June 8 Update
The penultimate paragraph of this article explains the 60 percent cliff seemingly created by the PPPFA. The plain text of the PPPFA supports this interpretation – in fact, Senator Marco Rubio was concerned about the unintended consequence and requested that the SBA resolve this issue. On Monday, June 8, the Treasury Department and SBA issued a joint press release stating that it will provide the requested interpretation: “If a borrower uses less than 60 percent 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 percent of the loan forgiveness amount having been used for payroll costs.” In other words, you have to spend 60 percent of the PPP loan amount on payroll costs, but you have two years (five years if you received your loan on or after June 5), rather than 24 weeks.
The same press release also explains that “new rules will confirm that June 30, 2020, remains the last date on which a PPP loan application can be approved.” We expect that the Treasury will correct this because Section 3(a) of the PPPFA extended this date to December 30. With few exceptions, the Treasury has consistently interpreted PPP loan provisions in favor of borrowers. We do not expect a deviation here, especially in light of clear statutory language.
With the Senate’s passage of, and the President’s expected signature on, the Paycheck Protection Program Flexibility Act (PPPFA), HB 7010 (discussed in detail here), increases the ability of Paycheck Protection Program (PPP) borrowers to maximize the benefit they receive from the program by:
- Extending the period during which a PPP borrower can have qualifying costs forgiven;
- Extending the two-year term of PPP loan to five years;
- Increasing the cap limiting forgiveness of non-payroll costs to 40 percent of the forgivable amount;
- Ensuring forgiveness has no impact on an employer’s ability to defer their portion of social security taxes; and
- Extending the deadline to restore reductions in headcount and compensation.
Because the Senate passed the same bill as the House with no amendments, and we have already summarized those provisions in our prior article on the PPPFA, we limit this article to one potential trap for the unwary.1
The language Congress used to increase the cap on forgiveness for non-payroll costs could also alter the rules governing forgiveness for the entire PPP loan. The Small Business Association (SBA) issued its first (of 15) Interim Final Rules (IFRs) governing PPP loan forgiveness in early April. In the IFR, the SBA adopted the position that “not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.” As demonstrated by the PPP loan forgiveness application, this (pre-PPPFA) position meant that the forgivable amount was capped at payroll costs divided by 75 percent.
PPPFA now changes the SBA rule by increasing the non-payroll cost threshold to 40 percent, i.e., payroll costs divided by 60 percent. Significantly, however, the Congress phrased the limit differently in the PPPFA: “to receive loan forgiveness under this section, an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs, and may use up to 40 percent of such amount for [other covered costs].” This change creates a cliff for forgiveness — if a borrower spends at least 60 percent of the PPP loan proceeds on payroll costs, they are eligible for forgiveness of all of the PPP loan (assuming sufficient forgivable costs). On the other hand, if the borrower spends anything less than 60 percent (e.g., 59.9 percent) on payroll costs, they disqualify themselves from receiving any forgiveness at all. PPPFA amendments are retroactive to the effective date of the CARES Act so this new rule covers all existing loans.
Notwithstanding the statutory language in the PPPFA, it isn’t completely clear at this time whether the 60 percent cliff is a bug or a feature. Senator Marco Rubio (R-Fla.) had expressed concern over the effect such a punitive condition would have on small businesses, but eventually decided to vote in favor with the new language as is. Others in the tax community favored a strong incentive for PPP borrowers to… well, protect paychecks. We are eager to see how the SBA interprets the new language (presumably via FAQs followed by promulgation of a new IFR).
Also worth noting is what is missing from the PPPFA. IRS Notice 2020-32 provided that borrowers were denied tax deductions for expenses paid with amounts that were subject to PPP forgiveness notwithstanding the provisions in the CARES Act saying that forgiveness would not create (cancellation of debt) income to the borrower. We concurred with the IRS analysis, and said so here, despite the anomalous result it created if the borrower was a sole proprietor or partner. Several prominent members of Congress expressed astonishment at the IRS position and Secretary Mnuchin promised that the Treasury Department and IRS would re-examine their position. Accordingly, it is somewhat surprising that the PPPFA did not attempt to reverse Notice 2020-32.
1 We previously discussed another potential trap: using the extended 24-week period for incurring forgivable costs also appears to extend the period during which reductions in headcount or reductions in compensation reduce forgiveness to the end of the longer covered period (loan origination plus 24 weeks). Accordingly, many borrowers will likely wait until the end of the extended 24-week covered period and then decide whether they prefer a longer or shorter covered period. This trap is not further discussed in this article, but we urge readers to review this issue in our prior article.