President Trump signed the Paycheck Protection Flexibility Act (PPFA) and made certain changes to the Paycheck Protection Program that was enacted as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act in March. Section 4 of the PPFA has amended Section 2302(a) of the CARES Act to delete section 2302(a)(3). At the same time, employers who have obtained forgiveness for the Paycheck Protection Program (PPP) loan can now defer all employer social security tax deposits that would otherwise be required to be deposited before January 1, 2020.
Under Section 2302 of the CARESAct, employers may now significantly defer the deposit of the employer share of social security taxes, but not Medicare taxes. Specifically, all employer social security taxes that were otherwise required to be deposited between the date of enactment and December 31, 2020, aren’t required to be deposited by December 31, 2021.
The remaining deferred social security taxes are going to be required to be deposited by December 31, 2022. However, Section 2302(a)(3) of the CARES Act precluded an employer who would obtain forgiveness of a PPP loan from taking advantage of the employer social security tax deferral. The IRS has issued some FAQs that clarified that an employer that obtains a PPP loan might defer the deposit of employer social security tax up until such time as the employer is notified that some or the entire PPP loan is going to be forgiven.
After the enactment of the PPPFA, this prohibition isn’t going to apply any longer, and PPP loan recipients can now take advantage of the deferral without regard to whether the employer has a PPP loan forgiven.
The biggest changes made in the PPP Flexibility Act are to the loan forgiveness provisions of the PPP. The CARES Act allowed for loan forgiveness, up to the original principal amount of the loan, based on the specified payroll and non-payroll costs incurred or paid during a covering period of eight weeks beginning on the date of the loan.
The PPP Flexibility Act has extended this covered period, and now a borrower can apply for forgiveness based on the payroll and non-payroll costs incurred or paid over a period starting on the date of the loan and ending 24 weeks after the date or on December 31, 2020, whichever period comes first.
After the enactment of the CARES Act, the SBA had issued guidance that required no more than 25% of the forgiven amount to be attributable to non-payroll costs. The PPP Flexibility Act loosened this requirement and increased the percentage for non-payroll costs to 40%.
The calculations to determine whether the loan forgiveness amount must be reduced are based on reductions in full time equivalent (FTE) headcount and wages under the CARES Act and existing SBA guidance continue to apply. However, some safe harbors have been modified or added by the PPP Flexibility Act.
Previously, the forgiveness amount would not be subject to reduction if a borrower restored their FTE headcount and wages by June 30, 2020. The PPP Flexibility Act extends this deadline to December 31, 2020. This means that if a borrower restores their FTE headcount and wages to their February 15, 2020, levels by the end of 2020, no reduction in forgiveness will apply.
The PPP Flexibility Act adds a new safe harbor for FTE reductions to address a borrower’s inability to rehire employees or resume pre-pandemic business activity. This new safe harbor provides that a reduction in the number of FTE employees will be disregarded if:
- The borrower can document an inability to rehire individuals who were employees on February 15, 2020, and an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020.
- The borrower can document an inability to return to the same level of business activity as it 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 the 2019 novel coronavirus (COVID–19).
These FTE/Wage Reductions have ensured that the Paycheck Protection Flexibility Act provides businesses with respite when it comes to calculating their wages.
Payroll Tax Deferral
The PPP Flexibility Act eliminates the exception to the allowance for deferral of payroll taxes relating to loan forgiveness. Previously, if a borrower received loan forgiveness, they could not continue to defer payroll taxes as allowed under the CARES Act. A borrower may now continue to defer 2020 payroll taxes, even after they receive loan forgiveness.
Leading up to the passage of the PPP Flexibility Act, certain senators expressed concern with extending the application window to the end of the year as well as the cliff nature of the 60 percent requirement discussed previously. Additionally, certain banking trade groups are pushing for SBA to allow automatic forgiveness for loans less than $150,000.
SBA has not further clarified the necessary certification and how it will go about auditing the thousands of loans above $2 million. SBA is expected to issue additional guidance in the form of Frequently Asked Questions and interim final rules to implement the provisions of the PPP Flexibility Act and to address inconsistencies with prior guidance and a number of questions that remain unanswered.
The PPPFA has changed the 6-month deferral period for loan repayments and interest accrual so that payments on any unforgiven amounts will start on the date where the loan forgiveness was determined or 10 months after the end of the borrower’s covered period if the forgiveness hasn’t been requested.
Expanded Fund Usage
The Small Business Administration (SBA) guidance that is related to the CARES Act limits borrowers to using 25% of the loan proceeds to pay for non-payroll expenses like rent, utilities or mortgage interest. The PPPFA now allows borrowers to use up to 40% of the loan proceeds on these non-payroll costs. To receive the full loan forgiveness, borrowers must use 60% of the PPP loan for payroll costs, and not more than 40% of the loan forgiveness amount may be attributable to non-payroll costs.
If a borrower doesn’t meet the 60% requirement, the borrower will receive partial loan forgiveness. At this moment in time, the Internal Revenue Service has deemed loan forgiveness expenses non-deductible, but this is expected to be challenged by legislators in the coming weeks.
The Paycheck Protection Flexibility Act is a major win for small businesses. The new amendments made to the Paycheck Protection Program gives business owners the freedom to spend their resources in a meaningful manner. As the Paycheck Protection Flexibility Act has now become law, it provides companies more flexibility. A lot of businesses were struggling to meet the 75% allocation of funds for their payroll, but with the amount reduced to 60%, they are expected to make better use of those funds.
With the tax deferral provided by the Paycheck Protection Flexibility Act, it has now become easier for businesses to manage their financial resources. They no longer have to be burdened with taxes and can suitably plan for the future in these trying times. It ensures that they can spend their loan amount on their payrolls.
There is no denying that this new law will make a massive difference.