Congress Eases Rules for PPP Loan Forgiveness by Andrew Leonard, CPA
Small businesses and nonprofit organizations that received emergency, government-backed Paycheck Protection Program (PPP) loans to help them maintain their workforce during the COVID-19 crisis can breathe a sigh of relief. On June 3, Congress passed a bill giving loan recipients more time and flexibility to use those proceeds and still be eligible for complete loan forgiveness.
The key provisions contained in the updated legislation include the following:
- An increase from eight to 24 weeks to spend the loan proceeds, beginning of the date of loan origination, provided the 24-week period ends by Dec., 31, 2020 (borrowers can elect to use the prior eight-week covered period window if they choose);
- An extension of time for borrowers to rehire workers at pre-pandemic wage levels wages from June 30 to Dec. 31;
- A reduction to the payroll spending rules, which now require loan recipients use at least 60 percent of their loan proceeds on payroll costs rather than 75 percent;
- An increase to the amount that borrowers must spend on “other” costs, including rent, mortgage interest and utilities, to 40 percent of loan proceeds, up from 25 percent; and
- An increase in the loan repayment terms to five years from two years; and
- A change to allow borrowers to defer payroll tax when they receive loan forgiveness. This means that borrowers can defer payments of Social Security and Medicare tax for the 2020 tax year and instead be required to pay 50 percent those tax liabilities in 2021 and the remaining 50 percent in 2022.
While the bill, HR 7010, also refereed to as the Paycheck Protection Program Flexibility Act is intended to make it easier for struggling borrowers to qualify for PPP loan forgiveness, either in full or in part, it is important for that all loan recipients work with their advisors to understand any restrictions or limitations to these benefits as well as any other form of financial assistance during and after the coronavirus crisis period. For example, any borrower who uses less than the required 60 percent of loan proceeds on payroll costs will not qualify for any forgiveness of their initial loan amount. Under the terms of the PPP as introduced by the CARES Act in March, borrowers who spent less than the mandated minimum on payroll costs during the covered period could still qualify for a portion of their total loan balance to be forgiven.
The PPP was introduced by the CARES Act to help small businesses and not-for-profit organizations in operation since Feb. 15, 2020, continue paying their employees and sustain their operations through the economic storm of the COVID-19 pandemic. When businesses abide by the program’s various provisions and restrictions, they may have all or a portion of the loan forgiven, which would be treated by the borrower as non-taxable canceled indebtedness. Unforgiven balances must be repaid over five years at an interest rate of 1 percent.
About the Author: Andrew Leonard, CPA, is a director with Berkowitz Pollack Brant’s International Tax Services practice, where he provides tax structuring, pre-immigration planning and a wide array of international tax and consulting services to international companies, entrepreneurs, families and foreign trusts. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or info@bpbcpa.com.
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