This week the Senate passed a House-passed Paycheck Protection Program reform bill, it now awaits President Trump’s signature.
Ken Logsdon is a partner at the international law firm Dorsey & Whitney who has been helping small businesses and banks navigate this program during the COVID-19 crisis. He has looked at the bill and has some key takeaways.
“The minimum maturity date of a PPP loan is now no sooner than five years (and therefore replaces the two-year maturity date implemented by the Small Business Administration (“SBA”)). The Act retains the maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness,” Logsdon says.
“The “Covered Period” during which expenditures of loan proceeds will qualify for forgiveness is no longer 8 weeks starting on the date of funding of a PPP loan, but the earlier of 24 weeks starting on the date of funding or December 31, 2020.
- Though not stated, it is likely the “Alternative Payroll Covered Period” in the PPP loan forgiveness application will also be modified, but a revised loan forgiveness application and accompanying interim rules will need to be published in order to confirm this.
- Note that borrowers will still be permitted to elect to use the 8 week period if they prefer.
- The end date of the safe harbor periods in which other actions that must be taken (i.e., restoring FTE/salary) has been changed from June 30, 2020 to December 31, 2020.
- It remains unclear if this now means that a borrower can fire/hire at will any time prior to December 31, 2020 provided the requirements of the applicable safe harborare satisfied by that date,” Logsdon says.
“Workforce reductions no longer necessarily result in a proportional reduction of loan forgiveness. Specifically, the full-time employee reduction penalty will now be ignored (i.e., no reduction in the amount of the loan to be forgiven) if a borrower in good faith is able to document an inability to:
(A) rehire individuals who were employees on February 15, 2020 or hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
(B) return to the same level of business activity as such borrower 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.” Logsdon says.
- “The 75%/25% split for payroll to nonpayroll costs required for forgiveness has been modified to 60%/40%, respectively.
- The law now reads that “to receive loan forgiveness under this section, an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs.” Thus, it now appears that if payroll costs are less than 60%, there will be no loan forgiveness (ideally this will be clarified and addressed by the SBA),” Logsdon says.
- “Regarding deferment:
- The deferment of payment of principal/interest/fees (including with respect to covered loans that are sold on the secondary market) has been changed from not less than 6 months and not more than 1 year to the date on which the amount of forgiveness is paid to the lender by the SBA.
- If a borrower fails to apply for forgiveness within 10 months after the last day of the covered period, payments of principal/interest/fees begin on the day that is not earlier than 10 months after the last day of the covered period,” Logsdon says.
- “PPP loan forgiveness no longer disqualifies a borrower from eligibility under Section 2302 of the CARES Act for deferral of deposits and payments of the 6.2% Social Security portion of the borrower’s share of FICA tax otherwise required to be made from March 27 to December 31, 2020. Section 2302 permits 50 percent of these deposits and payments to be deferred until December 31, 2021, and the remaining 50% of these deposits and payments to be deferred until December 31, 2022,” Logsdon says.
- “The Act does not, however, address the deductibility of expenses funded with forgiven loan proceeds and therefore such expenses remain nondeductible for income tax purposes. Nevertheless, forgiven loan proceeds do not give rise to taxable income, as provided for in the CARES Act,” Logsdon says.