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PPP Borrowers Breathe a Great Sigh of Relief
On May 29th, I posted an article about the House’s Bill, H.R. 7010, which can be viewed by clicking here.
This Bill, as I said, is remarkably short and to the point, containing only 7 pivotal provisions which will forever change how PPP borrowers can make expenditures to facilitate the maximization of forgiveness of their loans, and best position themselves to survive the economic tsunami that we find ourselves in.
Since writing and providing webinars on PPP loans, I have received thousands of emails with thousands of questions about how this loan program will apply to struggling businesses who endure excruciating circumstances and have tremendous pressure on their shoulders.
Our team of analysts, including Brandon Ketron, J.D., LL.M., CPA, and Kevin Cameron, CPA, will review these new rules in a free 30 minute webinar tomorrow at 11:30 am EDT, if you can not attend the live event a recording will be made available.
Please send me an email me at agassman@gassmanpa.com with the subject line “Senate” for a link, and later a recording, of this webinar.
Kevin Cameron is already working on an update of his PPP analyzer/spreadsheet that will hopefully become available in the next few days.
Borrowers who had only 8 weeks from the time that they received their PPP loans will now have 24 weeks, but if they do not spend at least 60% of the loan amount on payroll, health insurance premiums and pension contributions during the testing period, then they will have no forgiveness at all. The 75% test, which was a thorn in the side of everyone who looked at it, is thankfully a nightmare of the past that will not have to be relived.
The “workforce amnesty” provision that allowed employees to be replaced or rehired in sufficient number to replace the entire workforce was rolled back from June 30th to December 31st. Many businesses will need to save their powder, somehow, to be able to avoid losing full forgiveness by reason of not having a sufficient number of employee hours to replicate the pre-COVID-19 virus staffing that they had under the testing rules.
Borrowers will be able to choose to have the 8-week period apply, as originally enacted, or can elect to have the new 24-week period, with reference to both spending sufficient money on forgivable expenses, and having an appropriate restoration of workforce.
We strongly recommend that businesses that are able to spend sufficient monies on forgivable expenses while meeting the 60% test described above, and having the equivalent of most of the workforce intact, consider electing the 8-week period so that they can get their forgiveness loan application filed, based upon the present 8-week rules, and hopefully approved by their bank and the SBA so that they can be “debt-free” or almost “debt-free” and be able to borrow as and when needed from conventional lenders.
Under this new and more borrower friendly regime, there will be no payment due until five years after the borrower received the PPP loan, but please note that many borrowers will probably go bankrupt on the five year anniversary date, if they do not set money aside and otherwise take steps to act conservatively during the five year term.
Nevertheless, the loan is nonrecourse (the owner of a borrower corporation will have no liability if the company cannot repay the loan, and the rules are followed) and bears interest at only 1% per year if the rules are followed. Many borrowers will not follow the rules and find that officers and directors of their companies will have significant liabilities that they were not aware of.
There are also new provisions which allow for certain employees who are not rehired to nevertheless be considered to have come back if the borrower can show that they were unable to find similarly qualified employees, or that there was an inability to return to the same level of staffing during the testing period because of federally required sanitation, social distancing, or similar requirements. The new SBA rule that will require employers to rat to unemployment authorities on their employees who do not return will remain in force under this new law.
In addition to the above, employers will be able to defer paying the 6.2% payroll tax that employers are charged for employees for a period of two years, regardless of whether the borrower receives loan forgiveness under the PPP program. Prior law provided that no such deferral was available to PPP borrowers.
Benjamin Franklin would have been proud to see our country working together to save small businesses, jobs, and America’s competitiveness and opportunity for hard work and ingenuity.
Early to bed.
Early to rise.
Work like hell.
And advertise.
More detail on the 7 provisions of this laser-tuned new law that is expected to be signed by the President very soon are as follows:
1. Borrowers Can Extend the 8 Week Period to 24 Weeks. This will make it much easier for borrowers to get full or close to full forgiveness on their loans, but also makes it more challenging to keep a full workforce in place to qualify for full forgiveness, as further discussed below. This legislation would also allow borrowers with outstanding loans as of the date of the enactment of this legislation to make an election to have the original 8-week period apply in lieu of the 24-week period. This election would make sense for borrowers that have already spent the funds on sufficient expenses that provide for full forgiveness, so they can confirm their loan forgiveness and be better able to borrow, attract capital, have cleaner balance sheets, and better mental health.
Notwithstanding this extension, borrowers, and their bankers and accountants, will be best advised to file the application promptly after the 8 weeks, if they can qualify for full forgiveness in order to get the debt off of the books in case they will need bank financing, and to receive full forgiveness before the rules may change or the SBA bureaucracy might break down or delay the process. Even if somewhat aggressive (but justifiable) positions are taken to qualify for 100% forgiveness in the first 8 weeks, most likely a new law would allow forgivable expenses paid during the longer period of time to apply in the event of an audit.
2. The 75% Test Now Becomes a 60% Cliff! The Bill would change the 75% test that was issued by the SBA which requires that at least 75% of the amounts forgiven have to be spent on payroll expenses, meaning that if otherwise countable interest, rent and utilities exceed 1/3 of what is spent on payroll, health insurance or retirement plans, then the forgiveness will be reduced. It is questionable whether the SBA had the authority to pass this rule, and years of litigation were certain to keep many lawyers busy and borrowers in doubt, so Congress is hopefully stepping in to clear this up.
To be eligible to receive loan forgiveness under this new legislation, an eligible recipient of a PPP loan will now be required to use at least 60% of the loan amount for payroll costs, and may use up to 40% for permitted rent, utilities, and interest on secured debt, as defined in the law.
3. Penalties and Calculations for the Reduction in Work Force – June 30th Rolled Back to December 31st. The loan forgiveness rules that are currently in place contain a provision which generally reduces forgiveness in proportion to the reduction of the loan recipient’s workforce during the 8-week period, if the same number of employees are not hired or rehired by June 30th. This new law would modify this provision by using the 24-week period instead of the current 8-week period, while also extending the June 30th “amnesty rehire date” to December 31st. An example of how this would work is as follows: If a business that had 100 employees before the virus reduces its workforce to 50 employees during the 24-week period, it will nevertheless receive complete forgiveness of its loan if it spends what was borrowed on payroll, health insurance, retirement plan contributions and permitted interest rent and utilities during the 24-week period, as long as it has 100 employees on December 31, 2020, and they apparently do not have to be the same employees, or even doing the same things as the pre-virus employees.
4. Some May Still Be Hurt. Some businesses will be better able to have the 100 employees on June 30th while they are still operational with a chance to survive, as opposed to waiting until December 31st as the alternate testing date. However, if we do recover from this virus-caused recession, or whatever it is, most businesses will find this change to be advantageous, assuming that they stay open and can be back to full force, or implement some other configuration that provides for the equal number of full-time employee equivalents on December 31st. So, do you need to plan on working New Year’s Eve if you are employed in December by a PPP borrower? Fortunately not, in that receiving earned Paid Time-Off is counted as working for purposes of this rule, and getting to what may be a virtual New Year’s celebration for many.
5. New “We Tried to Rehire But We Really Couldn’t Exception”. The legislation also provides an exemption from a reduction in loan forgiveness for employers that have reduced their workforce if, during the period beginning on February 15, 2020, and ending on December 31, 2020, the employer, in good faith, is able to document one of the following:
A. Could Not Find Qualified Employees to Hire. To qualify for this exception, borrowers must establish an inability to rehire individuals who were employees on February 15, 2020, and an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020. This requirement seems as if it would be easy to satisfy for most employers given the large unemployment rate, but in some sectors of the economy it is hard to find qualified employees, and the health industry and other parts of the economy are hiring workers that had formerly been available for other sectors. On the other hand, please send any resumes for experienced corporate or estate planning paralegals who would like to live in Clearwater, Florida to me as soon as possible.
B. Could Not Restore Business To Comparable Level of Activity Because of Social Distancing or Other Federal Health Guidance. To qualify for this exception, the borrower establishes an inability to return to the same level of business activity that the business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
This will be a somewhat vague standard, as many businesses will not be able to come back to full size because of many factors, and in some cases only indirectly by reason of Federal guidelines. Hopefully, the Senate will provide language that will be more clear, but the above may be what we receive, and many businesses will need to save their cash to see if they are able to fully staff up by December 31st, based upon what the Governmental agencies do between now and then.
6. Repayment Period Extended to Five Years with 1% Interest During the Five Year Term. The proposed legislation would also extend the period for repayment of loans still owed, after being reduced for expenses that qualify for forgiveness and the EIDL grants (of up to $10,000), from 2 years to 5 years, and allow for payments on the loans to be deferred until the date on which the SBA makes a determination on loan forgiveness of the applicable borrower (which could be up to 150 days after submission of the loan forgiveness application under current guidance). We are not sure what this means, but it sounds good. The interest rate for these loans would remain at 1%.
7. Two Year Deferral of Employer’s Share of Payroll Taxes for All Employers. The final change under this Bill would be that borrowers will be eligible for the deferral of payment of the employer’s share of Social Security payroll taxes (6.2%), regardless of whether the borrower receives loan forgiveness. This allows borrowers to now defer the payment of the employer’s share until 2021 when 50% of such taxes must be paid, with the remaining 50% due in 2022.
There are many issues still remaining with respect to how the somewhat ambiguous and to some extent inconsistent CARES Act provisions and SBA interpretation, as soon modified, will apply to tens of thousands of struggling businesses. We will do the best we can to help separate what can be known to what will remain murky, but a much higher percentage of borrowers can rest easier during a week of protests and national awareness knowing that their government is doing the right thing, or at least the best it can on this front.