On June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act. That’s great news for PPP loan borrowers.
The new statute offers small businesses a bunch of useful new planning options. And, most importantly, it gives small business owners and their employees hope.
In this short post, therefore, I want to summarize the new law’s details. The new PPP Flexibility Act makes five gigantic changes to PPP loans.
And then, after that discussion, I want to offer up three business planning notions for you to gnaw on over the next few days. Some big issues appear once you dig into the details. You’ll want as much time as possible to work through your thoughts.
PPP Flexibility Act Change #1: Deadline Moves to Year-end
A first important change to note. The act changes the June 30, 2020 deadline for reversing reductions in employee headcounts and pay rates which otherwise reduce forgiveness. The new date? December 31, 2020.
As you maybe know, a borrower loses forgiveness if it fails to reverse earlier reductions in employee headcount or earlier reductions in employee pay rates.
Note: For more information about how reductions in head counts or pay rates matter, peek at our earlier blog post: Losing PPP Loan Forgiveness.
PPP Flexibility Act Change #2: Bigger 24 Week Spending Window
Perhaps the biggest change in the PPP rules? The act expands the window for spending PPP money from 8 weeks to 24 weeks.
You probably know this: To get forgiveness of the PPP loan, a firm needs to spend the PPP money on payroll, rent, utilities and interest within a set interval.
The old interval ran 8 weeks. Now, firms get 24 weeks.
One other thing to be alert to… Borrowers who received their PPP loans before June 5 get the option of continuing to use the old 8 week spending window if they want. But surely most borrowers should use the longer 24 week window.
Note: The 8 week option is discussed in the June 11, 2020 revision to the first Interim Final Rule the SBA published.
PPP Flexibility Act Change #3: More Money for Rent, Utilities and Interest.
A related and imminently practical tweak.
The act slaps down the SBA’s rule that limited forgiveness for spending on rent, utilities and interest to 25%. This 25% limit was just something the SBA made up in its rule making, by the way. (Thanks guys.)
Congress fortunately looked at that rule and then at the economy and the pandemic and said, “No, we’re not going to limit forgiveness for such spending to 25%. Rather, let’s say 40% and give everybody a little more breathing room. And flexibility.” (Thank you, Congress!)
PPP Flexibility Act Change #4: Worst-case Scenario Addressed
A change to address a small business’s worst case scenario…
The PPP flexibility act explicitly addresses the awkward situation where a firm can’t return to its previous employment level. In a nutshell, the new law says if you really can’t resurrect your business because of the pandemic or the economy, we’re not going to withhold forgiveness.
But let me quote the actual language because if this bit of the law matters, its details matter.
Specifically, for a firm to not lose forgiveness due to a drop in headcount it needs
to be able document an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020…
Or, alternatively, the firm needs to be able
to document an inability to return to the same level of business activity as such business 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 COVID–19.
Okay, scary to think about. But good to know…
PPP Flexibility Act Change #5: Longer Loan Term
The PPP flexibility act makes one other significant change to the PPP loan program. It extends the two year loan repayment term to five years.
This tweak may not matter to many folks. Surely many more borrowers get full forgiveness given the changes to the paycheck protection program. But this last change provides further cushioning for small businesses who borrowed PPP funds.
Note: A related point, too. A borrower needs to begin repaying a PPP loan within 10 months after the 24 week loan forgiveness covered period ends.
Three Quick Business Planning Notions
We all need time to process what the new Paycheck Protection Program Flexibility Act means.
And obviously, a sober reality permeates the new law: Congress thinks you need more time and flexibility to ramp up your business and rehire employees.
But quickly, the three thoughts pin balling around in my head…
First, if you haven’t yet applied for a PPP loan and you need one? Or if your bank bungled your PPP loan application and you need funds to continue or restart normal operations? You need to apply. Or apply again. Today if possible.
Note: The revised Interim Final Rule mentioned above says the Small Business Administration will only provide SBA loan numbers to lenders through June 30, 2020, making that a critical deadline for borrowers.
Second, as painful and awkward as it is to contemplate, you need to reexamine your business plan and consider a slower restart. A more gradual ramp-up and return to normality. That may mean furloughing employees in some industries. Or slowing hiring. (Sorry.)
Note: Over at our CPA firm’s website, we’ve got a short article about writing a business plan and a free business planning Excel workbook you can use to update your business plan.
A third final comment…
While the Covid 19 crisis counts as catastrophic, good reasons exist for optimism about the future and the economy. The infection fatality rate falls dramatically short of what people feared. (See the CDC’s updated Covid-19 guidance, for example. Or the Covid-19 research summary paper from Stanford University professor John Ioannidis.) As that reality percolates through our collective consciousness, the economy surely will improve.
And then the other thing? Congress has shown unprecedented support for the economy and especially for small businesses. Case in point? The proposed PPP legislation discussed here. This matters. A lot.
Tony Terreri, CPA says
Hi Steve. Thank you so much for all the timely updates and great insight! It looks like the House did not make any provision to allow tax deductions for expenses paid with forgiven loan proceeds. Early on, in response to the IRS position in Notice 2020-32 denying tax deductions, Chuck Grassley (Republican Chairman Senate Finance Committee) and Richard Neal (Democrat Chairman House Ways And Means Committee) were pushing hard in a bipartisan way to allow tax deductions as that was the original intent of the politicians when the CARES Act was passed and then signed by President Trump. Allowing tax deductions could only be done through legislation or a successful challenge in Tax Court.
Denying the tax deductions really renders the provision that loan forgiveness is exempt from tax (ie. that it’s not COD income) irrelevant. Of course, loan forgiveness is better than having to pay back the loan (I estimated the tax-effected net savings is about 60% of the loan forgiven for many California businesses assuming a combined fed & state tax rate of 40%), but the “tax-free” provision for loan forgiveness is currently irrelevant. Do you have any insight as to the status of a legislative change to allow tax deductions for expenses paid with forgiven loan proceeds?
Stephen Nelson says
Yeah, I have nothing to add to your useful summary of the situation, Tony. For the record, I agree wholeheartedly with your description of this bit of the legislative history.
I guess if there’s one mitigating factor here it’s that for the smallest firms, the tax bite might be pretty slight. Low or maybe even zero tax rates given the bad year?
But again I agree with you.
Wendy Korman says
Thanks, Steve. I saw this just this morning in the Financial Advisor Magazine. Just as I was getting ready to ramp up with assistance with forgiveness applications. Now we have to again hurry up and wait. But this is very good news nevertheless! Thank you for your input!
Guillermo A Birmingham CPA says
So does this mean, in an annualized basis, the limits on things like sole proprietor compensation will now be able to be more than the levels computed for the initial 8 week period?
Stephen Nelson says
Yeah, so that’s a really good question… I don’t see any hints as to how Congress wants to treat that. I’d be very curious as to your thoughts, Guillermo. But me? I guess I’d learn toward them sticking with the 8/52nds of 2019 owner’s cash compensation limit. Otherwise many small firms could use all the money for the owner?
Morgan says
I would have thought, and I thinking out loud is all I’m doing, that they would have removed the 8 week compensation cap for owners because they have effectively removed it for everyone else. If the PPP loans were meant to cover 8 weeks of pay, but can now be used for up to 24 weeks of pay, than to tell the sole-prop no-employees types of owners that they are exempt from this extension seems awkward at best.
It seemed as if they were essentially capping the total of wages for each person at their 8 week / 2 month total, and then an additional arbitrary 25% was loaned on top of that to cover expenses. By that reasoning, if I can pay Sam for 10 weeks now then why not Sue?
If they are increasing the grace period to 24 weeks, then the assumption would be that they believe we will not be bringing in enough income to cover our bills for quite some time. It’s actually one of the first times I’ve really seen the smallest companies left out in the cold with these bills.
Ron A says
Hi Steve:
Re your point “Or if your bank bungled your PPP loan application and you need funds to continue or restart normal operations? You need to apply. Or apply again..”
If you applied correctly, and got the amount due a the time derived from the application base period, but then you had to hire additional staff after that, and now are in a tight spot because of COVID,, is there any way you know of to apply for an additional PPP loan?
Thanks as always for the quick up-to-the-minute briefings.
— Ron
Stephen Nelson says
If you didn’t do your average monthly compensation right, such as for partnership that excluded partner compensation, you’re supposed to be able to apply for a little more to “fix” that mistake. (One of the recent IFRs talks about that I think… or maybe the PPP? I’ll see if I can’t find and point to that later today.)
I don’t know that you can get money for expanded operations as compared to the lookback year though. However, based on the partner compensation logic, if a firm asked for too little by mistake the first time? Maybe it’s worth talking with original lender?
Dave says
So, if it is to be extended over 24 weeks, shouldn’t we get the equivalent of 24 weeks worth of money instead of just 8 weeks worth of money. How is that really supposed to help us?
Jacob Remus says
At what point in the process of applying for the loan and receiving it can the company start to reduce its head count?
If the company received the loan in April and made 1 adjustment to the head count (1 person hired) for a really non essential position can they start to reduce head count of essential employees?
Is there a time limit on there reductions? I just might be missing it in the 8 week versus 24 week window. Thanks for any explanation.
Stephen Nelson says
With regard to the 24 week thing, note that this is pending legislation. We’ll need to see what the Senate does next week. Some people think the Senate will act quickly, perhaps tweaking the law by doing something such as changing the 24 weeks to 16 weeks. Other people think the Senate may do nothing soon.
With regard to the FTE adjustment, except for that exception quoted in the blog post, you’re still going to have to calculate and make the FTE adjustment. But that calculation gets tedious because you can calculate the reduction in FTE by looking either at your spring 2019 headcount or your spring 2020 headcount as discussed here, Losing PPP Loan Forgiveness.
David says
I read and article last week that hinted that only new PPP loans would fall under the new rules. Firms that already had a PPP loan, fall under the rules in place at the time they received the loans.
Any comment or thoughts??
Stephen Nelson says
The new flexibility act will change rules for everybody. That seems pretty clear from the statute.
Daniel Hoffman says
PPP yes, but the sooner we are prepared to open safely, the sooner we can get back to normal. I have been using CDC and GASSservices.com for the best ways to get my business open. REstrictions have not quite been lifted, but I feel ready.
Stephen Nelson says
You’re right… main thing? Get back to business…
Sharon says
Hi Steve,
I heard a rumor floating around that SBA may extend the PPP weeks to 10? Anyone else heard that?
On PR costs, if I show on an accrual basis, based on receiving PPP funds on 4/15, weeks would be as follows:
4/24 Pay date, based on 4/17 accrual date (we hold back a week)
This scenario would follow thru all the way to pay date 6/12, for accrued wages from 6/5, and my 8 weeks would be 4/24 thru 6/12. Is this correct? Also, please confirm the PPP Forgiveness Application is due by 6/30 Thanks!!!
Sharon says
Hi Steve,
By reading thru the comments, I think my initial question (extended PPP weeks) has been answered, albeit still waiting to see what the Senate does.
I know I can use an accrual basis on PR costs, I just need confirmation how; i.e.
PPP funds received on 4/15, Using an accrual method, my first PPP week would be 4/24 pay date for accrued wages from week ending 4/17 (wages are held back a week) So following this scenario through, the last PPP week would be pay date 6/12, for accrued wages from 6/5
One last question, for this post anyway, if I choose the accrual method for PR cost, can I still use actually paid dates for Non PR cost, utilities and rent?
Stephen Nelson says
So I think you don’t “choose” your accounting method. Rather, you count everything paid during the eight weeks. So from from April 15 through June 10. You’ll count all of your payroll paid on April 24 for example….
And then you’ll also count the payroll incurred by June 10 and paid the next regular payroll day ( which is June 12)…) I actually think you get to include the payroll after that for the days June 6 thorough June 10 too… Those are incurred by June 10… and paid the next regular date. But what might be smart? Paying those days with the June 12 payroll.
Steven p says
Even with congress extending pay period to 24 weeks.. is the ppp loan forgiveness still based on salary 2019 over 8 week period ?
And now you just have extra time to use the same 2019 calculated wages .
Stephen Nelson says
I think so. Maybe I’m wrong. The accountants are arguing about this. (In a friendly, good natured way.)
But I’m thinking owners still get limited to 8/52nds of their 2019 compensation.
The reason I say this is if this isn’t the case, a business owner could fire two other employees and take (in effect) their money from the PPP loan and use that for owner payroll. (The PPP loan amount was based on 8 weeks.)
Morgan says
I would have thought, and I thinking out loud is all I’m doing, that they would have removed the 8 week compensation cap for owners because they have effectively removed it for everyone else. If the PPP loans were meant to cover 8 weeks of pay, but can now be used for up to 24 weeks of pay, than to tell the sole-prop no-employees types of owners that they are exempt from this extension seems awkward at best.
It seemed as if they were essentially capping the total of wages for each person at their 8 week / 2 month total, and then an additional arbitrary 25% was loaned on top of that to cover expenses. By that reasoning, if I can pay Sam for 10 weeks now then why not Sue?
If they are increasing the grace period to 24 weeks, then the assumption would be that they believe we will not be bringing in enough income to cover our bills for quite some time. It’s actually one of the first times I’ve really seen the smallest companies left out in the cold with these bills.
Val says
Hi and thank you for all this guidance. I am currently filling out our forgiveness application. Our business is an s corp with one owner employee. We have reached the maximum $15385 payroll costs and have entered it on the form. Beyond that, we have made $3500 SEP contribution, but I can not figure out where to account for this on the application. Any guidance would be helpful.
Thank you!
Stephen Nelson says
The SEP-IRA contribution would be treated as a retirement plan contribution. So I think it goes on Line 7 of PPP Schedule A.
Steven p says
Do you think you can pay employee now over 24 weeks period .
I saw the post on employer being capped at 100k .
So does health insurance . Employer pension contribution And possible event salary
all get extended to 24 weeks ,
Stephen Nelson says
Yes, I think you can. I.e., you have a roughly 6 month window to spend money on payroll, utilities, interest, etc.,
Richard says
Could a partner/self-employed owner wait to rehire themselves, and sit on the funds, until after their PUA kicker runs out, and then use the remainder of the 24-weeks to pay themselves? Seems against the spirit of the program but an interesting question. Does employer payroll for themselves have to start when the loan is funded?
Stephen Nelson says
I think you can wait… but I should say that some accountants think you can pay owners more than eight weeks of “payroll” (so more than 8/52nds of your 2019 self-employment income). That possibility might play into what’s optimal in your situation.
BTW, the 8/52nds limit thing? And the possibility it’ll change to 24/52nds? We’ll need to get more guidance from the SBA to know what’s what…
Richard S says
I’d like to rephrase that for clarification purposes. A Self employed single owner no employees is awarded PUA (with some retroactive payment), and maybe that doesn’t matter to the question.
Does the self-employed have to start paying (Rehire) themselves with the PPP as soon as it is funded? Can they wait, now that there appears to be 24-weeks, to rehire and spend PPP funds paying themselves, and take advantage of the additional weekly unemployment benefits through the July PUA benefit deadline ?
Stephen Nelson says
I think the owner still only gets $15,385 of replacement income, which is $1923 a week.
So mathematically, you could get to $15,385 the last eight weeks of the 24 week window by paying $1923 a week. And then if you can get unemployment insurance the first 16 weeks–and I don’t know the rules for that–what you propose would work.
Steven p says
So if your employee makes 45k a year then his 24 weeks salary will be $20,769.
Which is greater then the max $15385 that owner can make
Is this correct ?
So if you only include salaries and don’t include health insurance or pension then can you still deduct health cost and pension of your taxes if file as s Corp?
Stephen Nelson says
So I think your example owner can count $15,385 as payroll costs regardless of whether you’re using 8 weeks or 24 weeks.
I.e., I don’t think the PPP flexibility act changes the 8/52nd fraction to 24/52nd. (We’ll learn the right fraction at some point when the SBA issues more guidance.)
I think you can include healthcare and retirement in addition to the $15.385…
ananda etcheverry says
I spent much time researching how to use our PPP and was under the impression I had to continue to pay our employees at least 75% of what they had been earning in the first quarter of this year. Is that now not the case? I just have to be back to the same level of employement in December as before the pandemic?
Stephen Nelson says
Your approach does work…
But there’s basically a new way to avoid a reduction in forgiveness due to a reduction in pay rates as described here: https://evergreensmallbusiness.com/paycheck-protection-program-loan-forgiveness-application-tips-tricks-and-traps/ … See the paragraphs under the heading “A New Safe Harbor…”
And then also see the discussion here about Gotcha #4: https://evergreensmallbusiness.com/losing-ppp-loan-forgiveness/ That should provide another way to not lose forgiveness due to a reduction in pay rates.
All that said, keep in mind that if you reduce wages, you may not have enough payroll… though with the new 24 week “window” that would seem an unlikely outcome.
Roderick says
Hi Steven, Thanks again for all the help insight. I applied for PPP and EIDL both at beginning of April. I received the PPP on May 5th and the EIDL yesterday on June 10th.
1. Is my understanding correct in that you can’t use both loans for the same expense at all or is the rule you can’t use it for the same expense for same time period? Example is 85 percent of my PPP so far been used for payroll. My 8 week period ends June 30th. If I don’t use the EIDL funds until the July 15th payroll would that be in compliance of the statue or should the money not be used at all for any payroll expense since money from the PPP was.
2. To clarify with the new PPP flexibility program, I can only get up to 60% forgiveness for payroll? I have already spent 85% on payroll and 5% on rent from my May 5th PPP loan. My bank told me originally when I did loan application that if I spent 90% on payroll and 10% on rent that would qualify for forgiveness rules. I’ve basically already done that and can’t change the payroll now.
3. I can only spend roughly $4800 on my employee owner compensation since I had a low income in 2019. However my pay checks for May totaled $8000 in salary. Would I be in compliance if I had Paychex void out $4000 in income and put the money back in the PPP account since my 56 day period is not over until June 30th?
Thank you
Stephen Nelson says
I don’t understand your question about the EIDL… sorry.
But the general answer about everything else in your message is, “Don’t worry.” With the PPP flexibility act, you get forgiveness for payroll costs, utilities, rent and interest you spend in the 24 weeks that starts on May 5th. You do face some limitations. For the owner, your 2019 compensation of $4800 limits the owner “payroll” you can count in the 24 weeks. And you need to spend at least 60% of your PPP loan on payroll to get 100% forgiveness. But you should be able to do that. (Your PPP loan equaled 10 weeks of payroll basically… and now they let you look at 24 weeks of payroll.)