bill is good for small business owners who have taken out Paycheck Protection Program loans.”

The PPP loan program has weathered intense criticism since the passage of the CARES Act. From early confusion regarding the loan application process to the slow pace in which the Small Business Administration (SBA) has released guidance, it has not been an easy path for borrowers. But this new bill provides hope that greater flexibility to the PPP loan forgiveness process will help many small business owners survive the Covid-19 crisis.

Longer Period To Spend

One of the key provisions in the new bill is that PPP borrowers will now have a longer time period to use the funds. In the original CARES Act, employers were limited to an 8-week period to use the funds. The new bill extends this period to 24 weeks.

This change addresses one of the challenges in the PPP loan program. When the initial law was enacted, Congress was focused on providing various types of liquidity. One of the unintended consequences is that the increase in federal unemployment coverage of $600 per week was in conflict directly with the purpose of PPP loans. Some employees were making more on unemployment than when they were employed.

As a result, this caused problems for employers seeking to rehire their employees with PPP money.

“Some small businesses are finding it hard to get some of their employees to come back to work,” explains Streig. “This could be for a number of reasons but under the original bill, the amount of the loan eligible for forgiveness would be reduced because the employee didn’t come back to work.”

Thus, PPP borrowers were in a tough position. Some struggled with the fact that they felt bad asking employees to come back and earn less. Others were frustrated that forgiveness was conditioned in a manner where they lacked control.

“The House bill that the Senate passed makes it so the employer won’t be penalized when they calculate the forgiveness amount because an employee doesn’t return to work,” says Streig.

Greater Flexibility in Spending

The other challenge the PPP loan borrowers were struggling with was that they felt forced to use the loan predominately on payroll when there were other pressing concerns to keep their businesses afloat.

“The Treasury and Small Business Administration set a level of 75% of the loan proceeds that needed to be spent on payroll in order to be eligible for forgiveness,” explains Streig. “Congress used this bill to lower the amount to 60%, so now businesses have some more options on how they spend the funds and still get their loan forgiven.”

This opens the door for many business owners who are trying to pay rent and utilities. Further the flexibility will allow these small businesses to have a longer lifeline to keep their monthly expenses going.

The law also will allow the loan period to be extended. Under the initial plan, the loan would have been a 2-year loan at 1% interest rate. This has been extended to up to 5 years. Again, this will alleviate some of the pressures felt by small businesses.

Still Hoping

But despite the benefits this new bill will provide, it does not address all the issues that tax professionals were seeking. 

Streig is quite pragmatic on what he hopes the SBA does next in its guidance on PPP loans.

“I would also like to see a blanket forgiveness for the smaller PPP loans,” he says. “For example, loans under $100,000 or $150,000 would only have a minimal amount of paperwork to get forgiveness. The effort to gather the information and prepare the application for forgiveness can be very burdensome for small businesses.” 

As we wait for the President to sign the Paycheck Protection Program Flexibility Act, we can only hope that additional guidance is on its way to continue to help small business owners.