Late last week the House passed the Paycheck Protection Flexibility Act of 2020 (HR 7010) which outlines significant changes to PPP regulations. While this still has a long way to go until it is signed into law, it has more support than originally anticipated so we will potentially see further changes. Unfortunately, the predicted timeline of when changes would be determined and the end of the 8-week timeline could be very close, if not after the fact, for many practices.
With this being said, below you will find additional information related to where we are now, where we could go, and what you should be doing to prepare. Please note, this is a highly complex situation, so this correspondence contains significant detail. If you do not have time to read this in full, please skip to the final section “what should I do”?
WHERE ARE WE NOW?
Taking a step back, we originally anticipated guidance from the SBA by the end of April to clarify many of the details of the Paycheck Protection Program. This date came and passed without statement, so instead we have learned abbreviated information piecemeal.
We learned a little bit more about ….
1. What expenses are eligible for forgiveness
Confirmed“Grey Area” *
Compensation more than $100k annually
For anyone earning over this amount the amount eligible for forgiveness is limited to $15,384.62 (100k/ 52 weeks)
Amount paid to the owner may be limited to the equivalent of what was earned in 2019 if they previously earned less than $100k
Compensation less than $100k annually
Amounts actually spent will be eligible for forgiveness. This includes bonus’ and hazard pay if payment is “ordinary and necessary”
Amount paid to the owner family may be limited to the equivalent of what was earned in 2019
Health Care
Amounts paid towards a group health insurance policy
Amounts paid towards HSA contributions
Retirement
Amounts paid towards corporate retirement plans
Amounts paid towards the owner or owners’ family may be limited in full
Rent
Amounts paid towards rent
If you own your building, the amount may be limited to the interest paid on your mortgage
Telephone
As stated on your invoice, includes office line and doctors’ cellphones
None
Internet
As stated on your invoices, includes only internet at the office
None
Gas (utility)
As stated on your invoice
None
Water
As stated on your invoice
None
Electricity
As stated on your invoice
None
*We have coined expenses for which we do not have concrete guidance to be in the “grey area”
2. About additional limitations
· 75/25 Rule – At least 75% of the forgivable amount must be related to payroll (this includes wages, healthcare, retirement).
· Employee Retention and Compensation – the amount eligible for forgiveness will be reduced if staffing levels or employee’s pay decreases by more than 25%. If staffing levels and pay are restored by June 30, 2020 than this limitation does not apply. There are exceptions if staff choose not to return.
3. About an “Alternate Payroll Covered Period”
· If you run payroll weekly or bi-weekly, you can delay the start date for using your PPP funds from the date you received the funds until your next payroll. (Ex: if you received your funds on a Tuesday, but run payroll weekly on Friday, you could use Friday as your “start date”)
4. About the “Forgiveness Application”
· The forgiveness application will be submitted to your lender and then they will submit it to the SBA for approval
· Clear documentation is required – it will need to be attached to your application and kept in your records as the SBA will have up to 6 years to audit your spending.
· As with the loan application you will be required to certify “in good faith that current economic uncertainty makes this loan request necessary to support the ongoing operations.” Falsifying this claim could lead to forfeiture of the loan and possible criminal prosecution.
WHERE COULD WE GO?
Below is a summary of the proposed changes. It is extremely likely that changes will continue to be made, so the information below is only for context purposes.
Current Law
HR 7010
Loan Term
Due 2 years after date of forgiveness
Due 5-10 years after date of forgiveness
Deferral
No payments for 6 months
No payments until SBA authorizes forgiveness
Covered Period
8 weeks after PPP loan proceeds are received
Earlier of 24 weeks after proceeds received or 12/31/20
Reduction in Headcount Safe Harbor
No headcount reduction if rehired by 6/30/20
No headcount reduction if rehired by 12/31/20
Reduction in Headcount Exceptions
No reduction if employee fired for cause, voluntarily resigns or requests reduction in hours
No reduction from 2/15/20 – 12/31/20 if employees are not available or business is unable to ramp up by 12/31/20 for reasons caused by COVID
75/25 Test
At least 75% of potential forgiveness must be used for payroll costs
60/40 Cliff Rule: To receive any forgiveness, at least 60% must be used for payroll costs
Deferral of Employer Social Security Tax
No new deferral of employer portion of social security taxes after PPP forgiveness date
Deferral of employer portion of social security taxes regardless of PPP forgiveness date
WHAT SHOULD I DO?
If your head is spinning you are not alone - it is difficult to make plans when you do not know what the rules are! Below are a few best practices that will help you position yourself so you can make decisions when the time comes.
1. Review the “confirmed” expenses eligible for forgiveness and ensure you are using PPP funds to pay these expenses during your 8-week period.
2. Review the “grey area” expenses eligible for forgiveness and, depending on your situation, determine if you feel comfortable spending additional funds on these items. The drawback is if it is determined these items are not eligible for forgiveness, then they would be considered a part of your loan – which would need to be repaid.
· If so, we suggest you wait until shortly before the end of your 8-week period to make the payments. This way you have a plan in place, however, if changes are enacted or we learn more you can decide to retain the cash.
· Of this list, we suggest that you first consider funding the portion of your retirement plan allocated to your employees. If you have a monthly draft to your plan then you most likely have already done so; however, if you wait and make large payments prior to filing your returns each year this is an item to consider.
· If you have concerns about cashflow throughout the summer or are unsure of the future, then we suggest limiting your salary during the 8-week period to the lesser $15,384.62 (the total eligible for forgiveness) or what you earned last year. This will allow you to retain additional cash to be used and also qualify for the maximum amount of forgiveness.
3. Obtain written documentation if you have employees who choose not to return to work or wish to reduce their hours. (There is not a “form” that needs to be signed, merely a short statement offering them their same job back at the same rate should be sufficient. You are just looking for documentation to send with your Forgiveness Application as to why your employee count changed.)
4. Do not rush to fill out your PPP Forgiveness Application after the end of your 8-week period. As we saw with the initial PPP Funding Application, it likely will go through several revisions before we have a finalize. As of right now, you will have several months to file it and there is no benefit in filing earlier. We are happy to help you fill out this application or fill it out for you when the time comes.
Our thoughts are with you all during this time. Please do not hesitate to give us a call if you have any specific questions or concerns you would like to address.
Take care,
Holden