PPPFA Regulations: PPP Loan Forgiveness and Tax Implications

© H. Len Musgrove, Jr. 2020, all rights reserved

The ongoing COVID-19 pandemic has affected virtually every business in this country. Many of our clients, and scads of other small businesses that employ up to 500 employees, applied for federal relief and financial aid through the Payroll Protection Program, or “PPP.” This program was enacted under the “Cares Act” and administered by the SBA and national and local lending institutions. The primary intent of the PPP law, that’s since been amended by the Payroll Protection Program Flexibility Act, or “PPPFA,” was focused on employer assistance in the maintenance and rebuilding of their employees and workforce during this time of economic crisis and uncertainty. Now, the goal of PPPFA regulations are to help employees maintain their jobs for the benefit of them and their families.

What PPP and PPPFA revisions should I be aware of?

Although the funds made available from the PPP loans are largely exhausted, important issues remain regarding its implications and the PPPFA regulations affecting our clients and potential clients. Clients continue to have questions about this oft-updated and revised program, and the Firm has been fielding questions on primarily two issues: the parameters of debt forgiveness and potential tax consequences should the PPP loans be partially or fully forgiven. We want to take this time to give you a brief summary of how PPP loans will be treated with respect to these issues.

In the weeks and months following the PPP law enactment, we have seen constant revisions in its parameters and regulations with the addition of the PPPFA. They continue to evolve as time goes on, but at this stage, the loan forgiveness qualification parameters are as follows:

  • PPP Borrowers now have the option to use 24-week covered period or keep the covered period at the original 8-week period previously set forth under the PPP (for loans originated prior to 06/05/20).
    • Borrowers who received PPP loan proceeds before the enactment of the revised PPPFA may still elect the original 8-week period, and their related obligations to maintain payroll levels only through June 30, 2020.
    • Borrowers who elect to utilize the new covered period will be obligated to maintain payroll levels for the extra 16 weeks of their 24-week covered period.
    • Borrowers have 10 months from the end of their elected Covered Period (8-week or 24-week) to file for loan forgiveness. This provides time to evaluate which Covered Period benefits each Borrower more advantageously.  In this regard, a Borrower could wait for 24 weeks and still decide between the initial 8-week or the longer 24-week Covered Period, depending on which time frame maximizes each Borrower’s forgiveness.
  • The 75/25 Rule is now the 60/40 Rule.
    • At least 60 percent of the loan amount must now be used on payroll costs (down from the original 75 percent) and no more than 40 percent may be attributable to non-payroll costs (up from the original 25 percent). Caveat: The requirement to maintain a Borrower’s average monthly FTE (full-time equivalent) amount and annual average salary or hourly wage employees at no less than 75 percent of the base salary or hourly wage received by that employee during the period of January 1, 2020 to March 31, 2020 remains in place.
  • First payment of a PPP loan is now automatically deferred until such time that the forgiveness is granted by the SBA and remitted to the Borrower’s lender.
  • PPP loan forgiveness must be requested within 10 months of the last day of their elected covered period or the loan payments would begin at that time.
  • Expanding the PPP loan term to 5 from 2 years for PPP loans which are not forgiven.
  • Ensuring full access to payroll tax deferment and the ability to defer the Employer’s share of 2020 Social Security taxes for businesses that take PPP loans.
  • June 30 FTE Safe Harbor extended to December 31, 2020.
    • The safe harbor deadline to eliminate reductions in headcount and salary or wages of employees has been extended from June 30, 2020 to December 31, 2020. Borrowers now have until December 31, 2020 to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness.
    • New Safe Harbor for Inability to Rehire or Restore FTE Due to Regulatory and Guidance Compliance
      • The PPPFA provides for an additional FTE Reduction Safe Harbor whereby any reduction in forgiveness based on a reduction in FTE will be disregarded in the event a Borrower is able to document that:
      • (i) It was unable to rehire individuals who were employees on February 15, 2020 and unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020, or
      • (ii) It was able to document its 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 HHS, CDC, or OSHA 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 COVID-19.

What are the most important takeaways?

The changes made by the PPPFA and its accompanying regulations are significant in several ways to employers. Employers now have the possibility of expanding the look back period for forgiveness of a PPP loan from 8 to 24 weeks. In addition, the percentage of wage and salary-related costs for which PPP loan proceeds must be dedicated to decreased from 75 to 60 percent, a much less restrictive number. We also saw flexibility in the time period for employers who were forced to furlough or temporarily lay off employees to rebuild their workforce by December 31, 2020. Regardless of these changes, our advice is to contact your PPP lender directly for more detailed calculations and each lender’s PPP forgiveness procedure with the addition of the PPPFA.

Am I eligible for tax benefits?

Another less known benefit from the PPP legislation, in addition to the PPPFA regulations, that is worthy of discussion is the employer tax benefits. A provision included in the original PPP legislation provides an employer tax credit under the condition that one’s employees were maintained for a certain period of time and that the employer benefit is in the form of a rare refundable tax credit. This provided additional incentives to employers to keep their workforce fully employed during the pandemic, resulting in economic slowdown. Even better, the general rule of discharge of indebtedness income that would otherwise result from the forgiveness of the PPP loans (or portions of loans) under the PPP is not applicable, as the CARES Act specifically excludes the PPP loans from gross income. However, there are still some variances and ongoing discussions regarding potential taxation from various states, so it is best to check with your CPA regarding your own applications of the PPP and PPPFA.

The lawyers of Musgrove Law Firm, P.C. are available to assist our clients with complex business; federal, state and local tax; Mergers & Acquisitions; intellectual property; and real estate and estate planning matters among our specialties. Our goal is to be not only excellent lawyers, but true business partners with our valued clients. Contact us today to schedule a consultation regarding the PPP and PPPFA regulations.