THE MORE THINGS CHANGE … THE MORE THEY CONTINUE TO CHANGE
Paycheck Protection Program … Favorable Changes for Borrowers
The Paycheck Protection Flexibility Act
Business owners and managers, you are well aware of the Paycheck Protection Program (PPP) and perhaps are participating as borrowers. Well there have been significant changes effective last week that liberalizes several key provisions of the program as originally approved by Congress.
By unanimous vote, the U.S. Senate passed the House version of the revised PPP legislation and submitted to President Trump who signed it into law. Combined, the changes result in significant flexibility to make it easier for more borrowers to reach full, or virtually full, loan forgiveness as contemplated in the PPP introduced last March and made effective April 3, 2020.
More on that in a bit as well as additional much needed relief for borrowers as they seek forgiveness of their loan amounts … but first a quick recap of the history of the PPP.
Employer Subsidies to Relieve Employee Finances
The Paycheck Protection Program (“PPP”): Authorizes forgivable loans to small businesses to pay their employees during the COVID-19 crisis. The U.S. Small Business Administration (SBA) will guarantee loans of up to $10 million to eligible businesses. The loans will be forgiven if businesses maintain payroll for eight weeks at employees’ normal salary levels and use the loan proceeds for qualifying expenses.
Effective April 3, 2020 businesses can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Questions should be directed to your local lender to determine its participation in the program.
The Two Laws That Shadow New Legislation
That’s it in a nutshell as designed. Following that came the two laws that invariably are the follow-up scenarios to new laws … 1) Unintended Consequences and 2) Interpretation Confusion. A sampling:
- Many big banks weren’t prepared to accept applications resulting in frustration on the part of business owners seeking financial relief. Notably, it was all too common for banks to only work with borrowers that were existing customers. That hamstrung numerous small businesses in their efforts to apply under the program … the specific group the PPP was designed to help.
- The compliance measurement for loans to be forgiven was eight weeks from receipt of the payment from the feds. Employers unable to open due to C-19 quarantine, were frustrated by not having a “rolling” 8-week qualifying period beginning when they resumed opening their doors.
- Lack of definition of taxation for loan amounts not qualifying as forgiven.
- Inability to locate and reinstate former employees, plus many refusing to return to work due to enhanced unemployment benefits under the CARES Act.
The Answer … the Paycheck Protection Flexibility Act
Following is a summary of six of the new legislation’s main provisions designed to simplify initiating and qualifying for PPP loans:
- Current PPP borrowers enjoy a tripling of the 8-week period to 24 weeks. New PPP borrowers will have a 24-week covered period terminating no later than Dec. 31, 2020. That means added flexibility for borrowers to attain maximum loan forgiveness as they now have 24 weeks to spend the borrowed funds. Alternatively, they can choose to retain the original 8-week period.
- Borrowers can use the 24-week period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. The deadline has been extended to December 31 from the previous deadline of June 30.
- Borrowers must spend a minimum 60 percent of the loan on payroll, significantly reduced from 75 percent. The original PPP rules provided for a sliding scale to determine forgiveness eligibility. On Monday, June 8, SBA Administrator Jovita Carranza and Treasury Secretary Steven Mnuchin clarified that partial loan forgiveness will also be available under the 60% threshold. Specifically, if a borrower uses less than 60% of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60% of the loan forgiveness amount having been used for payroll costs.
- Many employers anticipate, or are experiencing, difficulty in fully restoring their workforce to pre-pandemic levels. Under the new regulations, loan forgiveness eligibility will not be forfeited if employers can demonstrate that some employees declined to return to their jobs or the pre-pandemic headcount is no longer a requirement for the business to return to normal operations.
- Current PPP loan borrowers may extend repayment for up to five years if the lender agrees to revised terms. The payback period for new borrowers who are not seeking, or who are ineligible for forgiveness, is extended from two years to a minimum of five. The interest rate remains at 1%.
- PPP loan borrowers were prohibited under the CARES Act to delay payment of their payroll taxes. The new bill reverses that rule and allows for deferred payment of payroll taxes through December 31, 2020.
Summary
The loans, part of the Coronavirus Aid, Relief, and Economic Security Act (CARES), are meant to help owners cover payroll costs, rent and utilities. The Paycheck Protection Flexibility Act further extends the intent of federal regulators to provide business owners with financial relief. While it’s “early-days” under the new rule, business owners have generally responded positively to the boost in flexibility to respond to loan requirements and maintain eligibility for loan forgiveness.
A federal spokesperson, Kevin Hasset, a senior economic advisor to the White House and former Chair of the Council of Economic Advisors, said “The No. 1 ask was extending the PPP for 24 weeks, and this legislation delivers on that.”
And the much-improved national unemployment statistics seem to indicate that the PPP is having a significant impact on the retention and rehiring of workers. Unexpectedly, but pleasantly welcomed, 2.5 million jobs were added to the economy last month. The unemployment rate dropped to 13.4 percent in May from 14.7 percent in April. As more of the economy reopens, more jobs will return.
So, we’ll see how everything pans out under the new rules. Keep in mind the Two Laws That Shadow New Legislation … 1) Unintended Consequences and 2) Interpretation Confusion. That means there will be more in the way of guidance, clarity and regulatory revisions. Stay tuned and remember … you are not alone!
Give us a call and we’ll quickly help you determine how the new and changing rules affect your unique circumstances.