On June 3rd the Senate unanimously approved a bill that provides much-needed clarity and makes it easier for borrowers to have their Payroll Protection (“PPP”) loans forgiven. A couple of highlights for the new bill:
Longer Loan Term: The term for any portion of the PPP loan that is not forgiven has been extended from 2 years to 5 years. If your loan is not entirely forgiven the period of deferment for interest and principal payments on the loan is extended from 6 months to the date the lender receives forgiveness. Whether these changes are automatic for existing loans is uncertain so we recommend you call your lender to make sure these changes are reflected in your notes.
Extension of Forgiveness Period: The forgiveness period is extended from 8 weeks to 24 weeks or December 31, 2020, whichever comes earlier. How this impacts employees whose compensation is over $100,000 is uncertain. Will these employees’ forgiveness still be capped at 8/52, $15,385, or will it be increased to 24/52, $46,153? We will keep you posted
More Loan Proceeds Spent on Non-Payroll: Previously, 75% of the loan proceeds had to be spent on payroll and 25% could be spent on non-payroll. Under the new Bill, only 60% of the loan proceeds need to be spent on the payroll and 40% can be spent on non-payroll expenses. However, under the previous Bill if a borrower did not comply with 75% / 25% split then the amount of forgiveness was proportionately reduced. Under the new Bill, a cliff exists that will disallow all of a borrower’s forgiveness if they fail to comply with the 60% requirement. This may be ironed out with future guidance but that is how the Bill currently reads.
Longer time to replace FTEs / Restore Salaries: The time period for borrowers to restore FTEs and salaries to February 15th, 2020 levels is extended from June 30th, 2020 to December 31, 2020. Borrowers who are unable to achieve February 15, 2020 levels of FTEs and salaries despite a good faith effort to re-hire employees or hire new employees will not have their loan forgiveness reduced. Further, if a business is not able to achieve the requisite levels of FTEs and salaries due to compliance with COVID-19 safety standards then the loss in FTEs and salary as a result of this compliance will not reduce the amount of a borrower’s forgiveness.
A quick update on the taxability of the PPP loans. Initially, it was thought the PPP loan forgiveness would be tax-free. The Internal Revenue Services (“IRS”) then stated the forgiveness of the loan will not be taxable income to borrowers, but any expenses used by the forgiven loan will not be deductible. The inability to take the tax deductions for the expenses paid for by the PPP loan de facto makes the loan forgiveness taxable. Initially, Congress seemed inclined to overrule the IRS, and we at Burke & Schindler thought it was likely the PPP forgiveness would not be taxable. However, Congress has gone radio silent on overruling the IRS and it seems more likely than not that the PPP loan forgiveness will be taxable. This will make tax planning for 2020 difficult because even though your business operations may be down your taxable income will be higher due to the amount of the PPP loan forgiveness. This is something we will monitor throughout the rest of 2020.
We will keep you updated on how Congress responds to this IRS guidance.