PPP Flexibility Act: How It Impacts Businesses & PPP Loans
The PPP Flexibility Act includes a number of major changes to loan forgiveness and terms under the Payroll Protection Program.
For those who already have PPP loans, you may be wondering how this will effect what you owe and what the funds can be used for. If you haven’t applied for a PPP loan yet, you’ll want to make sure you have all of this information before accepting a loan. .
In this webinar you’ll learn:
- Which portions of PPP are impacted and which aren’t
- Loan forgiveness and repayment term changes
- Effect on existing PPP loans
- What it will mean for your business
Below is a transcript of the webinar.
Amanda: We'd like to welcome everyone to today's webinar, PPP Flexibility Act: How it Impacts Businesses and PPP Loans.
Henry Rinder: So thank you, Amanda. It's great to have everybody on this webinar. Once again, we have a piece of legislature that has passed to help us with COVID-19 economic implications and [inaudible 00:01:17] impact. And as soon as the bill was actually drafted and finalized through the Senate, I saw Nick walk in the office and he was already dissecting into the fine points of it, which is why Nick is here today, because I don't know anybody that really got into it so early, and digested this bill the way he did it. And obviously as soon as it got signed on June 5th, we wanted to address the amplification of this act on the Paycheck Protection Program's prior requirements. And we brought Joe, who obviously has been serving on our COVID-19 task force. We had several of our professionals on that task force, constantly monitoring how the government is responding to the economic crisis brought upon us by COVID-19.
As you can see on the agenda, we basically are focusing on the flexibility [inaudible 00:02:34] and I'm going to turn over to Nick so he can go through the first slides and bring us up to speed on what this act brings to us.
Nick Gutzmer: Thank you, Henry. So as you can see here, the bill was signed by Donald Trump on June 5th, and most of the features that this bill addressed are going to go retroactive to March 27th, the first date where PPP really started going live, and then also the rules were getting implemented. One of the major changes is that the covered period that we all knew as eight weeks has now been changed to 24 weeks. That is going to be applied for the new loans going forward and then also the old loans. However, what they did is they allowed the people that had loans existing before June 5th to make an election to keep that eight week cover period.
We'll touch on it a little bit later on when it may be smart to keep that eight weeks or let the 24 week period run its course. Probably the most notable change that you've heard and seen in articles is that they have now changed the use requirements of the PPP funds. Originally they started out at 75% payroll and 25% other uses. So your rent, your utilities, interest obligations, and so forth. Well now they have lowered that threshold to 60% payroll, 40% other payroll or non-payroll expenses. And that's been a huge help for our clients that we've seen so far. And we expect that to be a major benefit to those that got the PPP funds. And when this bill or the act was first signed, it was interpreted by many that there was a 60% threshold that needed to be achieved before you received any forgiveness. And the Treasury Secretary Mnuchin, and then SBA came out shortly after this act was signed and said that that is not the case, it was not their intentions.
Well, to further solidify that, there was an interim ruling issued today this morning, actually, and you can find that at the Treasury's website under the PPP section, that actually gives us explicit statement saying that that is not the case. They give you an example. So in their example, they mention you get a $100,000 loan. You use $59,000 on payroll, $40,000 on non-payroll items. You're going to get a forgiveness of 90,000 at that point. So it really helps solidify that this is the case. With many of these changes for the PPP funds, we've seen this is what senators or governors think. But when we get these final interim rules and examples from the SBA and the Treasury, it really helps solidify our understanding from a practice standpoint.
Henry Rinder: Thank you, Nick. As we move to the next slide, we'll turn it over to Joe, who will address the full time equivalents issue and the rehiring issue.
Joseph Andolino: Well, good afternoon everybody. Welcome back to PPP clarification. I think the essence of this new provision dealing with FTE is a general relaxation of the rules. So really what people are concerned about with full-time equivalents is how many people they have at the time they apply for forgiveness, which was June 30, and it goes forward as late as 12/31. But if you look at the new act, if you can document an inability to rehire individuals who were employed February 15th for any reason, then they don't count.
So what we're advising people to do, and let's take a typical employee who may have gone out under the enhanced unemployment and decided to stay on unemployment. If you send them a letter and you offer them their job and they fail to ... If they come back great, they're back and that's fine. And if that's an FTE that counts, they were here on February 15th, they're here on the testing date. They qualify. If they don't come back for whatever reason, they don't count. It's that simple. And if you make an effort to hire others that don't come back, come to work for you, that also doesn't count.
Now there's an economic test as well that just avoids the rule totally, which is if you have the ability to document that you have not returned to the same level of business activity that was in existence on February 15th, 2020, due to your compliance with various COVID regulations. Then the full time equivalency test is unnecessary totally. Now, when you think about what does that mean, same level of business activity, it probably means if you were to annualize your revenues in that timeframe February, and you forecast it a million, and now you're forecasting a half a million, they're basically saying all bets are off. There's no need to document how many full time equivalents that you have. It is important that you focus on this because there is a documentation requirement, and it can cut back on your forgiveness. But I think this new amelioration in this new act is, is very helpful.
Henry Rinder: Thank you, Joe. As we've gone through the change in the covered period, we've gone us for the full time equivalent definition and how it's mitigated now and perhaps relaxed, considering the circumstances we are in. There are also repayment term changes as we move on to the next slide. So Nick, can you pick up from there and tell us about these changes please?
Nick Gutzmer: Yeah, definitely. So worst case scenario with the PPP funds, you don't get a hundred percent forgiveness and you have this loan now that you're addressing. Whether you pay back the loan right away or the deficiency right away, or you take the loan, you can go either way. But the change that the new interim rule gave us, was that the minimum loan term is five years. However, what most people are seeing this great thing, "Oh, it's now five years instead of two," but it's not quite the case. The interim rule clarifies that that new five-year loan term is only for new loans. So if you've got a loan June 6th or later, you're stuck with, or you're given this five year term.
However, if you had a loan prior to June 5th, your maturity is still two years. Now, the interest rate has still been addressed at 1% as well. And if you read some of the interim rule and the guidance in the SBA rules, it says that it can go up to 10 years for a maximum maturity, but the secretary has already stated that five years is going to be pretty sufficient for anyone. I wouldn't expect anyone to get a loan that is longer than five years based on the temporariness of the economic issues that were being experienced here for COVID.
So another issue that was addressed and changed is this payment deferral. So under the original rules, you got a six month payment deferral after receiving the funds. They have now changed that to make more sense in my opinion, so when the lender gives you a final determination. Now that isn't necessarily that you had some forgiven and some not. If you got nothing forgiven, that counts as a determination as well. So you'll have up until that date before you have to make a payment. And then lastly, they have put a clock now as to when you have to apply for forgiveness. There's no start date, so some people may think you have to apply right at the end of that covered period. That's not the case. They don't say you have a month after the start. It's really up to you and how prepared you are.
But what they have stated is that you have 10 months from your last day of your covered period to apply for forgiveness. If you do not apply for forgiveness within 10 months, it automatically converts to a loan, even if you use these funds for covered expenses or qualifying expenses. Now, what I would say is, let's not wait to the end and be at the last minute, because we could have some documentation issues as each bank is going to be unique in what they request. Some may be more stringent than others. But I would say let's not be the first people through the door either, because as we've seen, there has been so many changes as these laws change and they get refined and clarified. We don't want to apply for forgiveness when maybe we get a little bit more later on. It's tough to say, but we know we don't want to cut it close to that 10 months.
Joseph Andolino: Well, the other thing Nick, and I think it's worth saying, it's in one of your slides here, they're saying to people there's going to be a new forgiveness form. So I mean, if I were out there, even if I thought I qualified under the old one, you might as well take a look at the new one because it might be even more clear, more helpful and less need for you to put information in that you may not want to do.
Nick Gutzmer: Yeah, exactly. There's been a ... I mean the amount of information that they're requesting, if you have, 5, 10 employees, it's not so bad, but as you start to get 50, 75, 100, you're really getting to a lot of documentation on an individual employee by employee basis. So maybe they say this is a little too burdensome for our small businesses. Because when we think of the majority of the businesses that got the PPP funds, and the ones they wanted to get those PPP funds the most are small businesses that may not have a robust accounting department in the company. And they rely on their CPAs, and it's definitely a burden for them. And to touch on Joe said, new forms coming out, they already have a new borrower application form.
So for those businesses that have not applied yet, there's a new form now that's slightly tweaked from the original form. But I'm sure there'll be rolling out more and more documents as we get these changes effectuated.
Henry Rinder: On the previous law, we had payroll tax, the [inaudible 00:13:05] provisions, which gave employers a break. But then there was also a basic ability to get forgiveness on PPP loans. And if you applied for that, you lost the ability to defer payroll taxes. I understand that in this new law, there's a change in these provisions. Could you address it please?
Nick Gutzmer: Yeah, definitely. So the OASDI is the employer, Social Security. And Amanda, do you mind changing to the next slide as well, please? So the OASDI we see here is the employer, Social Security, and as Henry mentioned, they allowed recipients of the PPP funds to defer the employer portion. So that's the 6.2% on the wages up to the maximum. And they would allow you to defer that up until your forgiveness decision date. And so it got a little tricky because who knows if you were stuck in the middle of the payroll period and so forth, it could be a little burdensome. However, with the flexibility act, they have removed this restriction retroactively as to March 27, 2020. And regardless of if you had the PPP funds or not, you can defer this tax as well.
So if you haven't done it yet, you can start. If you were concerned, maybe holding off, I would say get started now. It gives you an interest free loan and some additional cashflow. It may not be a big number for smaller businesses, but it can start to add up. And if you defer the employer, Social Security taxes, your first payment is going to be due on December 31st, 2020 with a 50% ... Oh, I apologize. You're going to defer through December 31st, 2020 with your first payment being due December 31st, 2021 at 50%. And then your next 50% will be due December 31st, 2022. So it can be a big help for those that have a lot more employees. But in the end, if you have cashflow issues, this is interest free loan, and it's a nice benefit to take care of and take advantage of if you can.
Henry Rinder: So as we move to the next slide Nick, I think you're going to approach this from what it means to our clients. We have this now, what seems like a relaxing provision somewhat. It's a change of rules that should make it easier for the client and for us in terms of compliance side. So please describe how that, from your perspective, affects our client base.
Nick Gutzmer: Yeah. Through talking with Joe and Henry, we really think that it does give businesses a ton of flexibility. And while there is flexibility, we are having to cope with some additional rule changes. Now, one of the things that could be troublesome for some companies is the FTE management over this new covered period. So because the covered period has been changed to 24 weeks as a whole through the bill, you now have to maintain your full time equivalent over that 24 week period.
So one of the examples we touch on here in the top, the first bullet point is, if you think you're going to have trouble maintaining your full time equivalents for the next 24 week period, so let's say you are a business now that may be in season. So here in South Florida, we are kind of coming into our slow point typically. It's been a little bit different now with the snowbirds sticking around a little longer to avoid COVID up North. But if you're expecting to have a decline in business due to natural seasonality of your business, it may make sense to get your eight weeks in now and move on whether you're a little bit short or not. But as Joe touched on the full-time equivalents can really have an impact on your forgiveness. So if you're close or if you can get to that 100% now with the relaxed rules of 60% payroll, it could be very preferable to go with that eight week election.
Now for businesses that may be really restricted by the guidelines of the CDC and OSHA and the other regulatory agencies, this is a bright light for you to carry on a little bit longer. Maybe you didn't want to bring on your employees just to pay them and use up the PPP funds. So now you have an additional time period to drag out their payroll costs. And you were really only given two and a half months of payroll. So they are now adding on at least three weeks. It could be even more, dependent upon where you were in your process, and you should be able to recoup the rest of those costs through payroll. And if it wasn't a hundred percent payroll, you now have the expanded ability to do more rent and utilities and those interests that were preexisting COVID times. So as Joe touched on, we are expecting a new form for forgiveness to come out that Treasury and SBA has already announced in their interim rules, that they are planning to give new guidance.
They will be revising the interim final rules that they issued previously. I would expect there to be more frequently asked questions added at this point. So it's going to be an ever-changing process like it has been for the last couple of months now. But it's a really bright light for those businesses that are struggling to get the payroll through. And maybe if you were unsure previously to get the PPP funds, maybe you were concerned about the certifications that were out there. We now know that anything under 2 million is going to be pretty easy to certify, but if you were still a little worried then, and now maybe you've changed your opinion and you want to go get those PPP funds, there's still tons of money out there. So if you were to get the loan now, it takes you pretty much close to the end of the year in that 24 week period.
So it's a great opportunity for businesses to take advantage of. And with this new expanded timeframe, I would expect pretty much everyone to get a hundred percent forgiveness at this point, based on the two and a half months payroll that you're getting. So because of the way they calculate it, it should be pretty good.
Henry Rinder: So Nick, before we planned out this webinar, one of my partners asked if we could perhaps approach and address some other loans that are available to clients. For example, Main Street lending programs through Federal Reserve and, and EIDL loans through SBA. And I was planning on doing something about presenting the requirements, and various options that are available in these packages. But when I looked at the overall sort of premise of presenting it today, I realized that perhaps we just need to set up another webinar, and perhaps even bring somebody either from the banking side or from the Federal Reserve to address some of the fine points of these different programs.
The one thing that is common though, as I went through the paperwork from the Federal Reserve or from the SBA, is that the use of the funds in all cases is directed to maintaining the payroll and paying for operating expenses. It is not designed to replenish the profits, the lost profits. It is not designed to basically allow the businesses to expand the businesses. So from that perspective, can you address the PPP loans from the same perspective, because we are getting those questions? Can I-
Joseph Andolino: Well, I mean look, this act that was just passed goes back and retroactively amends the Cares Act. Let's not forget there are obligations in the Cares Act to only spend the money. Your spend, your use of funds is limited to payroll costs, mortgage interest, interest on other debt that existed before February, qualified rent, qualified utilities and transportation costs, that's it.
You can't spend it on anything else. And you certify that you expect not to spend it on anything else. Now there's a lot of people that say, "Well, how do they know?" And all these questions. You are supposed to spend the money primarily and substantially on payroll costs. That's really what they're telling you. And they're giving you another 16 weeks to do it. I mean, so why shouldn't we say, do your best to spend it on payroll costs, which has a very broad definition. It's not just salaries. And if you do that, and if you get the 60% or even less with proportionate forgiveness, the loan is going to be forgiven. In effect, this is a grant if you plan it right. That's the bottom line. If you use it the way it's supposed to be used, you certify and you document.
And I would also say, yes, you have to prove that you have the same number of full time equivalents that you had at the beginning of the period, unless you fall into one of these exceptions. But that's where I am on this. And I think most people that are still operating will wind up with a forgiveness.
Henry Rinder: So Joe, I'm glad you brought it up. That it's very much like a grant because when we manage grants, normally we tell clients that because it's the compliance, the grant agreement compliance, is an issue that you got to follow whatever the compliance requirements are to a T. And [inaudible 00:23:11] many times we tell people that they got to set up a separate account, put the money in that accounts, and use the proceeds from that account to spend on the allowable expenses that are provided for in the grant.
Now let's take a look at PPP situation where our clients get, let's say hypothetically a million dollars to spend. Do they have to set up a separate account and trace the money they received from PPP on the specific expenses that I allow in the law?
Joseph Andolino: I think they should, because there is an obligation for use of funds. Of course, there is also a provision that says, if you don't apply for forgiveness, you just repay the loan, if you don't apply for it after 10 months. So I don't know what level of audit there will be. But I've advised clients to have the separate account and to be very careful about documenting what you spent the money on. And of course cash is fungible, so a separate account helps that.
Nick Gutzmer: Yeah. And from what I've heard on some of my clients is it was not possible to get an account set up right away with the lenders, because so many of the lenders were being overloaded with these applications. And these funds got either deposited into an operating account or an account that they had existing. So to Joe's point, documentation is going to be key. As long as you are making the proper documentation, and the SBA, if you look up the forgiveness application, that does give you examples of the documentation that they'll be looking for to certify these expenses. And having that documentation, starting to accumulate it now will make the forgiveness process a lot easier, because as we touched on previously, it is going to be a lot of documentation as it stands now.
It'll be documented on an employee by employee basis. And not only do you have to worry about your documentation on this eight week period, but you also have to do the FTE measurement period. And whether that is January 1st to February 15th, 2020, or you go back into the 2019 measurement period, we have to have the proper documentation for that as well so that when we do our comparison of full time equivalents, we can have the necessary support, because it can be a big hit to forgiveness if you're unable to meet the full time equivalent measurement or those exceptions that Joe touched on earlier.
Henry Rinder: Nick, you mentioned that there's still money available in the paycheck protection program. And you were suggesting that perhaps businesses that have not applied, they should consider applying now. And we have been getting calls from people that actually considered repaying and repaid paycheck protection program loans, because they were concerned with the certification of the need. Did they really have the need to borrow the funds, knowing what they know? So now that we got this amendment to the original law, is there any further relaxation of that type of certification? To what extent do clients have to go to certify that they have a need for this loan?
Joseph Andolino: You don't have to worry at all if your loan is under 2 million with respect to the certification that you were impacted by COVID. There are other certifications Henry, like I'm going to spend the money on payroll costs and other allowable costs. That you should have be very serious about your certification, because it can be audited. But the overall certification about there was enough economic uncertainty that I was impacted by COVID, the Treasury department has announced they're simply not going to examine that for loans on $2 million, period.
Nick Gutzmer: Yeah, and to expand on that Joe, they only have so many limited resources to put out there to audit the loans. I would think they're going to worry about the bigger fish in the pond here. But ultimately what the PPP helped do was relieve the stress on state and federal governments to have unemployment claims. By keeping people employed and helping fund that, now we have fewer people applying at the state level and then getting that additional $600 of federal unemployment. So we really kind of used the businesses as a conduit to get those funds out there. So as long as you're using it on payroll to Joe's point, I think even if there was maybe lesser levels of uncertainty, I think it would be okay.
Henry Rinder: Finally, the most gray area of this law, and that's deductibility of expenses related to the forgiveness amount. So obviously originally when the Cares Act was passed, it looked pretty clear that the proceeds were supposed to be tax-free.
Joseph Andolino: Correct, it's in the statute.
Henry Rinder: And it was not clear what happens to the expenses, but we naturally assume that the expenses have nothing to do with forgiveness of income on the side of the proceeds. Then the Treasury came out and said-
Joseph Andolino: They said, nondeductible to the extent it's ... if the expenses are otherwise deductible, to the extent that they're funded by forgiven funds, you don't get a deduction. That is the Treasury Department's analysis. It's an IRS notice to be clear. It's an IRS notice, which what's the effect of that? How do you feel about that? I think the IRS, they're treating it as if it was tax exempt interest income that you spent immediately on a deductible item. And there's a statute on that. And that was their analogy. There's a lot of debate. The Senate finance committee doesn't like it. But as we speak, that's the IRS' position. It's non-deductible [crosstalk 00:29:12] forgiven.
Nick Gutzmer: As Joe touched on, there's senators on both sides of the aisle that are screaming to try to get this corrected. And it would not be surprising here if before we got off the call or days later, there was a new change to this. But up until that point, we kind of have to operate that these expenses are going to be nondeductible expenses.
Joseph Andolino: It is a windfall if you get a forgiven loan and then you deduct the expenses. Right? So I get it. So I would be careful here.
Nick Gutzmer: It might be better to aim on the cautious side here when it comes to tax planning, but until we get further, guys-
Joseph Andolino: Don't spend all the money.
Henry Rinder: Amanda, I'm sure we've got some questions from the audience. We probably have one or two minutes for those questions. So perhaps if you could take a look and see what's coming through.
Amanda: Yeah. So we had a few people ask kind of the same question, which is basically if they use that full blown percentage, if it takes them after the eight weeks but if it's done before the 24 weeks, can they apply for forgiveness sooner? Or do they still have to wait until that full time period is up to apply?
Joseph Andolino: I think you can apply at the time you believe you have forgiveness. If it's in the 16th week, and there's going to be a new forgiveness form that should make that clear.
Nick Gutzmer: And that's exactly it. If we haven't received a new forgiveness form and you've spent a hundred percent of your funds and you qualify a hundred percent for forgiveness, I would probably pump the brakes a little bit, start getting my documentation in order. But once a new form comes out, go ahead and pounce on that to get the forgiveness taken care of. I know if I could get this put behind me and get it in the books, why not do it?
Henry Rinder: Amanda, any more questions?
Amanda: Yeah, so another one. We haven't talked about the full time employees. If a full-time employee is fired and then that person is replaced pretty quickly after, does that have any effect on the full-time employee test, or is that fine to do?
Joseph Andolino: As long as the full time equivalent makes less than a hundred and you've replaced him with somebody who makes less than a hundred, you're fine.
Henry Rinder: So we'll take one more question and we'll wrap it up Amanda.
Amanda: Yeah, sure. So some of them want to know if the organization has two fiscal years during that 24 week period, how do they accrue forgiveness for the first fiscal year? Does it just kind of go by those 24 weeks specific? Or does it have any impact on that?
Joseph Andolino: Yeah, I don't think your fiscal year has anything to do with it. It's the number of weeks following the date of the issuance of a loan. It's not a tax return. It's a separate form.
Nick Gutzmer: Yeah. You might have a liability on your tax return at that point, because as, as of the end of the first fiscal year, you weren't knowledgeable in your forgiveness amount. But then any reduction in expenses if needed or the cancellation of that loan will be recognized on the second fiscal year.
Henry Rinder: So with this question, we are going to wrap up the webinar. We wanted to thank everybody who basically came to listen to our presentation. We've got more webinars coming your way over the next week that address timely topics. And I wanted to thank Nick and Joe and Amanda for hosting. And Nick and Joe did a fabulous job as they always do. Thank you very much.