And just like that, Congress shuffled the deck. To be clear, the PPP Flexibility Act brings welcome relief to those small businesses that participated in the Paycheck Protection Program, but it didn’t address all the issues. My gut tells me that they’re not done tweaking this, and before anyone takes action, we need to see what regulations the SBA issues regarding the new law.
Any unforgiven portion of the loan can now be paid back in five years. Technically the bank could offer ten years, but at 1%, they’re not going to. This is an increase from two years in the original law. The initial deferral period was also extended from six months to one year.
It is unclear how this will apply to loans already made, since the notes everyone signed had the original term periods. So it’s possible this only applies to new PPP loans.
The covered period to determine the forgiveness amount has been changed from eight weeks to twenty-four weeks or December 31, 2020 whichever is earlier. The covered period is essentially the time you have to spend the loan proceeds on eligible expenses to obtain forgiveness. Notice that it is the earlier of the two, so the closer you get to the end of the year for new PPP loans, the less time you have to spend the proceeds.
The impact on small business taxes is this: Regarding the full time equivalents requirement, the new Act allows two new exemptions in calculating loan forgiveness. First, you don’t have to count positions that you couldn’t hire “similarly qualified employees”. Given the current economic environment, I’m not sure if this will affect many businesses, but it is an exemption.
The second exemption for full time equivalents is if the business is able to “document an inability to return to the same level of business activity” as of February 25, 2020 because of FEDERAL requirements (e.g. CDC or OSHA). The Act mentions nothing about local or state requirements, but most of the cities and states were following federal recommendations.
The Act also removed the exception for the delay of payment of FICA taxes if the business participated in the PPP loan program. We had noted that the original Act allowed businesses to delay payment of those taxes up until the loan was actually forgiven, but the provision eliminates the exclusion entirely. Bottom line, you can defer the employer portion of FICA taxes. See our COVID-19 page for more information.
Lastly, the Act increased the non-payroll portion of forgiveness from 40% from 25%, but see The Ugly below.
The Act doesn’t address anything regarding the requirement to keep salary by employee at least 75% of the reference period. So we assume nothing will change in the forgiveness calculation in that regard.
Presumably you will still have to do a full-time equivalent calculation to compare the covered period to the reference period. You do have some more wiggle room with the new exemptions.
Regarding those new exemptions, how are businesses going to document that? And does it only apply to Federal regulations, not local and state? It will be very interesting to see how the SBA handles this.
As for the implications this has on tax preparation for small businesses, we don’t know how the increased covered period (24 weeks) is going to affect self-employed borrowers in computing their forgivable amount. The SBA regs basically said the payroll portion of the forgiveness was the same amount used to compute the loan (2 months of 2019 self-employment income). With 24 weeks instead of 8, does that change?
The extended covered period raises some interesting problems with the IRS. Previously the IRS stated that expenses used to compute forgiveness of the PPP loans would not be deductible. The timing of the year-end and when the loan will be forgiven causes potential problems of when and what you’re going to deduct on the 2020 return.
The Act says “an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs” (emphasis added). This is different language than was in the original Act and SBA regulations. This implies that if you don’t spend at least 60% on payroll, then nothing is forgivable.
As a small business tax strategy and accounting company, we are keeping ourselves up-to-date on the latest news and legislation surrounding the PPP. Join the conversation by registering for our upcoming PPP webinars or by watching recorded webinars on our Downloadable Content page.