Updates to Paycheck Protection Program loan forgiveness

There have been many recent changes regarding loan forgiveness under the Paycheck Protection Program (PPP). These new developments are very positive for borrowers and make it easier for them to qualify for loan forgiveness. These new rules have come about from the Payroll Protection Program Flexibility Act signed into law on June 5, 2020 and postings from the SBA. This article explores the important changes and clarifications.

1. The covered period of loan forgiveness is expanded from 8 weeks to the earlier of 24 weeks or December 31, 2020. If the borrower received the loan before June 5, 2020, then they can elect an alternative period which is an 8-week period that start on the first day of their first pay period following the loan disbursement date.
2. The amount that can be spent on non-payroll costs has been increased from 25% to 40%. If the amount spent on non-payroll exceeds 40%, then the amount of loan forgiveness is reduced to the point where the non-payroll portion is 40%. Eligible non-payroll costs include those expenses paid or incurred during the covered period. The incurred expenses must be paid by the next regular billing date even though it is after the end of the covered period.
3. Those who experience loan forgiveness can fully participate in the delay of payment of employer payroll taxes.
4. The payback period is extended from two years to a minimum of five years.
5. The rehire safe harbor is extended from June 30, 2020 to December 31, 2020.
6. A new safe harbor is created for those who experience a decrease in full-time equivalent employees:

During the period beginning on February 15, 2020, and ending on December 31, 2020, 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—

(A) is able to document:

• (i) an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and
  • (ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or

(B) is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.

The paragraph (B) safe harbor should be especially helpful to those in the restaurant industry who have in most cases not been able to operate at full capacity.

7. For the amount of compensation paid to owners (owner-employees, a self-employed individual, or general partners) that is eligible for loan forgiveness, the amount is:
   1. capped at $20,833 (the 2.5-month equivalent of $100,000 per year) for each individual or the 2.5-month equivalent of their applicable compensation in 2019, whichever is lower, for a 24-week covered period;
   2. capped at 8/52 of 2019 compensation (up to $15,385), for an 8-week covered period
8. Generally, employer contributions for employee health insurance count as eligible payroll costs for loan forgiveness purposes. However, the cost of health insurance for the self-employed, general partners or owner-employees of an S Corporation do not count, because such costs are already included in their compensation.
9. While employer contributions to employee retirement plans generally count as eligible payroll costs for loan forgiveness purposes, the cost of retirement plans for the self-employed and general partners do not count because such costs are already included in their compensation.
10. Hazard pay and bonus pay count as eligible payroll for loan forgiveness purposes for those employees whose annual pay does not exceed $100,000. This may be helpful to those who choose an 8-week period.
11. It could take the lender up to 60 days to approve the loan forgiveness application and the Small Business Administration (SBA) another 90 days to grant final approval.
12. The SBA has a 6-year statute of limitations on reviewing the loan that starts on the day the loan is forgiven. In addition to documents required to be submitted with the application, there are many more that need to be kept in the files.

The content contained in this article is for information purposes only and not tax advice.  You should consult your own tax advisor for tax advice that applies to your particular situation.

John M. Stevko has over 40 years of professional experience as a tax practitioner, national seminar instructor, writer, and business owner. John began his career with what is now a “Big 4” public accounting firm before founding a local CPA firm in Beaverton, Oregon. At the same time, John began speaking for Gear Up Tax seminars, eventually becoming a managing partner of the business. John has lectured on tax law and healthcare reform throughout the country at national conferences and in-house for top 100 CPA firms and the large banking industry. John is a graduate of the University of California at Davis.