New flexibility provisions passed for Paycheck Protection Program loan recipients
The Paycheck Protection Program Flexibility Act (“the Act”), signed June 5, 2020, provides more flexibility to taxpayers participating in the Paycheck Protection Program (PPP) loan program, recognizing that the impact of the COVID-19 pandemic has lasted longer than originally anticipated. The Act modifies certain deadlines, limitations, tax deferral policies, and other provisions, primarily related to rules around loan forgiveness. Read on for an overview of what has changed.
Maturity for loan balances remaining after forgiveness
The new Act establishes that new PPP loans that are disbursed after the Act’s enactment (June 5) would have a minimum maturity of five years, in lieu of the previous two years. It also allows borrowers and lenders to mutually agree to modify the maturity terms of loans already in place to adjust for this change.
Under previous legislation and guidance from the Treasury and SBA, payroll costs are generally eligible for forgiveness if they are paid or incurred during an eight-consecutive-week (or 56-day) “covered period” beginning with either the date of the loan’s receipt or the first day of the first payroll cycle in the covered period. Nonpayroll costs – i.e., interest on mortgages or debt, rent, and utilities that were in place before Feb. 15, 2020 – had to be either paid during the covered period or “incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period.”
The new Act extends the covered period, granting recipients the period beginning on the date of the origination of a covered loan and ending the earlier of 1) the date that is 24 weeks after loan origination or 2) Dec. 31, 2020. A borrower may choose to keep the original eight-week period rather than the new 24-week one.
Alternatively, the Act also pushes the expiration date for the covered period of any loan from June 30 to Dec. 31, 2020.
Extension of time for employee retention or recruitment
Prior to the Act, employers who had fewer full-time equivalent employees than they had prior to the pandemic, or reduced wages for such employees, faced reductions in their forgiveness amounts unless the borrower could restore those employee numbers or wages by June 30, 2020, or they could meet certain exemptions to establish that they were unable to rehire employees.
The Act gives loan recipients until Dec. 31, 2020, to make those rehires and restore wages, and establishes that the amount of loan forgiveness shall be determined without regard to a proportional reduction in the number of full-time equivalent employees if an eligible recipient, in good faith, is:
- Unable to rehire employees who were employees on Feb. 15, 2020, and unable to hire similarly qualified employees for unfilled positions on or before Dec. 31, 2020; or
- Unable to return to the same level of business activity as such recipient was operating at before Feb. 15, 2020, due to compliance with requirements and guidelines issued by federal agencies during the period beginning on March 1, 2020, and ending Dec. 31, 2020, “related to the maintenance of standards for sanitation, social distancing, or other worker or customer safety requirement related to COVID-19.”
Revised limitations on use of funds
Under previous regulations, the Treasury and SBA required that 75% of loan proceeds and forgivable costs must be utilized for eligible payroll costs, with spending on non-payroll costs limited to 25%.
The new Act requires a borrower to use at least 60% of the covered loan amount for payroll costs, and states that a borrower may use up to 40 percent for any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), any payment on any covered rent obligation, or any covered utility payment. Consistent with previous rules as confirmed in a joint statement by the SBA and Treasury on Monday June 8th, “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.”
Loan payment deferral period
The CARES Act allowed PPP loan recipients to defer repayments of those loans for at least six months, and not more than one year.
Under the new Act, recipients may defer repayments until the date on which the amount of forgiveness is remitted to the lender. The Act adds that if an eligible recipient fails to apply for forgiveness of a covered loan within 10 months after the last day of their covered period, they shall make payments of principal, interest, and fees “beginning on the day that is not earlier than the date that is 10 months after the last day of such covered period.”
Deferral of payroll tax payments
The CARES Act allows employers to defer their portion of Social Security tax payments for the period March 27 - Dec. 31, 2020. However, under the CARES Act employers were only eligible for deferral for the period March 27 until the date they received forgiveness of their PPP loan.
The new Act permits PPP loan recipients who receive loan forgiveness to defer payroll tax payments for the entire March 27 – Dec. 31, 2020, period.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
InsightFAQ: Employer leave-based donation programs for COVID-19 relief, and their tax implicationsLori Rothe YokoboskyRead rules and tax implications for programs in which employees forego leave in exchange for employer payments to charitable organizations aiding COVID-19 victims.
InsightTax reporting for nonemployee compensation: Be aware of new form, deadline for 2020Dana FriedThe new form 1099-NEC has a 2020 deadline different from the one previously used for Form 1099-MISC, and there will generally be no automatic extension available.
InsightU.S. Department of Labor revises rules and requirements for FFCRA emergency leaveDana FriedChanges include an adjusted “health care provider” definition and less timely documentation requirements for workers seeking leave for COVID-19-related reasons.
InsightAny deferred employee OASDI tax must be paid ratably starting in 2021, IRS saysDana FriedRead about the rules and risks of the coronavirus relief option to defer employee portions of Social Security tax through the end of 2020