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New PPP Legislation

Yesterday, the Senate approved PPP legislation the House passed last week. President Trump is expected to sign the bill.

Following are the main changes from the bill:

Extension of Eight-Week Forgiveness Period

The bill changes the period in which the proceeds can be spent and count toward forgiveness to 24-weeks instead of the original eight-week period. However, there is also a hard cut-off of December 31, 2020 for the spending to count toward forgiveness.

In some cases, the extension of the period to 24-weeks actually harms the business. For example, if an employer reduces its FTEs after the end of its eight-week period but still during the 24-week period, that FTE reduction can reduce the amount of loan forgiveness. The new bill includes a provision that allows any businesses who already have their loans prior to the new legislation to apply the eight-week period instead.

Easing of FTE Reduction

The legislation provides an addition exception to the reduction of loan forgiveness if the business can document that during the period from March 1, 2020 through December 31, 2020, it was unable to return to the same level of business activity it had before February 15, 2020 because of compliance with federal guidance on social distancing, sanitation, or safety related to COVID-19.

In addition, the FTE reduction won’t apply if the employer can document an inability to rehire the same employees or similarly qualified employees by December 31, 2020.

Expansion of Employer Payroll Tax Payment Deferrals to Businesses with PPP Forgiveness

The original CARES Act allowed employers to defer payment of the employer portion of the Social Security Tax (or half of the self-employment tax). Fifty percent was deferred to December 31, 2021 and the other 50% was deferred to December 31, 2022. However, the original act prohibited any business who had PPP loan forgiveness from receiving the deferral. The new legislation allows businesses to defer the Social Security taxes even if they receive loan forgiveness on a PPP loan.

Extension of Loan Maturity for PPP Loans

The legislation extends the maturity of any portion of unforgiven PPP loans to a minimum of five-years instead of the prior maximum of two years. Note that this provision technically only applies to loans that are funded after enactment of the new law. If the bank and borrower agree, they can also apply these terms to the existing loans.

Loan Payments for Portion not Forgiven

Some businesses may have loan amounts that are not forgiven. The payments for these loans are deferred until the date that the application for loan forgiveness is filed with the lender. If the business does not apply for forgiveness by 10-months after the end of the loan forgiveness period, the first loan payment is due once the 10-month period for filing the application ends. Businesses will need to evaluate whether it makes sense to complete the application for loan forgiveness to remove the loan from their balance sheet or if they want to defer the loan payments for longer by waiting to file for loan forgiveness. If the business uses the full 24-week loan forgiveness calculation period, that business can defer the payments for the 24 weeks plus 10 months.

Drafting Error for Spending 60% of Loan on Payroll Costs

The original SBA guidance inserted a limitation that was not in the CARES Act legislation that required at least 75% of the loan forgiveness amount to be for payroll costs. The new legislation adjusts that percentage to 60% but included a drafting error that appears to change the calculation. If a business did not have enough payroll cost to meet the limitation, the total amount of forgiveness was reduced so that 75% of the total forgiveness was for payroll costs.

In contrast, the wording of the legislation seems to indicate that if a business does not spend at least 60% of the loan proceeds on payroll costs, they lose all the debt forgiveness. Hopefully, the SBA will issue guidance that addresses this harsh result.

The SBA Will Need to Issue New Guidance

The SBA will need to revise their application for loan forgiveness for the new rules. In addition, they will likely issue additional guidance on the new law provisions. We will continue to keep you up to date on new developments.

If you have any questions about PPP loans and this development, reach out to us at 303-989-7600.