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Law360 (June 15, 2020, 6:16 PM EDT) --
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| Christina Strasser |
As enacted, the PPP loans are to be forgivable when used for specific business and payroll expenses during a specified time frame. Any forgiven loan amounts are excluded from a business's taxable income.
As the centerpiece of the CARES Act relief, guidance from the U.S. Small Business Administration and the U.S. Department of the Treasury interpreting gray areas of the PPP has become critical for businesses.
For example, on May 22, prior to passage of the Flexibility Act, the SBA released interim final rules clarifying, among other things, that bonus and hazard pay to employees count towards forgivable payroll costs. However, even given helpful clarification, the PPP relief became inaccessible for many businesses due to insufficient funding and lengthier pandemic-related shutdowns, necessitating congressional action.
The changes made to the PPP by the Flexibility Act include:
- Allowing businesses 24 weeks — or until Dec. 31, if that comes first — post-loan origination to use loan money that will qualify for forgiveness. This applies to both new and existing loans;
- Reducing the amount of loan money required to be spent on payroll expenses from 75% to 60%, allowing more funds to be spent on rent, utility payments and mortgage interest.;
- Extending the time period for the rehiring exception to forgiveness reduction from June 30 to Dec. 31, and adding new safe harbors for employers who could not find qualified employees or were unable to restore business operations to Feb. 15 levels due to COVID-19-related operating restrictions;
- Extending the loan terms from two to five years, unless otherwise modified by lenders and borrowers;
- Permitting payroll tax deferment for businesses that receive PPP loans regardless of loan forgiveness. Under the CARES Act and subsequent interpretive guidance, payroll tax deferral could only be utilized up until a business received notification of loan forgiveness; and
- Replacing the six-month deferral of PPP payments due with deferral until the date on which the amount of loan forgiveness is provided to the lender.
The flexibility added by these changes ensures that businesses will be able to take advantage of the PPP while handling their specific employment and reopening issues. The extension of the time period for the rehiring exception to loan reduction and addition of rehiring safe harbors are critical for employers trying to balance reopening with the new normal of the workplace and hiring market.
Under the PPP, an employer's loan forgiveness will not be reduced if, among other things, it maintains or restores full-time equivalent employee levels to its Feb. 15 levels. The PPP Flexibility Act pushes out the deadline by which employers must meet this measure, giving them until the end of the year to bring employee levels back up.
Recognizing that an extension of time may only be so helpful if an employer cannot find the right employees, or if returning to Feb. 15 levels would jeopardize the safety of a workplace, the act includes two new hiring safe harbors from reduction in loan forgiveness.
The first safe harbor, which provides protections for employers unable to find qualified employees, is not only aimed at a scarcity in skill set, but relieves employers from potential market gaps directly linked to COVID-19 risks and realities.
The second safe harbor covers those employers for whom rehiring doesn't square with new social-distancing and safety policies.
To claim safe harbor based on such policies, however, an employer must be following the requirements established the U.S. Department of Health and Human Services, the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, and must be able to document the same. While these exceptions are welcomed, there is room for interpretation and questions about their applicability.
The eased restrictions on expenses eligible for full forgiveness, which reduce required payroll expenditure amounts from 75 to 60%, harmonizes with the above changes to rehiring. If, for example, an employer cannot restore its employment levels to what they once were due to social-distancing policies, the ability to use 15% more on nonpayroll expenses without suffering a reduction in loan forgiveness is in line with the reality of that employer's situation.
What's Missing From the Law
There are notable missed clarifications and corrections in the PPP Flexibility Act. The PPP Flexibility Act does not clarify the parameters of the required PPP certification that "[c]urrent economic uncertainty makes [a] loan request necessary to support the ongoing operations of the Applicant" — a requirement that has continued to be a source of concern for employers whose loans do not fall within the less-than-$2-million safe harbor, announced in Small Business Administration FAQ 46.
The law also fails to address the deductibility of expenses paid for by PPP loan funds, which the Internal Revenue Service determined would be impermissible double-dipping under the Internal Revenue Code and tax regulations, due to the fact that forgiven loan amounts are already excluded from taxable income.
An effort to provide for such deductibility and correct an interpretation that many lawmakers believe went against congressional intent fell short in the Senate. The Senate was expected to revisit the legislation, but it is unclear how much urgency Congress now feels following the better-than-expected May jobs report, which was released on June 5.
SBA Clarification and Forthcoming Guidance
On June 8, SBA Administrator Jovita Carranza and Treasury Secretary Steven Mnuchin released a joint statement,[1] clarifying that partial loan forgiveness will continue to be available under the PPP Flexibility Act's new 60% threshold for payroll expenses. Therefore, if a borrower uses less than 60% of the loan amount for payroll costs during the required time frame, the borrower will still be eligible for loan forgiveness, "subject to at least 60% of the loan forgiveness amount having been used for payroll costs."
Under previously released PPP guidance, a borrower failing to spend the original 75% threshold amount of its loan on payroll expenses could still qualify for a reduced amount of loan forgiveness. As enacted, the PPP Flexibility Act is unclear on this point.
By the joint statement, the SBA, in consultation with Treasury, stated that it will "promptly issue rules and guidance, a modified borrower application form, and a modified loan forgiveness application" implementing the changes made by the PPP Flexibility Act. Given this statement, we should expect more guidance over the coming days and weeks.
Christina J. Strasser is an associate at Williams Parker Harrison Dietz & Getzen LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the organization or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] sba.gov/about-sba/sba-newsroom/press-releases-media-advisories/joint-statement-sba-administrator-jovita-carranza-and-us-treasury-secretary-steven-t-mnuchin.
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