On June 11, 2020, the Small Business Administration (SBA) and Treasury Department issued an interim final rule (IFR) providing initial guidance for implementing H.R. 7010, Paycheck Protection Program Flexibility Act, which became law on June 5. Additional IFRs were released on June 12 and June 17.
SBA also published updated, streamlined PPP loan application forms for borrowers and lenders to use for loans made on or after June 5, 2020. If you received and subsequently returned a PPP loan, you are still eligible to re-apply for a PPP loan. Borrowers whose circumstances have changed, or who with new guidance once again feel that they qualify for a PPP loan, may find themselves in this situation. Keep in mind that you will need a PPP loan number (i.e., SBA approval) by June 30, 2020.
An updated loan forgiveness application was issued on June 17 reflecting changes effected by the PPP Flexibility Act. See our separate blog article with links to the new forms and instructions.
The key highlights of the new SBA guidance include:
Covered Period: The 24-week loan forgiveness covered period begins on the date of loan disbursement. All loans made on or after June 5, 2020 will have a 24-week loan forgiveness covered period. Borrowers who received their PPP loan before June 5, 2020 also have the option to use the original eight-week covered period as provided in the CARES Act. In no case will the loan forgiveness covered period extend beyond Dec. 31, 2020.
60% Use on Payroll Costs: Despite the plain language in the Flexibility Act, borrowers are not required to use 60% of the PPP loan proceeds on payroll costs in order to receive some level of forgiveness. The regulations state that a maximum of 40% of the loan may be used for non-payroll costs. The regulations also provide that, in situations where less than 60% of the loan proceeds are used for payroll costs, the borrower will only receive partial forgiveness—this will ensure that 60% of the forgiven amount is used for payroll costs.
- Example: A borrower received a PPP loan in the amount of $100,000, but only spent $54,000 on payroll costs. The borrower would receive a maximum of $90,000 of loan forgiveness, with $54,000 in payroll costs constituting 60% of the forgiveness amount, and $36,000 in non-payroll costs constituting 40% of the forgiveness amount.
Loan Maturity: For loans made before June 5, 2020, the loan matures in two years, but the borrower and lender may mutually agree to extend the maturity to five years. Loans made on or after June 5, 2020 will have a five-year maturity date.
Loan Deferral Period: For most borrowers, no payment of principal or interest is due until the SBA remits the forgiven amount to the lender (or informs the lender that no loan forgiveness is allowed). However, if the borrower does not submit a forgiveness application within 10 months after the end of the covered period, the borrower must begin making payments toward principal and interest at the end of that 10-month period.
Borrower Certifications: When applying for forgiveness, borrowers will continue to certify that, among other things, funds received will be used to “retain workers and maintain payroll,” but also confirm their understanding that “knowingly” using funds for unauthorized purposes may mean the federal government will hold the borrower liable “such as for charges of fraud.” Borrowers also must certify that “not more than 40 percent of loan proceeds may be used for non-payroll costs.” Some potential borrowers had asked if they can take a PPP loan and use it for ineligible costs, knowing that it would not be forgiven. Doing so would put the borrower at risk of being charged with fraud.
While the new guidance is helpful, there are still many unanswered questions. We anticipate that SBA and Treasury will be issuing additional FAQs. We are closely monitoring their web page, and will be posting new articles as more guidance is released.
Once again, please see our separate blog post with details on the new loan forgiveness application forms.
As we have been doing with all coronavirus legislation and SBA guidance during these past few months, we will be sure to update you with any additional insight as soon as possible. Continue to check back here for the most up to date tax information and changes in response to coronavirus. If you have questions about this or related topics contact an MCB Advisor at 703-218-3600 or click here.
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