[UPDATED 6.5.20] Guidance & New Legislation on Forgiveness for PPP Loans

Since our original post on May 20 (text below), new legislation has addressed some matters regarding the SBA’s guidance on PPP Loan Forgiveness. Some take-aways from the new legislation are:

• Instead of an 8-week covered period for distribution of funds, the period is now 24 weeks or December 31, 2020, whichever is earlier. However, borrowers with existing loans can elect to keep the current eight-week period. Borrowers who received a PPP loan before June 5, 2020 may elect the shorter 8 week period, which would also limit the period for which the headcount and salary-maintenance requirement applies and allow a borrower to avoid carrying unforgiven debt any longer than necessary.
• A borrower is required to spend at least 60% on payroll costs order to qualify for forgiveness. However, if the borrower doesn’t spend at least 60% on payroll costs, then there is no forgiveness for the loan whatsoever.
• Any unforgiven amounts will now be amortized over at least five years instead of two years. This change is effective only for loans disbursed after the statute’s adoption. For loans made prior to the statute’s adoption, borrowers and lenders must mutually agree to modify the maturity of the loan to take advantage of the extended maturity.
• The forgiven amount remains tax-free however; however, there has yet to be a fix concerning the deductibility of the expenses paid with the loan proceeds.
• The changes do not extend the period of time during which loans may be sought. Lenders may not accept or approve loans submitted after June 30, 2020.

Original post from May 20, 2020 is below, with indications of updates

A key component of the Paycheck Protection Program has been the availability of loan forgiveness for certain covered expenses. However, guidelines clarifying the procedures for obtaining forgiveness had not yet been released, resulting in confusion about the process. Late last week, the SBA released the Loan Forgiveness Application for the PPP, providing some clarifying guidance to the implementation of the program but raising additional questions.

Here are some key details to keep in mind and some areas where we hope that more clarification will be issued soon:

• The application requires you to provide copies of Form 941(s) and state unemployment reports.  For employers, this means that you shouldn’t plan on filing the application for forgiveness before the middle of June at the earliest.
  
• Earlier guidance established the presumption that loan amounts below $2 million were in good faith. The loan forgiveness application has a specific box that employers must check if they received a loan in excess of $2 million. Under current guidance, you can expect some sort of audit for those larger loans, but it is unknown whether that will be in the form of an on-site audit, a request for supporting paperwork, a remote proceeding, or some other manner. And, of course, even recipients of smaller loans should be scrupulous with their record-keeping.
• The time period for payroll costs is a strict 56 days (for now).  For example, if you received your loan on Monday, April 20, the Covered Period ends 56 days later on Sunday, June 14.  It does not carry over to Monday.  Despite the strict 56-day time period, Employers who pay bi-weekly or even more frequently have some administrative flexibility in choosing when the clock begins running. They are allowed to use either the payroll that is accrued during the eight-week “Covered Period” beginning on the date of the PPP Loan Disbursement Date, or they can elect to calculate payroll costs using the eight-week period that begins the first pay period following the PPP disbursement—the “Alternative Payroll Covered Period.”  See updates above.
• Self-employed taxpayers must “pay” themselves during the eight-week period to get forgiveness. How this is accomplished is not explained in the application, so there are some open questions as to whether there are requirements about the manner and timing of payment by a self-employed person to herself.
  
• It appears that only cash (versus in-kind) compensation will qualify for forgiveness.  This means that commodity wages do not qualify unless further guidance it given.  If an employer applied for an original PPP loan using commodity wages, this may result in an adjustment to the allowed loan amount. This is an area where further guidance is needed.
• The costs appear to be based on “earned” amounts during the eight-week covered period. This allows the employer to pay certain items after the covered period ends, however, it does not allow the employer to prepay any costs including extra labor.  It is silent as to whether raises or bonuses during the covered period are allowed.  Further guidance on this is needed.
• It appears that fuel for vehicles is not an expenditure for a business utility.  However, this is not specifically addressed in the application.

We will continue to update our blog as additional information becomes available, and, of course, the Business Services Group at DPBC is ready to assist you with your specific needs.

Post by Paul S. Parker.
Paul provides tax and trust expertise to individual and institutional clients, including corporations, business owners, charitable institutions, and private foundations.