CARES Act Commentary June 4 2020
Payroll Protection Program Flexibility Act
June 4, 2020
Written by Paul M. Polito, CPA
CARES Act update – Payroll Protection Program Flexibility Act was sent to President Trump for signature last night (June 3, 2020).
Key provisions of this Act greatly ease the terms of the PPP loan program.
For existing PPP Loan Borrowers:
- Can elect to use a 24-week period commencing on the day the loan funds were received instead of the original 8-week period.
- Can now have the loan forgiven provided that 60% (previously 75%) is spent on qualifying payroll costs. However, if the 60% threshold is not met, then none of the loan is forgiven. (Senate leaders are working on a technical correction that would restore the previous “sliding scale”)
- The deadline for use of the PPP loan funds is changed from June 30, 2020 to December 31, 2020, however the deadline for applying for a PPP loan is June 30, 2020.
- The term of the loan is increased to five years from the previous 2 years.
- There are relaxed provisions regarding reductions of the forgiveness amount. Under the original CARES Act, the forgiveness amount was reduced for certain reductions in payroll or employee head count. Previously, there was an exception to the forgiveness reduction if the borrower could demonstrate that it offered employment under the same terms and conditions to employees who refused to come back to work. Now, in addition, there are exceptions for the following conditions:
- Employer could not find qualified employees or
- Borrower was unable to restore business operations to February `15, 2020 levels due to COVID-19 related operating restrictions.
For new PPP borrowers:
- Must apply no later than June 30, 2020.
- 24 weeks to use the PPP loan funds, but no later than December 31, 2020.
- 2-5 above, identical terms.
Based on past history, we expect the SBA administrator to fold her understanding of this new provision into a revised Loan Forgiveness application. We also expect to see another “interim final rule” which will document the SBA’s “operating interpretation” of the now-revised CARES act and Small Business Act.
Generally speaking, because of the formula used by SBA to determine the original loan amount (2.5 times average monthly historical payroll amount), most borrowers who were able to operate during the “economic pause” will have no trouble obtaining forgiveness of the entire loan.
Both houses were concerned that some borrowers who received PPP loans did not need the loan. However, the assertion made on the PPP loan application was that “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant”.
It is difficult to imagine how badly the economy has been damaged by the forced interruption of normal economic activity and the far-reaching effects of some of the policies limiting the ability of some citizens to work at gainful employment. Absent this PPP forgivable loan program, many if not most businesses would normally have trimmed the ranks of their employees and started to conserve cash. This is the normal response to an economic slowdown or recession. The difference with this event is that it was sudden, unexpected and forced. Such circumstances would clearly generate swift and significant cuts in business spending. The very reason for the emergency grant and loan provisions was to curtail these normal responses by the nation’s employers. As mentioned in one of our articles, documenting this “uncertainty” will be key if the loan is ever examined or challenged by SBA.
For those businesses that received PPP loans and had the good fortune of normal operations during the “economic pause”, the forgiven amounts used to pay allowable operating expenses including payroll will pay tax on income equal to the forgiven amount since those expenses will not be deductible. See our article on tax planning for additional insights.
Additional articles written by Polito Eppich can be found on our website at https://politoeppich.com/covid19-resources