Here's the thing, friends. Even if a mid-game rule change is ultimately to your advantage, it’s still confusing and even disconcerting when it happens. When the game involves vast sums of money and the viability of your business, the stakes are even higher. That’s probably why so many people offline are asking us so many questions about the recent legislative and regulatory changes to Paycheck Protection Program (PPP), and why we want to discuss them here too.
As we’ve discussed previously, the Coronavirus Aid, Relief and Economic Security Act CARES Act) created the PPP. The goal of this low-interest and largely forgivable loan program is providing small and mid-sized business owners with a quick source of cash to pay employees and finance operations during the COVID-19 economic downturn. Last week, President Trump signed new legislation designed to make PPP loan forgiveness criteria much more flexible. Meanwhile, the Small Business Administration (SBA) was already scrambling to produce the regulatory details borrowers and lenders needed to participate in the program under its original terms. Now they are rushing to create new rules to implement the legislative changes.
There many nuances to the intersection of the new law with the existing program rules since the new law doesn’t render them all obsolete. To break it all down, here’s what the new law does, how (we believe) the existing rules affect the new law and some of the areas where we think the Administration needs to provide more guidance regardless.
The Paycheck Protection Program Flexibility Act of 2020 (PPPFA) gives new PPP borrowers and existing loan recipients more options, and make it much easier to obtain complete loan forgiveness. The provisions that change the original loan requirements in the CARES Act apply as if they were part of the original law.
Some of the most important ways the new law changes PPP loans include:
Covered Period Extended. New borrowers will have 24 weeks or until December 31, 2020, to spend funds for loan forgiveness purposes. Existing borrowers can change their spending window to 24 weeks or keep their original 8-week period.
Payroll Expense Requirement Lowered (Sort Of…). The percentage of loan qualified payroll expenses for loan forgiveness dropped from 75% to 60%. However, spending 60% of the loan proceeds on payroll during the spending period is mandatory if a borrower wants any portion of their loan forgiven.
Changes to Loan Terms. New borrowers now have five years to repay their loans. Existing borrowers can either keep their two-year loan term or increase it to five years. The guaranteed interest rate remains 1%.
Measurement Date Delayed. Borrowers now have until December 31, 2020, to restore employee counts and wages to pre-pandemic levels to qualify for full forgiveness.
Excludable Employees Borrowers were already allowed to exclude
people who refuse to return to work following a written offer;
employees who voluntarily quit during the spending period; and
employees who are fired for cause during the spending period, from the calculations requiring the forgivable amount be reduced for employers who do not maintain their workforce.
The new law will also allow borrowers to reduce their full-time employee count if they either:
1. cannot find a qualified replacement employee; or
2. cannot restore their business to pre-pandemic status as of February 15, 2020, due to the impact of COVID-19.
Expansion of Payroll Tax Provisions. PPP loan recipients may delay payment of their payroll taxes over the next two years, like other businesses.
Before the PPPFA was even a gleam in Senator Rubio’s eye, the SBA was issuing a stream of interim final rules and sub-regulatory FAQs addressing PPP eligibility criteria, the loan application, fund disbursement, acceptable expenses, and the loan forgiveness process. Some are still relevant. Some need to be changed. Some need tweaks, no matter what. Here’s how they break down.
PPP Elements That Will Stay the Same (Probably):
Eligibility Criteria. The original CARES Act provisions establishing which businesses qualify to apply for a PPP loan did not change. We expect all of the guidance explaining and expanding on that criteria will not change either.
Basic Forgiveness Timeline. The law changed the PPP spending period for forgiveness purposes for new borrowers to 24 weeks. However, the interim final rules outlining the basic timeline for lenders and the SBA to review and approve forgiveness applications once submitted should not change. Since the new law gives existing borrowers the option to convert their 8-week spending period to 24 weeks, we can expect that at least some borrowers will keep their original terms. So, regulatory timeframes that rely on the eight weeks are still relevant; they will just need expansion for borrowers operating under the new 24-week framework.
Forgiveness Application and Documentation. The PPP forgiveness application is going to need alterations to account for 24-week borrowers and the 60% payroll spending threshold rather than 75%. However, the application's general framework and documentation requirements should remain basically the same. Given that some original PPP recipients may elect to keep their eight-week spending period and could be in the forgiveness process now, their ability to rely on at least the documentation portion of the existing process is paramount.
Reference Period. Borrowers will still need to demonstrate how their business compares to before the pandemic, so the current terms for a reference period before February 15, 2020, should remain consistent.
FTE Calculation. The SBA established a 40-hour workweek standard for determining the number of full-time employees (FTE). They also allow for two alternative methods for accounting for part-time employees – pro-rating hours or counting each as .5 of a FTE. No need for this standard to change.
Forgivable expenses. Even though the spending percentages are now different, the definitions of forgivable payroll and non-payroll expenses are detailed in the CARES Act statute and will not change. Despite initial interest from some lawmakers to expand the scope of these expenses to include things like the cost of personal protective equipment, the final version of the PPPFA did not make any changes to the forgivable expense list.
Accuracy when it comes to loan eligibility, meeting the threshold of “economic uncertainty” and forgiveness reporting. All regulatory guidance to-date clearly places the responsibility for ensuring that all loan applications (both initial and forgiveness) are accurate on the borrower, not the lender. Larger borrowers should also expect to have to justify how they met the criteria of "economic uncertainty" required for PPP eligibility. The existing guidance establishing that the SBA will consider all borrowers of less than $2 million as automatically meeting the "economic uncertainty" criteria should stand.
Loan Audits. The SBA rules make it very clear that they can review any loan at any time, even up to six years after repayment. They plan to automatically review all loans above $2 million, in addition to other loans as appropriate, following the lender's submission of the borrower's loan forgiveness application.
Penalties - Falsifying an SBA loan application is punishable under the law by imprisonment of between 5-30 years and fines between $250,000 to $1,000,000. So, when it comes to a PPP application, honesty remains the best policy!
Details That Will Need to Change:
Loan Terms Process. Existing borrowers may elect to extend their loan term to 60 months, rather than 24, and new borrowers will automatically have 60 months to repay their non-forgivable loan balance. So new rules to facilitate the durational switch are necessary.
New 24-Week Spending Period. The PPPFA expands the spending period for forgivable expenses for new borrowers and gives old borrowers the option to extend their spending window. New rules to outline how existing borrowers make the switch, as well as a refinement to all current guidance that relies on the eight-week timeframe exclusively, will be crucial.
Switch to the 60% Payroll Expense Threshold. While the new law lowers the forgivable expense spending ratio to 60/40 for payroll/nonpayroll expenses, it also creates a spending cliff. If a borrower does not meet the 60% standard, then none of their loan is eligible for forgiveness. All of the old rules relied on the 75% qualified payroll expense standard, so they all will need immediate adjustment.
Exclusions. The old rules allowed borrowers to exclude certain employees from the calculations requiring the forgivable amount be reduced for employers who do not maintain their workforce at pre-pandemic levels. The PPPFA expands that list, requiring regulatory changes.
Measurement Dates. Previously borrowers had until June 30, 2020, to restore employee salaries and counts to prior levels to obtain full loan forgiveness. Now all borrowers have until December 31, 2020, impacting existing rules and the forgiveness application timeframe.
Areas That (We Think) Still Need More Guidance No Matter What:
Forgiveness Timeframe. The essential deadlines for lenders and the SBA are available. However, we would like to see more information about borrower notifications, handing disputes with borrowers and lenders regarding forgivable expenses, and the SBA appeals process.
Documentation. The PPP application details the documentation borrowers must provide. Still, it would be VERY helpful if there was a clear list in the regulations to borrowers to ahead of time, so they can be directed to maintain the correct records all along, without confusion.
Paid and Incurred Expenses. The rules around how incurred but not paid expenses that occur during the spending period need to tightening and perhaps could change a bit to account for the realities in health insurance billing cycles when you reinstate an employee.
What do you think, friends? Are we missing any aspect of the PPP loan process where more regulatory clarification is needed? How are you and your clients responding? We don’t know about you, but we are both grateful for the PPP safety net and wish it was a little more secure and less shifty. Even though PPP loans are providing needed assistance to millions of American small business owners, all of the changes and lack of certainty about the forgiveness process moving forward is tough for many borrowers. That’s team why the team at MZQ is now offering a comprehensive PPP loan assistance program. If you have any questions about it that you’d like to discuss with us, please feel free to reach out directly!
