Now that few people seem to care about COVID-19 anymore, I would like to focus on some good news from the government instead. Last week, the federal government passed the Paycheck Protection Program Flexibility Act (PPPFA). The PPPFA addressed many problems businesses had with the original Paycheck Protection Program. Also, the Small Business Administration issued a sample loan-forgiveness form for businesses wishing to seek forgiveness of the loans given to them.
For those who have not received a PPP loan yet, the deadline to apply is June 30, 2020. There is plenty of money left.
I will cover the major points of the PPPFA that I think will be the most useful to businesses and provide some general spending advice. If you have a large number of employees, have many part-time employees, or if you are scared of an SBA audit, contact a professional immediately.
Extension Of Spending And Hiring Deadlines
Before the PPPFA was passed, employers receiving PPP funds had eight weeks to spend it on payroll costs, rent, utilities, or business mortgage interest payments. They also had until June 30, 2020, to rehire employees that were laid off between February 15 and April 26, 2020. And all employees must be paid at least 75% of the wages they were paid in 2019 or the loan forgiveness amount would be reduced.
From my experience working on PPP repayment plans with several businesses, a timetable of eight weeks required a strict repayment schedule to qualify for full forgiveness. If one employee abruptly quits, due to COVID-19 or for otherwise, then the employer had to find a replacement quickly. That was under the assumption business would be back to normal again, including a business’s spending pattern.
It turns out that it was harder to spend the PPP funds as directed in eight weeks mainly because businesses could not meet the payroll cost requirement. In some sectors, like restaurants, business went down so much that they did not need their full work force. Also, it was also more difficult to rehire laid off employees by the June 30 deadline. Employees were reluctant to return because of the risk of contracting COVID-19 and the extra unemployment benefits they were receiving.
I’ve heard that some businesses had some backdoor workaround plans with highly trusted employees. Some would pay them for doing nothing. Or they would make side deals with highly trusted employees where the payments would be treated as advances and would be paid back later.
The PPPFA addressed the above by extending the timeframe to use the PPP funds to six months. Also, the rehiring deadline was extended to December 31, 2020. This expansion of deadlines makes it easier for businesses to use the PPP funds because they can rehire employees when they are actually needed.
Exemptions From Loan Forgiveness Reductions Due To Employee Reduction
The PPP loan forgiveness amount will not be reduced based on employee reduction if the employer can show they either tried to rehire the laid off employees working on February 15, 2020, and was unable to find similar replacements for those employees by December 31, 2020. They can also qualify for an exemption if they can show that by the forgiveness date, they were unable to return to the same level of business activity before February 15, 2020.
Most have recommended to make an offer to rehire the employee in writing or by email and to request a response. A copy of the offer and rejection should be included in the forgiveness package. Some have suggested adding language that failure to accept the offer would result in reporting the rejection to their state’s unemployment benefit agency. This should be enough documentation to satisfy the rehiring attempt requirement.
As for proving the inability to return to previous business levels, there are no specifics. How much of a decline is necessary? This may be clarified by the SBA in future regulations or through the individual lender. As a common sense matter, if the business can show that their business income has dropped to the point where they cannot afford to hire an employee without incurring a net operating loss, that should be enough. Also, keep a close eye on bank statements and note gross income reductions compared to previous years. I would also recommend keeping a copy of the state’s shutdown order — particularly if your PPP lender is an out-of-state bank unfamiliar with your state’s shutdown rules.
Reduction Of Minimum Spending On Payroll
The PPPFA also reduced the minimum 75% expenditure requirement for payroll expenses to 60%. The remaining 40% must be spent on rent, business mortgage interest, or utilities. There was some concern that if all of the PPP funds were not used as directed, then the entire PPP loan must be paid back and not just the portion spent on ineligible expenses. However, a joint statement from Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza suggests that there can be partial loan forgiveness so long as at least 60% of the funds have been used for payroll purposes.
If businesses have already made plans to spend at least 75% of their PPP funds on payroll, they should stick with their original plans. The modest reduction of the payroll expenditure requirement is most likely to be helpful for businesses that have trouble finding full-time employees.
Since Congress missed this, I am hoping that the SBA in future regulations is able to include personal protective equipment (such as face masks, gloves, and disinfectant supplies) in the definition of utilities.
Now, I want to provide some general advice for PPP recipients in light of the PPPFA.
Have A Payment Plan Set Up
While the PPPFA makes using the PPP funds easier, it is wise to have a payment plan set up for the next six months. For businesses that have not been affected by COVID-19 and other current events, you may be able to spend the funds fairly quickly and easily. For businesses that are unstable or has many employees, several plans may need to be reviewed to deal with certain situations.
Apply For Loan Forgiveness As Soon As You Are Eligible
In addition, the business does not have to wait until the 24 weeks are over. As soon as the business has spent the PPP funds, it can request forgiveness from its lender. I would advise doing so as soon as possible before the SBA or Congress changes the rules again, sometimes to the employer’s detriment.
You Cannot Give Yourself A Raise With PPP Funds
The question I get the most by far in all kinds of permutations and semantic gymnastics is: “How can I keep as much of the PPP money for myself without having to pay anybody else?” The straight answer is the SBA forgiveness application states that employers can only pay themselves the lesser of eight weeks’ worth of their 2019 annual W-2 wage or self-employment income or $15,385 (which is a $100,000 annual salary prorated to eight weeks.) You cannot get around this by contributing to a retirement account like a SEP-IRA.
The remainder has to be spent on raises to additional employees, new employees, or the qualifying nonpayroll costs described above.
One option is to wait the full 24 weeks and hope that Congress or the SBA changes the rule. If the economy continues to sputter, then this may be in the next stimulus package.
Pay Close Attention To The PPP Forgiveness Application Form
The application form can be found here. Reviewing it can help prepare you to plan for forgiveness.
The PPPFA provided the payment flexibility that businesses have requested. Businesses won’t have to resort to side deals, or strict planning, and will not be at their employees’ mercy. With the right planning, it will be easier for businesses to use the PPP money in the manner they think is best for their business while maximizing chances for forgiveness.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at sachimalbe@excite.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.