June 12, 2020 …
Just when we thought that the business-related news might slow down… last Friday’s unemployment numbers came out positive and improving (much to the surprise of everyone and the delight of the stock market!).
As we mentioned last week, congress passed, and the President signed into law the Paycheck Protection Program Flexibility Act (PPPFA) – that affords businesses who received the Paycheck Protection Program (PPP) (whether in the first or second round) some big flexibility when it comes to applying for forgiveness. Namely:
- 60% Threshold: You only need to use 60% of the loaned money for payroll*, not 75% as previously required. The other 40% can be used on rent / mortgage, utilities, and loan interest.
- 24 Weeks: You can now spend this money over 24 weeks (through the end of this year) while still being eligible for forgiveness, as opposed to the original 8-week window. This gives you more flexibility on how you want to spread that money out.
- 12/31 Hiring Window: You can now count anyone rehired through the rest of the year, not the previous deadline of June 30th.
- Terms: Whatever PPP funds that don’t get forgiven will go into a 5-year loan** at 1% (instead of a 2-year). With the end-of-year forgiveness window, that means your first payment might not be until May ’21.
You might have noticed we put some asterisks on a couple of those items. As with everything “tax code” the devil is in the details.
First asterisk (*):
- On Monday, the U.S. Small Business Administration (SBA) and Treasury further clarified the 60% Threshold. Borrowers under PPP can qualify for partial loan forgiveness if less than 60% of the PPP loan is used for payroll. That’s a relief!
Second asterisk (**):
- Extending the terms to 5 years (instead of 2) for any portion of the loan that is NOT forgiven is a nice gesture … but again, the LANGUAGE of the bill indicates that this extension of terms is only automatically in place for those PPP loans initiated after the passage of the new bill. Which isn’t very many.
The rest of us (you) are at the mercy of the discretion of your lender. Chances are good that they will honor this 5-year (instead of 2-year) extension … but it is NOT automatic.
Lastly, the PPPFA did NOT address the deductibility of those expenses used to calculate forgiveness. They remain NOT deductible. In essence, it means that the forgiven portion of the PPP loan counts as income for your business (with various tax ramifications that depend on your entity setup).
As always, if you have questions, give us a call. We are in your corner!
Team Legacy CPA