PPP Gets A Promotion: House Passes Bill That May Save Thousands Of Businesses — And One Million Headaches
by Alan Gassman
Tens of thousands of American businesses have collectively borrowed over $511 billion dollars under the Paycheck Protection Program. These loans are non-recourse, require no collateral and bear interest at only 1%. Below, we describe the 8 changes that the bill would make.
“H.R. 7010” is your friend.
Better yet, the loans are forgiven to the extent that the borrower spends money on certain categories of payroll, state and local payroll taxes, health insurance, retirement plans, interest, rent and utilities that qualify under very complicated, and somewhat inconsistent and vague, rules that have kept lawyers and accountants up for many nights, and have cost small businesses significant consternation and indirection from uncertainty. I thank Brandon Ketron, J.D., CPA, LL.M (and now PhD in PPP!) for his many hours spent studying, writing and lecturing with me on this law and practices. Please send any hard questions to Brandon@gassmanpa.com and any easy ones to me. Brandon and I have worked with CPA Kevin Cameron on a spreadsheet that has an explanatory video that lays out the rules very well. We can share this 60-minute video and a PDF of the spreadsheet with you, if you e-mail me at Agassman@gassmanpa.com and put “spreadsheet” in the RE line, to see how these rules actually work. We also have a new spreadsheet for independent contractors and proprietors that will knock your socks off. The AICPA has a free spreadsheet, but no instructional video.
I will be covering the below described House rule in a free webinar tomorrow morning at 10 a.m. If you would like to attend, you can email me at agassman@gassmanpa.com and put the word “webinar” in the RE line. If you cannot attend the live session, a recording will be provided to registrants for viewing at your convenience.
The big challenge has been the requirement that the expenditures referenced above be made within the 8 weeks following the date that the PPP loan proceeds go into the borrower’s account. It is noteworthy that a great many borrowers are in their 6th and 7th weeks, and have already spent more money on things that would have better been delayed in order to get forgiveness, while others are in their first 2 to 3 weeks, or have not started the 8 weeks, and will derive much more benefit from this law, if it is passed.
Some flexibility was added by the SBA’s recent publication of the Loan Forgiveness Application and Instructions and also the Interim Final Rules that are the subject of my article dated May 23, 2020, which is still current as to what the law is at this moment, and was harder to write than my Bar Mitzvah speech and my LL.M. in Taxation thesis combined. Thanks to Larry Starr, Brandon, Kevin, commenting readers and patient editors for helping out with the May 23rd article, and improvements (which is a nice word for “corrections”) thereto that have be made since May 23rd. It feels like this was 40 days and 40 nights ago.
Beyond having to spend the amount borrowed within that general 8-week period on permitted expenses, borrowers had to maintain existing salary/wage and employee headcount levels to avoid having a portion of their loan forgiveness reduced. Further, early on in this process, the SBA issued an Interim Final Rule that requires that no more than 25% of the loan forgiveness amount be attributable to non-payroll costs (interest, rent, and utilities), meaning, we later learned, that the amount forgiven would be reduced if non-payroll related expenses exceed 1/3rd of payroll related expenses (health insurance and retirement plan expenses are considered to be payroll expenses for this purpose). Most recently, one rule will require employers to report employees who were laid off and refuse to come back to the unemployment authorities—yes, this could get nasty.
All of these rules, and the business and financial crisis that tens of thousands of small businesses have found themselves in, have caused a near hysteria among a great many borrowers and their CPAs, financial, and legal advisors as they have struggled to determine whether to spend money during the 8-week period on payroll or other expenses, or reduce staff and expenses to save cash that would be better used later as the economy reopens, but would not be forgiven unless spent during the 8 weeks.
The obvious strategy of the Treasury Department was to push hard to have the money spent in the first 8 weeks to get the economy back up and running. While this strategy may have seemed fine when there was a chance of this whole virus shutdown being over in 8 weeks, the simple fact is that many businesses and entire industries are still shut down, and that it is a very serious threat to public health for Congress to force businesses open by giving their owners no forgiveness of loans unless money is spent, not to mention that these businesses have a much better chance of surviving if they spend the money on the right things at the right time.
So along comes the House of Representatives, with bipartisan legislation appropriately titled as the “Paycheck Protection Program Flexibility Act of 2020” (H.R. 7010) which would provide much needed relief. This bill was passed by the House on May 28th with a vote of 417-1 to handle the problem in a logical and borrower-friendly manner and is now being considered by the Senate.
This House Bill is remarkably short and to the point, containing only short sections, which will do the following:
1. Borrowers Can Extend the 8 Week Period to 24 Weeks. This will make it much easier for borrowers to get full or close to full forgiveness on their loans, but also makes it more challenging to keep a full workforce in place to qualify for full forgiveness, as further discussed below. This legislation would also allow borrowers with outstanding loans as of the date of the enactment of this legislation to make an election to have the original 8-week period apply in lieu of the 24-week period. This election would make sense for borrowers that have already spent the funds on sufficient expenses that provide for full forgiveness, so they can confirm their loan forgiveness and be better able to borrow, attract capital, have cleaner balance sheets, and better mental health.
2. The 75% Test Now Becomes a 60% Cliff! The Bill would change the 75% test that was issued by the SBA which requires that at least 75% of the amounts forgiven have to be spent on payroll expenses, meaning that if otherwise countable interest, rent and utilities exceed 1/3 of what is spent on payroll, health insurance or retirement plans, then the forgiveness will be reduced. It is questionable whether the SBA had the authority to pass this rule, and years of litigation were certain to keep many lawyers busy and borrowers in doubt, so Congress is hopefully stepping in to clear this up.
To be eligible to receive loan forgiveness under this new legislation, an eligible recipient of a PPP loan will now be required to use at least 60% of the loan amount for payroll costs, and may use up to 40% for permitted rent, utilities, and interest on secured debt, as defined in the law.
3. Penalties and Calculations for the Reduction in Work Force – June 30th Rolled Back to December 31st. The loan forgiveness rules that are currently in place contain a provision which generally reduces forgiveness in proportion to the reduction of the loan recipient’s workforce during the 8-week period, if the same number of employees are not hired or rehired by June 30th. This new law would modify this provision by using the 24-week period instead of the current 8-week period, while also extending the June 30th “amnesty rehire date” to December 31st. An example of how this would work is as follows: If a business that had 100 employees before the virus reduces its workforce to 50 employees during the 24-week period, it will nevertheless receive complete forgiveness of its loan if it spends what was borrowed on payroll, health insurance, retirement plan contributions and permitted interest rent and utilities during the 24-week period, as long as it has 100 employees on December 31, 2020, and they apparently do not have to be the same employees, or even doing the same things as the pre-virus employees.
4. Some May Still Be Hurt. Some businesses will be better able to have the 100 employees on June 30th while they are still operational with a chance to survive, as opposed to waiting until December 31st as the alternate testing date. However, if we do recover from this virus-caused recession, or whatever it is, most businesses will find this change to be advantageous, assuming that they stay open and can be back to full force, or implement some other configuration that provides for the equal number of full-time employee equivalents on December 31st. So, do you need to plan on working New Year’s Eve if you are employed in December by a PPP borrower? Fortunately not, in that receiving earned Paid Time-Off is counted as working for purposes of this rule, and getting to what may be a virtual New Year’s celebration for many.
5. New “We Tried to Rehire But We Really Couldn’t Exception”. The legislation also provides an exemption from a reduction in loan forgiveness for employers that have reduced their workforce if, during the period beginning on February 15, 2020, and ending on December 31, 2020, the employer, in good faith, is able to document one of the following:
A. Could Not Find Qualified Employees to Hire. To qualify for this exception, borrowers must establish an inability to rehire individuals who were employees on February 15, 2020, and an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020. This requirement seems as if it would be easy to satisfy for most employers given the large unemployment rate, but in some sectors of the economy it is hard to find qualified employees, and the health industry and other parts of the economy are hiring workers that had formerly been available for other sectors. On the other hand, please send any resumes for experienced corporate or estate planning paralegals who would like to live in Clearwater, Florida to me as soon as possible.
B. Could Not Restore Business To Comparable Level of Activity Because of Social Distancing or Other Federal Health Guidance. To qualify for this exception, the borrower establishes an inability to return to the same level of business activity that the business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
This will be a somewhat vague standard, as many businesses will not be able to come back to full size because of many factors, and in some cases only indirectly by reason of Federal guidelines. Hopefully, the Senate will provide language that will be more clear, but the above may be what we receive, and many businesses will need to save their cash to see if they are able to fully staff up by December 31st, based upon what the Governmental agencies do between now and then.
6. Repayment Period Extended to Five Years with 1% Interest During the Five Year Term. The proposed legislation would also extend the period for repayment of loans still owed, after being reduced for expenses that qualify for forgiveness and the EIDL grants (of up to $10,000), from 2 years to 5 years, and allow for payments on the loans to be deferred until the date on which the SBA makes a determination on loan forgiveness of the applicable borrower (which could be up to 150 days after submission of the loan forgiveness application under current guidance). We are not sure what this means, but it sounds good. The interest rate for these loans would remain at 1%.
7. Two Year Deferral of Employer’s Share of Payroll Taxes for All Employers. The final change under this Bill would be that borrowers will be eligible for the deferral of payment of the employer’s share of Social Security payroll taxes (6.2%), regardless of whether the borrower receives loan forgiveness. This allows borrowers to now defer the payment of the employer’s share until 2021 when 50% of such taxes must be paid, with the remaining 50% due in 2022.
8. Deductibility of Expenses Still at Issue. Many of us were expecting Congress to act on the IRS’s position that monies spent from PPP borrowed funds that are forgiven would not result in tax deductions for the borrower, which would have given borrowers a double advantage. While the chairman of the House Ways and Means Committee and the Senate Finance Committee have both indicated that this was what was intended, and what should happen, perhaps this is not so agreeable to a sufficient number of senators and congressmen to make it a “no brainer.”
H.R. 7010 is delightfully short, and while it is disappointing that Congress will not act to clear up many issues resulting from the “overnight drafting” of the CARES Act and a number of somewhat ambiguous SBA pronouncements, for the vast majority of borrowers the forgiveness issues will go by the wayside when they have spent significantly more on the permitted “forgivable” expenses during the 24-week period, and can have a work force the size of what they had before the virus by December 31st.
But beware, because thousands of borrowers will inadvertently violate the law that prohibits spending the PPP proceeds on personal expenses and payrolls exceeding more than $100,000 per annum, ratably applied, per employee, and many more will face bankruptcy if they cannot bring back the same number of workers they had, or fit within an exclusion and have to “pay the piper” in five years. Many businesses do not have the sophistication or discipline to set money aside or to plan to be able to repay a loan off in 5 years, so there will be carnage up the road for many, but hopefully the economy will be back on its feet by then so that full employment will nevertheless continue.
While the result of this or similar legislation will be that fewer jobs come back immediately, and fewer workers will be off of unemployment because businesses will spend what remains of their PPP money more gradually, there should be a more efficient and effective use of the funds. This will give businesses a better chance to take a deep breath and plan ahead to recover from the horrific economic nightmare that so many are enduring, while also giving financial advisors and CPAs more time to wrap their arms around how the rules work in order to advise borrowers on how to best spend monies, and what their expected forgiveness will be.
From our experience, far too few borrowers realize how difficult their financial situation may become, and should carefully consider how to handle their situation and leave enough cash aside for bankruptcy proceedings or other almost unthinkable things that may have to happen to their businesses and professions, as covered in my April 5th posting entitled What To Do If Your Company May Be Or Becomes Insolvent.
As with many other financial advisors, I sincerely hope that this law passes, so that the suffering caused by the PPP Act itself does not exceed other problems that borrowers and their advisors are already having to endure, and so that Kevin can spend another 30 hours updating his spreadsheet to help CPAs give their clients much better news and guidance on loan forgiveness than was going to be the case.