New Law Provides Greater Flexibility for Borrowers
Dealers Need to Review Adjusted PPP Loan Timetables
By Jane Saxon, CPA, Somerset CPAs and Advisors
President Trump has signed the much-anticipated Paycheck Protection Program (PPP) Flexibility Act of 2020. The new law comes just in time for many PPP borrowers who are reaching the end of their original 8 week covered period. It provides an additional 16 weeks of time to spend PPP loan proceeds on eligible expenses and will also increase the percentage of “non-payroll” expenses eligible for forgiveness.
Significant changes to the forgiveness requirements are:
- Extends the “covered period” during which loan funds must be used for eligible expenses from 8 weeks to the earlier of 24 weeks or December 31, 2020. The original 8-week period may still be elected.
- Increases the maximum payroll amount per employee from $15,385 to $46,154 during the extended covered period.
- Changes the FTE safe harbor date (the date to restore FTE count to pre- COVID-19 levels) from June 30, 2020 to December 31, 2020.
- Provides additional FTE reduction exceptions to allow for changes in business activity and inability to hire similarly qualified employees.
- Changes the required spend for eligible payroll costs from 75% to 60% of forgivable funds, which then allows up to 40% of loan funds to be used for non-payroll, eligible expenses.
- Changes the loan term of unforgiven amounts to a minimum of 5 years and maximum of 10 years which overrides the SBA original term of 2 years. For existing loans, the lender and borrower must agree to the change in the term.
- Allows employers who receive PPP loan forgiveness to also qualify for payroll tax deferment. (The ability to defer the employer portion of payroll tax for the remainder of the year to be paid in two installments – 50% by 12/31/2021 and 50% by 12/31/2022.
- Extends the payment deferral period from 6 months to the date forgiveness is determined.
Although the new law allows much needed flexibility, it also requires borrowers to make more decisions. PPP loan recipients will need to determine if they should elect to stay with the 8-week covered period, choose the alternative payroll covered period, or adopt the 24-week period. This decision will be based on many factors including eligible funds spent to date, the increase to non-payroll eligible expenses, current FTE count, consideration of staffing requirements during the extended 16 weeks and other factors that are unique to a borrower’s industry or business. The adoption of the extended period may impact loan covenants, bonding, and prequalification capacity, etc. in certain industries if borrowers are required to carry the funds as a current liability past the end of the current year.
The new law will require the issuance of an updated SBA Forgiveness Application. Borrowers will have 10 months from the end of their elected covered period to apply for forgiveness or begin making payments. Borrowers should consider the timing of their forgiveness application as well, giving the potential of additional updates in the future.
Jane Saxon is a CPA at Somerset CPAs and Advisors and has conducted two webinars for RVDA through strategic partner The Stanek Group at Morgan Stanley. She can be contacted via email at firstname.lastname@example.org.